What is financial literacy and why do we need it?
Written by Jana Tichauer
Keeping an account book and doing some basic math in your head? Financial literacy is more than that!
In 2020, the OECD defined financial literacy as a complex web of knowledge, skills, attitudes, behaviors and financial awareness. Those who possess it can make sound financial decisions and, as a consequence, achieve financial prosperity (OECD 2020). Financial education thus lays the foundation for people to act and decide both consciously and effectively in monetary and financial matters (Aprea 2012).
This set of competencies can be divided into a content area and personal dimensions. The former addresses different aspects of the financial world, the latter different aspects of the individual approach.
The content area includes, for example, aspects of income and expenditure, financial planning, credit and debt, pensions and insurance, or knowledge of consumers’ rights.
The personal dimensions are
● knowledge and awareness
● skills and behaviors, and
● motivation and attitudes.
Hence, the question “How does insurance work?” plays as big a role in financial literacy as the ability to make a reasoned decision for or against insurance (Mania & Tröster 2015; European Union/OECD 2022).
Why do we need financial literacy?
The German Institute for Adult Education classifies financial literacy as part of general education. It is thus on a par with other cultural skills such as reading or writing and is equally essential for social participation (Project CurVe 2015). A lack of financial literacy has serious consequences, for example a constant “fear” of money and increased psychological pressure due to finances, or undersaving. The latter describes the phenomenon of not saving enough or saving incorrectly for retirement even in developed economies (Öffentliches Gesundheitsportal Österreichs 2019).
The combination of declining public protection and increasingly complex financial products also justifies the need for financial education. Life risk and retirement provision must be made individually. Demographic change, high mobility requirements, and new family models call for new forms of financial security as both the state and the family are receding into the background as an alternative form of security (Aprea 2018). The simulations of Haan et al for Germany are symptomatic of the need for better financial education that is already visible [1]. They predict that the risk of poverty in old age will increase in the coming years, disproportionately affecting certain groups such as people with low education, single-parent families, or people who have an immigration background (Haan et al 2017).
“To make matters worse, financial services are becoming increasingly incomprehensible and opaque — and not only for non-professionals,” Carmela Aprea sums up, adding that digitalization and globalization will further sharpen this effect (Aprea 2018). The importance of empowered decision-making in financial matters and so-called “financial inclusion” becomes evident in light of these developments (Reifner 2011). This is in stark contrast to the flawed self-assessment of a considerable amount of respondents found in various studies: the measured level of competence of many consumers is lower than they self-evaluated (OECD 2005).
Reifner also stresses the importance of self-confident consumers to act as a countervailing force on the market: they can make competent decisions and thus demand products from suppliers that meet their needs (Reifner 2011). Accordingly, the goals of financial education are consumer protection, self-awareness and critical analytical skills(ibid.).
Apparently, there are also economic and individual reasons for more financial education, in addition to the demand for social participation.
However, this statement is too seldom followed by the urgently needed measures: Financial literacy must be canonized in school education and requires in-depth scientific and instructional research.
[1] The study by Haan et al. (2017) is a simulation study that is not able to provide an exact forecast. Depending on the scenario, it is assumed that 17%-22% of the total population will be at risk of poverty in the years 2031–2036 in Germany.
— Works cited.
Aprea, C. (2012): “Messung der Befähigung zum Umgang mit Geld und Finanzthemen: Ausgewählte Instrumente und alternative diagnostische Zugänge”. Berufs- und Wirtschaftspädagogik online, Nr. 22, http://www.bwpat.de/ausgabe22/aprea_bwpat22.pdf. Abgerufen am 17.04.2022.
Aprea, C. (2018): ‘Finanzielle Bildung gegen Armut — ein zielführender Weg?’. Wiesbaden: Springer. Abgerufen unter https://link.springer.com/chapter/10.1007/978-3-658-23934-3_3 am 15.08.2021.
European Union/OECD (2022), Financial competence framework for adults in the European Union. https://www.oecd.org/daf/fin/financial-education/financial-competence-framework-for-adults-in-the-European-Union.pdf. Abgerufen am 17.04.2022.
Haan, P. et al. (2017): ‘Entwicklung der Altersarmut bis 2036: Trends, Risikogruppen und Politikszenarien — ZEW-Gutachten und Forschungsberichte’. Gütersloh: Bertelsmann Stiftung. Abgerufen unter http://hdl.handle.net/10419/168442 am 15.05.2022.
Mania, E. & Tröster, M. (2015): “Finanzielle Grundbildung schaffen — Programme und Angebote planen”. W. Bertelsmann; DOI: 10.3278/43/0049w (10.04.2022).
OECD (2005): ‘Improving Financial Literacy — Analysis of Issues and Policies’. OECD. Abgerufen unter https://doi.org/10.1787/9789264012578-en am 17.06.2022.
OECD 2020: Recommendation of the Council on Financial Literacy. https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0461
Öffentliches Gesundheitsportal Österreichs (2019): “Schulden & Auswirkung auf die Gesundheit”.https://www.gesundheit.gv.at/leben/psyche-seele/finanzielle-probleme/gesundheitliche-auswirkungen, abgerufen am 13.06.2022.
Projekt CurVe (2015): ‘Kompetenzmodell „Finanzielle Grundbildung“‘. Projekt CurVe / DIE. Abgerufen unter http://die-curve.de/content/PDF/DIE_Kompetenzmodell.pdf am 15.05.2022.
Reifner, U. (2011): ‘Finanzielle Allgemeinbildung und ökonomische Bildung’. Retzmann, T. (Hrsg.): “Finanzielle Bildung in der Schule”. Schwalbach/Ts.: Wochenschau Verlag. S. 9–30.
