With young adults acquiring more debt through rising education costs, more governments boosting access to financial services and changing social security systems that make retirement planning an ever bigger burden on an individual, financial knowledge becomes increasingly vital – and financial ignorance, progressively risky.
So says Annamaria Lusardi, professor, founder and academic director of the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business: “We see everywhere the cost of making financial decisions – the world around has changed.”
Says Diane Vazza, head of global fixed income research for Standard & Poor’s Ratings Services: “Consumers who fail to understand the concept of interest compounding spend more on transaction fees, run up bigger debts and incur higher interest rates on loans.” She adds: “This group also ends up borrowing more and saving less money. They won’t participate in the broader financial markets, nor can they sustain financial markets around the world.”
For low-income consumers, a growing body of literature shows limited financial services and access to products drives them to take high-interest debt. But one additional key cause of ignorance is simple: lack of education. “Most adults can go through their entire life without a formal or informal education on financial literacy,” Vazza says.
Both experts note a snowball effect of financial ignorance. Employees with financial problems and debt become less productive at work. Not having retirement savings or the ability to pay for a child’s education translates into lower financial wellbeing. And all over the world, young adults saddled with considerable student debt maintain a lower standard of living, stalling down payments on a house, purchase of a car, or moving into a nicer or less crowded apartment. “People feel less happy, less able to achieve their objectives, their dreams,” Lusardi says.
Improve how we think about money
With the goal of increasing financial literacy, Standard & Poor’s teamed with the World Bank in 2014 to create The Standard & Poor’s Ratings Services Global Financial Literacy Survey (S&P Global FinLit Survey) to better grasp how people across the globe fare in terms of their financial knowledge. The results, published in late 2015, built on efforts from GFLEC, the International Network on Financial Education and the Organization for Economic Co-operation and Development. It delivers the first and most comprehensive global gauge of financial literacy to date.
The researchers posed questions accessing adults’ knowledge of four concepts – interest rates, interest compounding, inflation and diversifying risk – to 150,000 people in more than 140 economies. Questions included: “Is it safer to put your money into one versus multiple businesses or investments?” To gauge people’s understanding of inflation, researchers asked: “If products double in price over 10 years, and your income doubles, can you buy less, the same or more than you can buy today?” And to test knowledge of numeracy, respondents had to answer the following: “If you must borrow $100, which is the lower amount to pay back: $105, or $100 plus 3%?”
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The findings
Key takeaways include:
- Among young adults, a different profile exists for emerging vs advanced economies. Young adults in advanced countries are least knowledgeable when compared to other age groups, and younger adults in emerging places are more knowledgeable about finances, though few are experts on the topic.
- Australia, Canada, Denmark, Finland, Germany, Israel, the Netherlands, Norway, Sweden and the United Kingdom, where about 65% of adults are financially literate, possess the highest financial literacy. South Asian countries possess some of the lowest scores, where only a quarter of adults – or fewer – are financially literate.
- Financial literacy varies a lot across countries, even within the same continent. For example, rates are much lower in southern versus Northern Europe. In Spain, for instance, only 49% are financially literate. Countries joining the EU in or after 2004 have the lowest rates there, like Romania with its 22% financial literacy rate.
- A large gender gap exists in financial literacy. Around the world, women are disproportionately more likely than men to answer: “I don’t know”. Lusardi says: “Women know their lack of understanding of finances, and therefore become an ideal target for financial education programs.”
Noting that financial education coupled with affordable products and services improve people’s financial capability and health, experts offer these suggestions:
- Improve financial literacy of school-age children and add financial literacy training in the workplace.
- “Target women, who are more likely to attend a financial education program, will do wonders,” Lusardi says. “By reaching women, we have a chance to reach children.”
- Educate millennials who can use strong financial knowledge to their favor long term. “This head start would put them on a good path to financial success,” Lusardi says.
- Get the word out on the data, Vazza says.
