Financial literacy

Financial literacy is the ability to understand how money works in the world: how someone manages to earn or make it, how that person manages it, how he/she invests it (turn it into more) and how that person donates it to help others. More specifically, it refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources. Raising interest in personal finance is now a focus of state-run programs in countries including Australia, Canada, Japan, the United States and the United Kingdom.

The Organization for Economic Co-operation and Development (OECD) started an inter-governmental project in 2003 with the objective of providing ways to improve financial education and literacy standards through the development of common financial literacy principles. In March 2008, the OECD launched the International Gateway for Financial Education, which aims to serve as a clearinghouse for financial education programs, information and research worldwide. In the UK, the alternative term "financial capability" is used by the state and its agencies: the Financial Services Authority (FSA) in the UK started a national strategy on financial capability in 2003. The US Government also established its Financial Literacy and Education Commission in 2003.

International findings

An international OECD study was published in late 2005 analysing financial literacy surveys in OECD countries. A selection of findings included:

• In Australia, 67 per cent of respondents indicated that they understood the concept of compound interest, yet when they were asked to solve a problem using the concept only 28 per cent had a good level of understanding.
• A British survey found that consumers do not actively seek out financial information. The information they do receive is acquired by chance, for example, by picking up a pamphlet at a bank or having a chance talk with a bank employee.
• A Canadian survey found that respondents considered choosing the right investments to be more stressful than going to the dentist.
• A survey of Korean high-school students showed that they had failing scores – that is, they answered fewer than 60 percent of the questions correctly – on tests designed to measure their ability to choose and manage a credit card, their knowledge about saving and investing for retirement, and their awareness of risk and the importance of insuring against it.
• A survey in the US found that four out of ten American workers are not saving for retirement.

"Yet it is encouraging that the few financial education programmes which have been evaluated have been found to be reasonably effective. Research in the US shows that workers increase their participation in 401(k) plans (a type of retirement plan, with special tax advantages, which allows employees to save and invest for their own retirement) when employers offer financial education programmes, whether in the form of brochures or seminars."

However, academic analyses of financial education have found no evidence of measurable success at improving participants' financial well-being.

According to 2014 Asian Development Bank survey, more Mongolians have expanded their financial options, and for instance now compare the interest rates of loans and savings services through the successful launch of the TV drama with focus on the fiscal literacy of poor and non-poor vulnerable households. Given that 80% of Mongolians cited TV as their main source of information, TV serial dramas were identified as the most effective vehicle for messages on financial literacy.

Additionally, a growing number of financial literacy researchers are raising questions about the political character of financial literacy education, arguing that it justifies the shifting of greater financial risk (e.g. tuition fees, pensions, health care costs, etc.) to individuals from corporations and governments. Many of these researchers argue for a financial literacy education that is more critically oriented and broader in focus; an education that supports individuals better understand systemic injustice and exclusion rather than one which understands financial failure as an individual problem and the character of financial risk as apolitical. Many of these researchers work within social justice, critical pedagogy, feminist and critical race theory paradigms.

Asia Pacific Middle East Africa

A survey of women consumers across Asia Pacific Middle East Africa (APMEA) comprises basic money management, financial planning and investment. The top ten of APMEA Women MasterCard's Financial Literacy Index are Thailand 73.9, New Zealand 71.3, Australia 70.2, Vietnam 70.1, Singapore 69.4, Taiwan 68.7, Philippines 68.2, Hong Kong 68.0, Indonesia 66.5 and Malaysia 66.0.

Australia

The Australian Government established a National Consumer and Financial Literacy Taskforce in 2004, which recommended the establishment of the Financial Literacy Foundation in 2005. In 2008, the functions of the Foundation were transferred to the Australian Securities and Investments Commission (ASIC). The Australian Government also runs a range of programs (such as Money Management) to improve the financial literacy of its Indigenous population, particularly those living in remote communities.

In 2011 ASIC released a National Financial Literacy Strategy (www.financialliteracy.gov.au) — informed by an earlier ASIC research report 'Financial Literacy and Behavioural Change' — to enhance the financial wellbeing of all Australians by improving financial literacy levels.The strategy has four pillars:

1. Education
2. Trusted and independent information, tools and support
3. Additional solutions to drive improved financial wellbeing and behavioural change
4. Partnerships with the sectors involved with financial literacy, measuring its impact and promoting best practice

ASIC's MoneySmart website was one of the key initiatives in the government's strategy. It replaced the FIDO and Understanding Money websites.

