Why financial literacy matters more than ever
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Growing up in a just-about-managing former market town on the fringes of the south Wales valleys, with a music teacher dad and a psychologist mum, there weren’t many signs to suggest I would develop an interest in finance. Then, for my 16th birthday, my father gave me a present: £100-worth of BT shares on the occasion of the telecoms group’s Thatcherite privatisation. For months afterwards, I would check the share-price pages of The Daily Telegraph, my parents’ paper of choice. If the stock was up a ½ pence, I would rejoice that I was now £1 better off.
Primitive stuff. And yet that early interest has taken me to my current job as the Financial Times’ deputy editor. Financial literacy has been the cornerstone of my career.
The contrast between my professional life and my early years, as well as the stark gap between haves and have-nots in northeast London where I live, are among the factors that have encouraged me to try to make a difference. In the coming months, the FT is going to establish its first ever charitable foundation, the Financial Literacy and Inclusion Campaign.
We no longer live in a world of paternalistic employers, nanny states and friendly bank managers. The shift towards a myriad choice of financial products, self-determined retirement planning and sometimes unscrupulous companies that seek to exploit us has made it steadily more important for all of us to have a firm grasp of basic finance. Your mobile phone contract might be great value or a horrible rip-off. Your credit score can rule your life unless you understand its mysteries. These would be reasons enough for the FT to be launching this initiative.
Letter from the editor
Read Roula Khalaf on the FT’s first ever charitable foundation: the Financial Literacy and Inclusion Campaign
But now feels like an especially important juncture to be doing so. Financial misery has already engulfed many people amid the economic fallout from the Covid-19 pandemic and the lockdowns that have accompanied it. The IMF predicts global gross domestic product will fall 4.4 per cent this year, with Spain, Italy, France and the UK suffering declines of 10 per cent or more. Unemployment is forecast to peak at 8 per cent in the US and the advanced economies of Europe. Financial stress is sure to spike again once government aid programmes shrink and job losses spiral.
The fallout will hit every demographic. To my shame, I haven’t been back to Brynteg School in Bridgend in the 33 years since I left. But even with the restrictions of a Welsh circuit-breaker lockdown, I was determined to find out what the current generation of students felt about their financial futures.
The video call proves a challenge — the classroom laptop is playing up and mask-wearing students are hard to hear. But I get the gist. Lauren asks if she should be worried about student loans. Theo wants tips to get on the housing ladder.
All of these A-level students seem concerned about the economic effects of coronavirus and Brexit. Financial literacy is theoretically part of the school curriculum across the UK nowadays, but in practice it is patchy — as in much of the world. The questions from the Brynteg students are smart. But without the mass-market share privatisations of the 1980s, there is even less to engage this generation in the practicalities of basic personal finance.
Young people, like those in my old school, make up one of the disenfranchised constituencies of society on which our financial literacy foundation plans to focus. Among the others are disadvantaged black, Asian and minority ethnic (Bame) communities, migrants and women. All have been shown by academic research to fall below average levels of understanding in basic finance, increasing the likelihood that they will be unable to budget efficiently, will get into unsustainable debt or will be open to exploitation. The FT’s charitable foundation will produce a series of educational videos and other material and collaborate with existing charities to distribute them in the UK and around the world. Readers will be invited to contribute both financially and as volunteers to help promote the cause.
Andy Haldane, the Bank of England’s chief economist and vice-chair of the National Numeracy charity that promotes everyday maths skills, believes the FT should be able to channel financial expertise, particularly that of the City of London, for the greater good. “What a shame it is that we have a huge repository of financial literacy in one tiny part of the country and huge need for it everywhere else,” he says. We hope to spread some of that knowledge.
Why is this so important now?
For Catherine McGuinness, policy chief at the City of London Corporation, the scale of the current economic crisis will highlight the gaps in people’s financial understanding as well as exacerbating their problems. “At a time when national and personal finances are taking a hit, it’s more important than ever that people understand complicated concepts such as interest rates and inflation,” she says. “If we’re to have a sustainable recovery it is vital that people . . . understand how their financial decisions will affect them over the short, medium and long term.”
A huge number of households around the world have low levels of financial cushioning to absorb the coming stress, according to the Organisation for Economic Co-operation and Development (OECD). In a 2020 survey of 26 countries, it found that only in Hong Kong did a majority of the population report having rainy-day savings that would last them for more than six months. In seven countries, including Russia, Romania and Indonesia, a majority of people had savings that would sustain them for only a week or less, or did not know. The US and UK did not participate in the study.
