Calls for improving our financial knowledge abound. But they rarely take into account the tools that would actually help the most vulnerable.
Hardly a week goes by without a call to improve our financial literacy. Last week, the European Union commissioner for financial services, Mairead McGuinness, advocated for making such education a priority for Europe. She noted that one in three EU households couldn’t handle unexpected financial shocks in regular times — and the pandemic has only made things worse.
We’re all for better financial education. But a lack of knowledge is hardly the main reason why some families struggle so much with money. Low incomes, the economic environment and inflation all make budgeting challenging and falling into debt easier. If policymakers want to improve people’s financial well-being, they have to start with addressing these issues.
Surveys supposedly highlighting our financial illiteracy test us on arcane matters such as estate and inheritance-tax planning or what is the maximum lifetime allowance for pensions contributions. The Great British Financial Literacy Test, for example, surveyed more than 2,000 people quizzing them on the precise meanings of a number of financial acronyms and determined that 48% “failed.” The rate rose to 80% on issues related to retirement.
The U.K. is no outlier here — S&P Global puts it on a par with North America and the richest European countries. Its “FinLit” survey describes two in three adults globally as being financially illiterate.
The problem is these quizmasters tend to measure a narrow type of know-how — one that doesn’t often help people understand their financial situation. Many difficulties around money are caused not by a lack of financial knowledge, but by low and unpredictable incomes.
