Invest in financial literacy for long term gains

Governments around the world are asking people to take on an unprecedented degree of responsibility for managing their finances. In the UK, government policies such as Universal Credit and greater pension flexibility, giving people the freedom to extract benefit much earlier than before, provide an opportunity for people to take greater control of their finances. But this also comes with the risk that low financial literacy skills and poor decision making could make many worse off.

This shift in responsibility for financial management comes at a time when households are becoming more susceptible to debt. National debt advice charity the Money Advice Trust recently revealed that more people are falling into debt because they can’t afford basic household bills such as energy bills, water bills and council tax.

Debt charity, Stepchange, found in 2013 that the two biggest triggers forcing people to seek debt management advice were unemployment or redundancy (23%) or a loss of hours at work (16%) with a lack of budgeting the third main reason (14%).

This combination, of pressure on incomes, susceptibility to debt and increasing personal responsibility for financial management makes it critical that everyone has basic financial literacy skills. At the moment this just isn’t the case. Research for the Money Advice Service in 2013 found that 16% of people are unable to identify the balance on a bank statement. Nine million people are in need of urgent help with managing their money. Another 14 million, spanning young and old, are focussed on the now rather than the future.

There are programmes underway to improve financial literacy. From September 2014 there is a statutory requirement for maintained schools in England to teach financial education as part of the curriculum. Other projects are well established, such as MyBnk which delivers financial and enterprise education for 11-25 year olds in schools and youth organisations. Together with young people, it creates financial and enterprise education programmes on topics such as saving and budgeting, survival money management and start up entrepreneurship. MyBnk has formed the first ever youth-led banking scheme MyBnk-in-a-Box, that allows young people to save and develop positive habits around money from a young age.

And some financial service providers are starting to integrate financial and money management advice with financial service products. For example, ThinkMoney ensures customers’ bills are paid on time, provides a pre-paid card with available spending money and financial advice to support customers to stay out of debt.

But more often, money management and debt advice is provided at crisis point. For example, Prince Bishops Community Bank, a credit union in County Durham, refers those in greatest financial difficulty to the Debt Support Trust. And many people wait until they are deeply in debt before seeking help.

Much more upfront financial literacy support is required. It should be commonplace that provision of financial services comes with an offer of independent money management advice. Opportunities to access skills improvements should not start and stop at the school gates. There should be better provision of financial support and advice at different life stages, in different environments and with greater range of independent, trustworthy providers. For example, encouraging large employers such as supermarkets to offer financial literacy training in the mix with other forms of staff training and universities to offer it as a core module during under graduate degrees.

Canada has recently appointed its first national financial literacy leader, with a $3m budget to promote good practice and ensure better provision of financial literacy services. In the USA, nudge behavioural theory has become central to initiatives to build savings schemes and invest in pension plans. Investment is key. But with financial illiteracy costing the government an estimated £3.4 billion a year, it is one investment sure to pay off.

If you want to check out your own financial literacy skills, try out the FINRA Investor Education Foundation test. Although developed in the USA it is used widely as an effective benchmark for who is on the money and who is adrift.