While it’s often thought to be the young who make the worst financial decisions, research has shown that often the financial literacy of adults is not much better. In fact, a recent OECD study on the grasp of money issues around the world has found that it’s not just parents and schools that need to do more to protect young people. It’s also the regulators who need to step in to prevent adults from making equally questionable decisions.
In a world where there are more complex financial products than ever before, you might think literacy levels would be improving. However, it’s actually a better time than ever for financial service providers to rip us off because many of us are unable to make informed and rational decisions.
What did the research find?
The results of the research were damning. The headline finding is that one-in-five consumers around the world are financially illiterate and incapable of grasping even basic shopping conundrums. That includes questions like whether buying four tins of tuna fish in a single pack represented better value than buying four cans separately.
As well as some simple maths-based questions, the study also asked respondents to identify the tell-tale signs of scam phishing emails and the potential factors that go into determining the cost of vehicle insurance. Perhaps not surprisingly, many of the respondents struggled. Also, what was particularly concerning was the fact that many people were unaware where to go to find reputable sources of financial information like these free resources courtesy of the online lender Wonga SA.
Low levels of literacy among the young
We also learnt that levels of financial literacy among the 15 year-olds who were questioned is currently very low. In fact, just 12 percent of the respondents were able to answer all the questions correctly. In the vast majority of countries, the girls outperformed the boys. Perhaps not surprisingly, the research also found that young people who gained most their financial information from friends scored lower than those who discussed financial matters with their parents.
In terms of the best-performing countries, it was not necessarily the case that the most financialised economies performed the best. In fact, teenagers in Russia had higher levels of financial literacy than those in the US. Despite the fact that they are less likely to have debit cards and bank accounts, Chinese students outperformed their American and European counterparts to top the list.
What can we do to change things?
This report is a wake-up call not just for parents who need to make a concerted effort to improve the financial literacy of their children, but also to schools, which need to take the time to teach financial education. But what about the regulators? At the moment, there are very few financial protections in place for the financially illiterate and this is enabling rip-offs to happen at lightning speed, with the bottom 20 percent of consumers usually the group that suffers the most.