ASIC also has a MoneySmart Teaching website for teachers and educators. It provides professional learning and other resources to help educators integrate consumer and financial literacy into teaching and learning programs.

A number of Australian universities offer financial literacy subjects, such as Monash University (BEX2001: You, Money & Life), Macquarie University (AFAS300: Principles of Financial Literacy), The University of Western Australia (FINA1109: Managing Your Personal Finance) and The University of Melbourne (FNCE30008: Street Finance).

The Know Risk Network of web and phone apps, newsletters, videos and website was developed by insurance membership body ANZIIF to educate consumers on insurance and risk management.

Saudi Arabia

A nationwide survey was conducted by SEDCO Holding in Saudi Arabia in 2012 to understand the level of financial literacy in the youth. The survey involved a thousand young Saudi nationals, and the results showed that only 11 percent kept track of their spending, although 75 percent thought they understood the basics of money management. An in-depth analysis of SEDCO's survey revealed that 45 percent of youngsters did not save any money at all, while only 20 percent saved 10 percent of their monthly income. In terms of spending habits, the study indicated that items such as mobile phones and travel accounted for nearly 80 percent of purchases. Regarding financing their lifestyle, 46 percent of youth relied on their parents to fund big ticket items. 90 percent of the respondents stated that they were interested in increasing their financial knowledge.

Singapore

In Singapore, the National Institute of Education Singapore established the inaugural Financial Literacy Hub for Teachers in 2007 to empower school teachers to infuse financial literacy into core curriculum subjects to embed pedagogically sound activities to engage students in learning. Such day-today relevant and authentic illustrations enhance the experiential learning to build financial capability in youth. Integral to evidence-based practices in schools, research on financial literacy is spearheaded by the Hub, which has published numerous impact studies on the effectiveness of financial literacy programs and on the perceptions and attitudes of teachers and students. A longitudinal study on the impact of financial literacy education on attitudinal and behavioural change is on-going. The baseline study on financial literacy in Singapore Schools 2008/9 (Koh, 2011) involved more than 6000 students and a thousand school teachers. It is the vision of the Hub to empower educators to equip their students to be financially savvy so as to make informed decisions and exercise discipline in managing their personal finance. The Hub is committed to spearheading high quality education programmes with research embedded for continual improvement so as to provide evidence-based practices.

The Singapore government through the Monetary Authority of Singapore funded the setting up of the Institute for Financial Literacy in July 2012. The Institute is managed jointly by MoneySENSE (a national financial education programme) and the Singapore Polytechnic. This Institute aims to build core financial capabilities across a broad spectrum of the Singapore population by providing free and unbiased financial education programmes to working adults and their families. From July 2012 to May 2014, the Institute reached out to more than 24,000 people in Singapore via workshops and talks. Some of the topics covered in these workshops and talks include:

• Making Sense Of Your Money
• Financial Planning Begins Now
• Do I Need Every Type Of Insurance?
• Are You Borrowing Too Much?
• Building Your Nest Egg
• Managing CPF Money For Your Retirement
• Introduction To Personal Investing
• Buying A Home Within Your Means
• Introduction To Estate Planning
• Understanding Basic Health Insurance Schemes

Europe

Belgium

The FSMA is tasked with contributing to better financial literacy of savers and investors that will enable individual savers, insured persons, shareholders and investors to be in a better position in their relationships with their financial institutions. As a result, they will be less likely to purchase products that are not suited to their profile.

Switzerland

A study measured financial literacy among 1500 households in German-speaking Switzerland. Testing the three concepts compound interest, inflation, and risk diversification, results show that the level of financial literacy in Switzerland is high compared to results for other European countries or the US population. Results of the study further show that higher financial literacy is correlated with financial market participation and mortgage borrowing.

The Swiss National Bank aims at improving financial literacy through its initiative iconomix that targets upper secondary school students. The new public school curriculum will cover financial literacy in public schools.

The United Kingdom

The UK has a dedicated body to promote financial capability – the Money Advice Service.

The Financial Services Act 2010 included a provision for the FSA to establish the Consumer Financial Education Body, known as CFEB. From April 26, 2010, CFEB continued the work of the FSA's Financial Capability Division independently of the FSA, and on April 4, 2011, was rebranded as the Money Advice Service.