Understanding budgeting and borrowing costs is particularly important in lean times. The OECD found that three-quarters of those surveyed across the 26 countries could not calculate simple and compound interest correctly. The data also showed that more than a third of people reported spending more than they earned in the previous 12 months.
Even in rich economies such as Germany, Italy and Hong Kong, about one in five people had a financial shortfall over the year. The OECD report predicted that the added pressures of the Covid-19 crisis would put “a severe test on individuals’ financial resilience”. Last month the organisation announced, as part of its Covid-19 recovery package, that it was redoubling efforts to promote financial literacy, with a particular focus on women and young migrants.
“In the Covid crisis, young people have been more impacted by over-indebtedness,” says Flore-Anne Messy, executive secretary of the OECD’s International Network on Financial Education. “Young people also have lower levels of financial literacy.
This is especially concerning in areas such as decision-making on credit.” Companies such as Klarna in Europe, Ant in China and PayPal everywhere make it easy, but often expensive, to rack up debt via point-of-sale credit when shopping online — a particular temptation for the smartphone generation.
Diane Maxwell, a former banker who led a national financial literacy programme in New Zealand, says engaging people who are frightened of finance is key. “We developed a series of short films featuring Ken and Barbie puppets. They were a huge hit. Done right, financial capability education can help cut crime and problem gambling and foster financial independence.” The benefits go beyond our bank balances: some of the people who accessed Maxwell’s programme lost weight and quit smoking as their financial pressures eased.
Where better to start such financial education than in our schools? Anne Richards, chief executive of investment giant Fidelity International, worked at the Cern nuclear research centre before moving into finance. But she believes that real-world money maths is likely to be far more useful to most people than the abstruse mathematical concepts taught in the classroom.
“There are armies of people who left school knowing their SOHCAHTOA [trigonometry mnemonic] and how to find a first derivative, never to use them again,” she says. “Perhaps teaching children and young students the building blocks of how mortgages, credit cards, insurance and pensions work through the basic tools of statistics, risk pooling, compound interest and the like might be . . . more useful for the majority.”
The role of financial education
Clapton Girls’ Academy in east London is rated “outstanding” by the Ofsted school inspection service. Its cluster of buildings in the heart of Hackney melds austere Edwardian with modern glass and steel; this state school has good facilities and a sound academic record. But achievement is not a given: it has a high intake of students from disadvantaged backgrounds and some don’t speak English as a first language. When it comes to financial literacy, the girls at CGA are fighting the statistical averages all the more — as young people, as women and, in many cases, as members of Bame communities.
Some are already having to deal with financial realities beyond their years. Anna Feltham, the headteacher, says the issues are far more immediate than you might imagine. “Some of our 15- and 16-year-olds are even having to manage rent and mortgage issues because they are English-speakers and their parents aren’t.”
Fatou, who is 17 and a pupil in Year 12, studying for a qualification in health and social care, is typical of many her age in being unfamiliar with the core concepts of personal finance. She admits, for example, to being uncomfortable with percentages and interest rates. But she knows one thing — in line with her Muslim heritage and sharia restrictions on interest-bearing debt, she is concerned about borrowing. “Getting into debt can ruin your life,” she says. “When my mum and dad came here from Gambia, they were very careful. Personally, I think it’s not good to take out a loan. What if you can’t pay it back? You get into poverty and it stresses you out.”
Fatou says she has seen friends and acquaintances get into just that kind of fix thanks to preoccupations with how they look and what they wear, fuelled by social media: “A lot of people get so much in debt because they want to dress in designer stuff like they see on Instagram. Either that or they try to make quick money from doing something illegal.”
Fatou’s savviness about spendthrift consumerism is striking but her antipathy to debt might have a downside too: without student loans, a university education is impossible in many countries these days. “Taking out a loan is one of the things that scares me about going to college — having to pay for accommodation and getting into debt,” she says.
This is exactly the kind of concern that deters many poorer students from going to university. In 2017, UCL academics Claire Callender and Geoff Mason published intricate research concluding that “lower-class” students were “far more likely” than students from other social classes to spurn higher education “because of fear of debt”. That instinct was higher than when previous research was done in 2002, in line with an increase in tuition fees and the prospective debt burden.
