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.[1] Raising interest in personal finance is now a focus of state-run programs in countries including Australia, Japan, the United States and the UK.[2]
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.[3]
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.[4]
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An international OECD study was published in late 2005 analysing financial literacy surveys in OECD countries. A selection of findings[5] included:
“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.”[5]
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.[6]
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.[7] The task force also recognised the need for a social marketing campaign.[5] In 2008 the functions of the Foundation were transferred to the Australian Securities and Investments Commission (ASIC).[7] 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 UK has a dedicated body to promote financial capability - the Money Advice Service.
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[8] across a seven-point plan. The priority areas were:
A baseline survey[8] 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.”[8]
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.
The US Treasury 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 [2] in 2006. The Jump$tart Coalition has championed personal financial literacy in the United States since as early as 1995.
While many organizations have supported the financial literacy movement, they may differ on their definitions of financial literacy. In a report by the President’s Advisory Council on Financial Literacy, the authors called for a consistent definition of financial literacy by which financial literacy education programs can be judged. They defined financial literacy as “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.”[9] The Jump$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$tart Coalition adds that financial literacy should be a dynamic understanding, enabling “each individual to respond effectively to ever-changing personal and economic circumstances.”[10] Lois Vitt of the Institute for Socio-Financial Studies defines financial literacy somewhat more comprehensively:
“Personal financial literacy is the ability to read, analyze, manage and write about the personal financial conditions that affect material well being. It includes the ability to discern financial choices, discuss money and financial issues without (or despite) discomfort, plan for the future, and respond competently to life events that affect everyday financial decisions, including events in the general economy.”[11]
The Council for Economic Education (CEE) conducted a 2009 Survey of the States and found that 44 states currently have K-12 personal finance education or guidelines in place.[12] Due to differing criteria, the Jump$tart Coalition only considers 24 states to have a component of personal financial education required.[13] Results from the Jump$tart Survey of Personal Financial Literacy indicate low levels of financial literacy among American youth.[14]
Additionally, automobile finance companies and retailers provide consumer education through Americans Well-informed on Automobile Retailing Economics.[15]
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.
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