Young people, deprived ethnic minorities & women lack financial skills
Remember the days of pocket money? Our parents gave us an amount of money to spend accordingly during a week or a month. This was basic financial education in a very practical sense. And this is the time when actual financial knowledge and practice should start, in the early days of life.
Nowadays, unfortunately, only 41% of young people could be classified as financially literate in the UK, according to a survey undertaken in 2023 by the Centre for Economics and Business Research (Cebr). But it is not only a matter of age. Economic deprivation, race, and gender seem to play a significant role in the level of financial skills. The FT Ipsos Mori research in England suggests that already vulnerable communities, like ethnic minorities and women, find their problems worsened by low levels of knowledge about how debt interest is calculated or how to mitigate risk or budget effectively. In Europe, about half of the EU adult population does not have a good enough understanding of basic financial concepts, according to the OECD/INFE 2020 international survey of adult financial literacy. In the case here it seems that the problem is more acute in some parts of society than others, with the most vulnerable disproportionally affected, like low-income groups, women, young people, and older people. Another study by Allianz in 2020, showed that only 30% of Europeans were able to answer basic financial questions and understand fundamental concepts such as inflation, diversification, and interest rate.
Below you can see Figure 1 from a 2017 survey by “Standard & Poor’s Ratings Services Global Financial Literacy” reflecting a gap between northern European countries and southern Europe. In the survey, we read that “On average, 52% of adults are financially literate, and the understanding of financial concepts is the highest in northern Europe. Denmark, Germany, the Netherlands, and Sweden have the highest literacy rates in the European Union: at least 65% of their adults are financially literate. Rates are much lower in southern Europe. For example, in Greece and Spain, literacy rates are 45% and 49%, respectively. Italy and Portugal have some of the lowest literacy rates in the south. In Bulgaria and Cyprus, 35% of adults are financially literate. Romania, with 22% financial literacy, has the lowest rate in the European Union.”
What is financial literacy?
Financial literacy means the knowledge and skills needed to make important financial decisions. How to open a bank account, how to make an application for a loan, how to invest our money, how to save money, and how to avoid fraud, are some of the important decisions someone has to make from early age until late adulthood. The way we manage our money reflects also the way we live and raise our kids, and affects our mental and physical health as time goes by. It is said that healthy financial behaviours can empower people to reduce stress, live healthier lives and become active citizens, thus promoting well-being. Last but not least, financial literacy, includes essential competencies that are fundamental to building resilient communities, inclusive societies, and robust democracies.
The importance of financial education
According to a UK charity, thirty hours of financial education each year at high school would significantly boost money management and practical mathematical skills. Also, in the UK alone, almost two-thirds of young adults do not recall having received financial education at school.
In January 2023, the European Commission and the OECD jointly presented the Financial competence framework for adults in the European Union as part of objective 2 of the Capital Markets Union (CMU) action plan of the EU. It was considered a positive first step towards the promotion of financial literacy.
Another initiative by EBA (European Banking Authority) is a one-page information sheet providing consumers with tips to protect themselves when choosing online or mobile banking services. You can download this document in different languages here: https://www.eba.europa.eu/consumer-corner/personal-finance-at-the-eu-level
According to OECD data, in 2017 only 21 of 48 European States had developed,
Implemented, or revised a National Strategy for Financial Education.
What consists of financial behavior?
- How to manage money: paying purchases and bills, using bank services, budgeting income and expenditures, and knowing how to keep within the budget.
- Save money for preempting purposes: creating and maintaining savings or credit as a buffer and precaution against adverse conditions and unexpected expenditures.
- Save money to finance our plans: saving for a particular purchase or transaction.
- Legal knowledge: understanding the implications, rights and duties, risks and consequences of contracts and financial products.
- Assets management: creating and maintaining capital by investing in stocks and real estate. In other words, risk diversification. Suppose you have some money. Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments?
- Basic knowledge of economic definitions: Do you know what inflation, interest rate, and compound rate are?
Test your knowledge! Take this test
Some examples for testing your knowledge would be:
- Suppose over the next 10 years the prices of the things you buy double. If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today or more than you can buy today?
- Suppose you need to borrow 100 US dollars. Which is the lower amount to pay back: 105 US dollars or 100 US dollars plus three percent?
- Suppose you put money in the bank for two years and the bank agrees to add 15 percent per year to your account. Will the bank add more money to your account the second year than it did the first year, or will it add the same amount of money both years?
These literacy questions were used in the “Standard & Poor’s Ratings Services Global Financial Literacy”, which measured the fundamental concepts for financial decision-making.
The digital world poses even greater difficulty for financially illiterate people
Digital applications, electronic payments, and a cash-free economy that is underway impede even more the daily transactions of people who lack basic financial knowledge, like the elderly, and immigrants in Europe who come from less developed countries. These people have grown up in societies where cash is the king and the black market thrives. Suddenly, they are required to use a debit card for their payments, web banking, mobile applications for online payments, and so on. The latest global survey on financial literacy shows that a lot of countries have very low financial literacy. According to the “Standard & Poor’s Ratings Services Global Financial Literacy” survey, as you can see in the graph in Figure 2, around 3.5 billion adults globally, most of them in developing economies, lack an understanding of basic financial concepts. We see that only 33% of adults worldwide are financially literate.
This situation makes the need for financial education more important than ever before.
Our project Ploutos
Ploutos means “wealth” in Greek. Wealth in terms of economic value as well as our inner mental one. It is the title of our European-funded project that addresses exactly the issue elaborated on in the previous paragraphs. It aims to enhance the financial literacy, business language, and digital abilities of the Third Country Nationals (TCNs). Through PLOUTOS, people will get access to financial services and self-employment professional community interpreting skills. As immigrants form an integral part of European societies over the last few decades, it is more than crucial to be able to cope with the financial landscape, the legal and economic context and to manage and monitor their savings.
Watch some great videos on financial literacy issues made by the European Commission. They cover a bunch of issues like the protection of online payments, the use of bank accounts in Europe, text phishing, deposit insurance, mortgage rights, pension products, green bonds, crypto assets, and more.