Financial literacy

Financial literacy is the ability to understand finance. More specifically, it refers to the set of skills and knowledge that allows an individual to make informed and effective decisions through their understanding of finances. Raising interest in personal finance is now a focus of state-run programs in countries including Australia, Japan, the United States and the UK.

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 serves 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.

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.

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 per cent 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.”

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: Thai 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. The foundation created an educational website titled "Understanding Money" shortly thereafter^. The task force also recognised the need for a social marketing campaign. 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.

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 Credit Action, The Talking Economics Project, Citizens Advice Bureau and the Personal Finance Education Group.

Description above from the Wikipedia article Financial literacy,More