Financial literacy
Encyclopedia
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.
“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.”
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.
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 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:
A baseline survey conducted 5,300 interviews across the UK in 2005. The report identified four themes:
“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
.
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. The Jump$tart Coalition has championed personal financial literacy in the United States since as early as 1995.
While many organizations have supported the financial literacy movement, they may differ on their definitions of financial literacy. In a report by the President’s Advisory Council on Financial Literacy, the authors called for a consistent definition of financial literacy by which financial literacy education programs can be judged. They defined financial literacy as “the ability to use knowledge
and skills to manage financial resources effectively for a lifetime of financial well-being.” The Jump$tart Coalition mirrors this sentiment, defining financial literacy as “the ability to use knowledge and skills to manage one’s financial resources effectively for lifetime financial security.” The Jump$tart Coalition adds that financial literacy should be a dynamic understanding, enabling “each individual to respond effectively to ever-changing personal and economic circumstances.” Lois Vitt of the Institute for Socio-Financial Studies defines financial literacy somewhat more comprehensively:
The Council for Economic Education
(CEE) conducted a 2009 Survey of the States and found that 44 states currently have K-12 personal finance education or guidelines in place. Due to differing criteria, the Jump$tart Coalition only considers 24 states to have a component of personal financial education required. Results from the Jump$tart Survey of Personal Financial Literacy indicate low levels of financial literacy among American youth.
Additionally, automobile finance companies and retailers provide consumer education through Americans Well-informed on Automobile Retailing Economics
.
Also, 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.
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
. 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
Personal finance
Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future...
is now a focus of state-run programs in countries including Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
, Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
, the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
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
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
(FSA) in the UK started a national strategy on financial capability in 2003. The US Government also established its Financial Literacy and Education Commission
Financial Literacy and Education Commission
The Financial Literacy and Education Commission was established under Title V, the Financial Literacy and Education Improvement Act which was part of the Fair and Accurate Credit Transactions Act Act of 2003, to improve financial literacy and education of persons in the United States...
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 AustraliaAustraliaAustralia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
, 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)
401(k)
A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
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 marketingSocial marketing
Social marketing is the systematic application of marketing, along with other concepts and techniques, to achieve specific behavioral goals for a social good. Social marketing can be applied to promote merit goods, or to make a society avoid demerit goods and thus to promote society's well being as...
campaign. In 2008 the functions of the Foundation were transferred to the Australian Securities and Investments Commission
Australian Securities and Investments Commission
The Australian Securities & Investments Commission is an independent Australian government body that acts as Australia's corporate regulator...
(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 ServiceThe Money Advice Service
The Money Advice Service, is an organisation that provides money advice for consumers in the UK.The service was launched under the Money Advice Service banner in April 2011 and supersedes the Moneymadeclear-branded service provided by the Consumer Financial Education Body...
.
The Financial Services Act 2010 included a provision for the FSA to establish the Consumer Financial Education Body
Consumer Financial Education Body
The Consumer Financial Education Body was the former name for The Money Advice Service, an independent body that promotes personal financial literacy in the United Kingdom....
, 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
Credit Action
Credit Action is a UK charity founded in 1994 that promotes money education and financial literacy. Credit Action works with government, regulators and the lending industry and has a close partnership with the Consumer Credit Counselling Service , a debt counseling and management service.The...
, The Talking Economics Project, Citizens Advice Bureau
Citizens Advice Bureau
A Citizens Advice Bureau is one of a network of independent charities throughout the UK that give free, confidential information and advice to help people with their money, legal, consumer and other problems....
and the Personal Finance Education Group
Personal Finance Education Group
The Personal Finance Education Group is a UK educational charity focused on equipping young people with confidence, skills and knowledge in financial matters, particularly personal finance. It was founded in 2000 and receives support from both government and business...
.
United States
The US TreasuryUnited States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
established its Office of Financial Education in 2002; and the US Congress established the Financial Literacy and Education Commission
Financial Literacy and Education Commission
The Financial Literacy and Education Commission was established under Title V, the Financial Literacy and Education Improvement Act which was part of the Fair and Accurate Credit Transactions Act Act of 2003, to improve financial literacy and education of persons in the United States...
under the Financial Literacy and Education Improvement Act in 2003. The Commission published its National Strategy on Financial Literacy in 2006. The Jump$tart Coalition has championed personal financial literacy in the United States since as early as 1995.
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 Jump$tart Coalition mirrors this sentiment, defining financial literacy as “the ability to use knowledge and skills to manage one’s financial resources effectively for lifetime financial security.” The Jump$tart Coalition adds that financial literacy should be a dynamic understanding, enabling “each individual to respond effectively to ever-changing personal and economic circumstances.” Lois Vitt of the Institute for Socio-Financial Studies defines financial literacy somewhat more comprehensively:
“Personal financial literacy is the ability to read, analyze, manage and write
about the personal financial conditions that affect material well being. It
includes the ability to discern financial choices, discuss money and financial
issues without (or despite) discomfort, plan for the future, and respond
competently to life events that affect everyday financial decisions, including
events in the general economy.”
The Council for Economic Education
Council for Economic Education
The Council for Economic Education is a national non-profit organization "committed to empowerment and opportunity through economic and financial literacy."...
(CEE) conducted a 2009 Survey of the States and found that 44 states currently have K-12 personal finance education or guidelines in place. Due to differing criteria, the Jump$tart Coalition only considers 24 states to have a component of personal financial education required. Results from the Jump$tart Survey of Personal Financial Literacy indicate low levels of financial literacy among American youth.
Additionally, automobile finance companies and retailers provide consumer education through Americans Well-informed on Automobile Retailing Economics
Americans Well-informed on Automobile Retailing Economics
AWARE is a national nonprofit organization that was formed in 2005 to enhance consumer understanding of the vehicle financing process..- Background :...
.
Also, 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.
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.
External links
- FSA National Strategy for Financial Capability Resource Centre (UK)
- Junior Achievement/JA Worldwide Headquarters (Offices Worldwide) creates curriculum and teaches financial literacy in schools to students
- Junior Achievement Europe (Europe)
- Financial Literacy and Education Commission (US)
- National Financial Literacy Strategy is the Australian financial literacy website by ASIC (Australia)
- MoneySense is a website set up by Monetary Authority of SingaporeMonetary Authority of SingaporeThe Monetary Authority of Singapore is Singapore's central bank and financial regulatory authority...
to boost Financial Literacy in SingaporeSingaporeSingapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the... - Student Money Management Services was developed by Bowling Green State UniversityBowling Green State UniversityBowling Green State University, often referred to as Bowling Green or BGSU, is a public, coeducational research university located in Bowling Green, Ohio, United States. The institution was granted a charter in 1910 by the State of Ohio as part of the Lowry Bill, which also established Kent State...
in Bowling Green, Ohio to increase financial literacy for undergraduate and graduate students. - BBC raw money Get to grips with money management with BBC raw money.
- Child and Youth Finance
- Financial Capability in Africa - resources