The Poor Standard of Financial Literacy in Adults
Standard & Poors (S&P), one of the world’s leading credit risk and research companies, has interviewed something like 150,000 adults, in more than 140 countries to assess their levels of financial understanding, and the conclusions are stark. Two thirds of all the adults interviewed are not financially literate and it seems that within that disturbingly large group there is a gender gap of about five percent between men and women.
Even in countries like the USA, in which over 60% of the population use credit on a day to day basis, for one reason or another, levels of financial understanding are dangerously low. According to the survey, 30% of Americans who have a credit card have “low financial literacy”, while 34% of those interviewed could not give the correct answer to a question about compound interest!!!
For those of us involved in teaching young people about finance, there is nothing new in the S&P survey. We know just how little, practical understanding of finance and its related topics there is amongst the bulk of our secondary school population, and there is no reason to believe that will change in the immediate future.
What is more worrying, is the way that financial education is delivered in a vacuum which utterly fails to take into account the broader context in which young people will have to display their financial aptitude.
We believe that there are four key, life-long relationships which every young person has to learn to manage if they are to build a sustainable and independent adult life.
These relationships are with employment, property, finance and the state, and they are each so deeply interconnected that to try and disaggregate them, as so much financial education does, is a grave mistake.
This is a really easy proposition to prove. When the S&P interviewers wanted to asses the practical levels of financial comprehension amongst American adults, they identified those who were financing their homes through bank finance and they asked them about compound interest. One of the most obvious ways that we use money is to finance the home we live in, whether we rent it or are buying it on a mortgage.
To separate financial comprehension from one of its primary uses i.e. to generate enough money to pay rent or a mortgage, is very silly but it happens day after day in too many of our current attempts to produce a generation of young adults who would pass the S&P test.
When we deliver Keep the Cash! we illustrate every aspect of financial literacy through the four key relationships that I just mentioned, because understanding the connections between them, and mastering the skills required to successfully manage them, are the very essence of what we mean by a financially literate person.