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Financial literacy is the ability of
individuals to make appropriate decisions in managing their personal
finances. Raising levels of financial literacy is now a focus of
government programmes in countries including Australia, Japan, the
United States and the UK. The Organisation 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 (www.financial-education.org),
which serves as a clearhouse for financial education programmes,
information and research worldwide. In the UK, the alternative term
“financial capability” is normally used: 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.
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.”
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