The strategy previously involved the FSA spending about £10 million a year across a seven-point plan. The priority areas were:

• New parents
• Schools (a programme being delivered by pfeg)
• Young Adults
• Workplace
• Consumer communications
• Online tools
• Money advice

A baseline survey conducted 5,300 interviews across the UK in 2005. The report identified four themes:

• Many people are failing to plan ahead
• Many people are taking on financial risks without realising it
• Problems of debt are severe for a small proportion of the population, and many more people may be affected in an economic downturn
• The under-40s are, on average, less financially capable than their elders

"In short, unless steps are taken to improve levels of financial capability, we are storing up trouble for the future."

There are also numerous charities in the United Kingdom working to improve financial literacy such as MyBnk, Credit Action, The Talking Economics Project, Citizens Advice Bureau and the Personal Finance Education Group.

Financial literacy within the UK Armed Forces is provided through the MoneyForce programme, run by the Royal British Legion in association with the Ministry of Defence and the Money Advice Service.

North America

Canada

In 2006, Canadian securities regulators commissioned two national investor surveys to gauge people's knowledge and experience with investments and fraud. The results from both studies demonstrated there is a need better to educate and inform investors about capital markets and investment fraud. Education in this area is particularly important as investors take on more risk and responsibility of managing their retirement savings, and a large baby boomer population enters the retirement years across North America.

In 2005, the British Columbia Securities Commission (BCSC) funded the Eron Mortgage Study. It was the first systematic study of a single investment fraud, focusing on more than 2,200 Eron Mortgage investors. Among other things, the report identified that investors approaching retirement without adequate resources and affluent middle-aged men were vulnerable to investment fraud. The report suggests investor education will become even more important as the baby boomer generation enters retirement.

United States

See also: Financial Literacy Curriculum and Financial Literacy Month

In the U.S., a national nonprofit organization, the Jump$tart Coalition for Personal Financial Literacy, is a collection of corporate, academic, non-profit and government organizations that work for financial education since 1995.

The United States Department of the Treasury established its Office of Financial Education in 2002; and the US Congress established the Financial Literacy and Education Commission under the Financial Literacy and Education Improvement Act in 2003. The Commission published its National Strategy on Financial Literacy in 2006.

While many organizations have supported the financial literacy movement, they may differ on their definitions of financial literacy. In a report by the President's Advisory Council on Financial Literacy, the authors called for a consistent definition of financial literacy by which financial literacy education programs can be judged. They defined financial literacy as "the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being."

The Council for Economic Education (CEE) conducted a 2009 Survey of the States and found that 44 states currently have K-12 personal finance education or guidelines in place.

Automobile finance companies and retailers provide consumer education through Americans Well-informed on Automobile Retailing Economics.

Northern Illinois University started a campus-wide Financial Literacy Initiative in 2009 with a program called Financial Cents. Financial Cents provides college students at Northern Illinois University with the tools and knowledge needed to make sound financial decisions during their college careers as well as after they graduate. Other public and private universities across the United States have implemented similar financial literacy programs.

In July 2010, the United States Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which created the Consumer Financial Protection Bureau (CFPB). The CFPB has been tasked, among other mandates, with promoting financial education through its Consumer Engagement & Education group.

The current approach to informing adults is typically from a deficit perspective with the educator seen as the expert providing the knowledge to the passive student; however, the recommended approach would incorporate a transformative learning framework as per the National Endowment for Financial Education's (NEFE) Quarter Century Project. The transformative learning model is the most established within adult education; within this framework, adults embark through a psychocultural process of acquiring new and/or revised interpretations of financial beliefs and attitudes that inform and shape new perspectives and behaviors. In addition, according to Xiao et al., it is suggested that financial education be provided to adults so as to correlate with their readiness to change as in Prochaska et al.'s Transtheoretical Model of Behavioral Change. Financial social work is a transformative learning model that was developed by Reeta Wolfsohn, CMSW at the Center for Financial Social Work. While it originated in 1997 from Wolfsohn's work with women as femonomics, it expanded in 2005 to all individuals, regardless of gender. Financial Social Work is a multi-disciplinary psychosocial approach that helps individuals examine and re-evaluate their money thoughts, attitudes and beliefs, and as it increases self-awareness and self-esteem, it empowers individuals' to establish long-term healthy money habits leading to greater financial security.

Further reading

• "Improving Financial Literacy – Analysis of Issues and Policies" OECD 2005
• Lucey, T. A., & Cooter, K. S. "Financial Literacy for Children and Youth"
• Federal Reserve Bank of San Francisco. "Community Investments: Financial Education" 2009.
• M. Schuhen / S. Schürkmann: "Construct validity of financial literacy", International Review of Economics Education, Elsevier, Amsterdam 2014.