Compound interest. Credit rating. Budgeting. These are just a few financial topics that most of the world doesn’t understand. Why? Because financial education is lacking, leaving people around the world struggling to understand why their credit card interest is so high and they can’t afford the lifestyle they have dreamed of since they were young.
There is no single entity to blame for a lack of global financial education. It is up to everyone: parents, schools, and governments, to pitch in and teach the next generation how to properly handle their finances. And for adults, financial education could be the way to get out from under seemingly insurmountable debt and back to a financial life above water.
What is financial education?
Financial education is the teaching of financial topics to children and adults in hopes of providing them the tools they need to be financially literate. This financial literacy as a result of education allows people to be more informed and make better financial decisions.
Some of the core principles of financial education include:
- Saving — Ensuring that saving for the future is made a priority
- Budgeting — Learning how to set, and keep a budget
- Investing — The benefits of investing over time, including compound interest
- Credit and Debt — What it really means to be in debt, and how to use credit wisely
- Financial Safety and Security — Keeping personal and financial information secure
Financial education is not just limited to those in primary school. Adults also need their own financial education to be better prepared when it comes to big financial decisions like buying a home, financing a car, and saving for retirement.
It’s been proven that those with higher levels of financial education are more likely to be better prepared for handling financial uncertainty, and have more of a chance of living the financial life they have always wanted.
A global problem
Financial education is a common problem around the world. To determine levels of financial literacy, global citizens were asked a series of basic financial questions. Those who couldn’t answer the majority of the questions correctly were considered financially illiterate. So, how do financial literacy rates stack up?
Scandinavian countries Denmark, Norway, and Sweden rank at the top of the global list for financial education, with 71% of their population being financially literate. Yet, other countries in Europe aren’t so financially savvy. Places like Romania (22%), Portugal (26%), and Italy (37%) all lag behind in their understanding of financial topics. Additionally, the further east in Europe you go the worse literacy rates get, with no country east of Hungary grading out at a rate of higher than 50%.
As you might expect, regions like Africa and South America, where traditional education rates are already low, also score low in financial literacy. Yet, even a country like the United States, where you might think everyone is financially literate, only has 57% financial literacy, a similar rate to Ireland (55%).
What can be done?
There are several ways to improve the quality of financial education, and in turn, improve the financial wellbeing of people around the globe. But it will take buy-in from many different stakeholders to keep this issue at the forefront of global consciousness.
Government
Financial literacy is now at the forefront of the minds of elected officials around the globe. As several researchers noted, “Policymakers have embraced financial education as a necessary antidote to the increasing complexity of consumers’ financial decisions over the last generation.”
Government programs designed specifically for low-income constituents get at the heart of good saving habits and understanding credit. Researchers have recommended policy changes of their own to ensure financial education is made a priority.
The European Union has periodically published Financial Education for all, a guide for financial education strategies and best practices to provide support to educators and parents alike. But financial education across the EU is varied, with some nations implementing their first financial literacy programs, and others updating previously enacted policies.
Non-governmental organizations
Outside of governments, organizations aimed at financial education are providing their own value. Junior Achievement works with schools and teachers to provide better financial education around the world.
A consortium of insurance associations around Europe — called Insurance Europe — released a publication title Financial education in a digital age. Initiatives by the European insurance industry, which provides a range of initiatives to increase financial literacy and understanding of insurance.
Then there is the European Platform for Financial Education, a resource launched by a group of nine financial organizations throughout the region. This platform works to provide young people a quality financial education, and thereby increase financial literacy. According to the project, the platform, “Serves to exchange ideas, information, insights, and experiences, as well as to facilitate discussions on how the European Union can play a leading role in advancing financial literacy.”
Schools
The research is clear: students who get a financial education in their own school are more prepared to make financial decisions later in their life. The European Banking Authority has recommended the EU prioritize financial education in school settings, and have seen that students report better education from learning in a school setting:
Some NSAs [National Supervisory Authorities’] have conducted, either directly or through an external independent company, studies to assess the effectiveness of financial education initiatives. This is the case for some financial education programs in schools, with students being tested before and after taking the program, to check progress. These NSAs have reported positive results from these assessments.
Elsewhere, in the United States, financial education has not just become a priority, it has become mandatory. Some states in the US have passed policies that require students to complete a financial education course in order to graduate from high school. In fact, North Carolina just became the 20th state in the US to require financial literacy classes for high school students. Making finance a core part of the curriculum ensures that each and every student is getting a minimum level of financial education. New Jersey took this even one step further, putting financial literacy course requirements into middle school curriculums.
Families
It isn’t just governments and schools that can solve this problem, it is up to parents to educate their children as well. Your children are never too young to learn about financial education. In fact, you can begin having conversations about money with them while they are still adolescents.
Something as simple explaining what it means to save money, or, showing them what they can buy with a small allowance will get them started thinking about money in a healthy way. Habits like conscious consumption and saving which are developed at this young age can stick around for life.
This becomes especially apparent as children grow into young adults. Many young adults report their parents never discussing money or financial topics with them, leaving them to fend for themselves.
It’s about how you teach
While getting finance into schools and on the radar of families is a good start, what ultimately matters is how financial education is taught. Unfortunately, there are a slew of ineffective programs using resources to spread financial information that is not getting absorbed.
According to Bill Hensley, President and CEO of the National Endowment for Financial Education in the United States, the area of financial education needs to be consolidated in order to be more effective:
“The majority of what’s called financial education is, in reality, just passing along financial information. While it’s a building block, it does not by itself change behavior. Our field needs to clearly articulate that financial information, education, well-being, literacy and capability coexist in one ecosystem, but the terms do not all mean the same thing. It’s a development of regular exposure to education that increases knowledge and confidence, leading to increased satisfaction, and ultimately driving an individual to act in their own best interest as the current landscape allows.”
Some organizations have gone a step further, and provided their own resources and guides to teaching financial education. These are perfect for the parent or teacher who doesn’t know where to start when it comes to teaching on these topics.
A solvable problem
There is no question that financial education is a global problem. The real question is, what can we do about it? Education starts at home. Parents can address financial topics to children out in the open and at a young age. Throw in government support and financial education in school settings, and this issue could change in the coming generations.
Financial education doesn’t just provide people useless knowledge. It allows them to be more financially independent and create a better life for themselves. There is no doubt about it: increased financial education would be better for everyone.
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