In the UK, unlike in some countries, the terms of student loans are at least designed to be reassuring: you only have to repay anything once you’re earning more than £26,575 a year — and then only at a rate of 9 per cent of any excess earnings. If you still have any outstanding debt after 30 years, it is wiped out automatically. But this message is clearly failing to get through, with damaging implications for social mobility. These students are ripe for financial literacy education.
The ‘Big Three’ financial literacy questions
30 per cent of Americans, 25 per cent of Italians and 53 per cent of Germans answered all three of these correctly. Can you? (Answers at the bottom of the article)
1 Suppose you had $100 in a savings account and the interest rate was 2 per cent per year. After five years, how much do you think you would have in the account if you left the money to grow?
• More than $102
• Exactly $102
• Less than $102
• Do not know
2 Imagine that the interest rate on your savings account was 1 per cent per year and inflation was 2 per cent per year. After one year, how much would you be able to buy with the money in this account?
• More than today
• Exactly the same
• Less than today
• Do not know
3 Is this statement true or false? “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”
• Do not know
When women get left behind
Money headaches cannot necessarily be solved by financial education — but knowledge can help enormously. When Annamaria Lusardi was growing up in the market town of Carpaneto, midway between Milan and Bologna, she remembers trailing into the town square every Wednesday morning. Her mother would beetle off to do the food shopping. She would stay in the square with her dad, a vintner, as he negotiated deals with all-comers.
“Nobody saw the little girl with pigtails and a flowery dress holding the hand of a young man in a business suit, but I spent those Wednesday mornings with my nose up observing people shaking hands, writing cheques, whispering numbers,” she writes in the introduction to her forthcoming book, Financial Literacy: A Vision For the Future.
It was that early familiarisation with finance — combined with the rarity of it among women in her patriarchal home country — that inspired Lusardi to devote her working life to studying and promoting financial literacy. In a paper last year, Lusardi, who now heads the Global Financial Literacy Excellence Center at The George Washington University School of Business, wrote of the “near-crisis levels of financial illiteracy” around the world, with low levels of understanding even in advanced economies with sophisticated financial markets. (To Lusardi’s chagrin, Italy routinely scores worse than almost any other developed country, especially for women.)
While insufficient income is clearly the genesis of poverty, gaps in basic financial knowledge compound the issue considerably. Lusardi says her research showed almost half of the costs paid out on credit card debt in the US, for example, were “due to ignorance” of charging structures and the impact of compound interest. “Financial literacy is a shield against shocks,” she says.
Lusardi’s specialist subject is women and the financial literacy gap with men. Women’s income will typically be more volatile and they are likely to live longer than men, making financial knowledge all the more important. Yet, in a recent research study, she found women knew less on every topic in a series of 28 questions on eight different areas of finance. In the US, if you are a woman, young and from an ethnic minority, you are in the worst possible situation when it comes to understanding finance: that is the vortex. “Women are left behind,” she says simply. And the Covid-19 crisis has made matters worse: McKinsey estimates that around the world women are 1.8 times more likely than men to lose their jobs in this downturn.
“It’s about empowerment,” says Lusardi. “We owe it to women, who are bearing the brunt of this crisis, to make sure they are equipped with the financial knowledge to recover.” But, she stresses, the mission must be far broader than that: literacy in finance, like literacy in language, must be instilled in any community that lacks it. “It’s about basic knowledge, knowing your ABC of finance,” Lusardi concludes. “And knowledge really is power. That’s true for everyone.”
Working with the most vulnerable
More obviously disadvantaged are the swaths of refugees, asylum seekers and migrant workers across our globalised world. Many migrants struggle financially, with inescapable vulnerabilities sometimes worsened by gaps in basic financial literacy. Jennifer Blair, co-lead of legal protection at the Helen Bamber Foundation, which supports refugees who have suffered extreme cruelty, sees this regularly. “Refugees often lack the wherewithal to cope in society. Survivors of human trafficking, for example, may have no understanding of what life costs here. One former client got a water bill. She said: ‘What? You have to pay for water?’”
Michael Gilmore, a financier based in Singapore who works with local migrants in his spare time, believes in harnessing entrepreneurial instincts to help: “At weekends, I teach basic entrepreneurship to migrant workers from Indonesia and elsewhere,” he says. The first lesson is about the power of saving. So important is it that he has developed a whole saving and investment theory, the “Seven Dollar Millionaire”, to explain how compound interest, combined with a $7 daily savings habit, can yield $1,000 in six months and $1m in 50 years, assuming a 7 per cent annual return. This, he says, is crucial financial literacy in practice. “No one thinks about being financially literate per se. But they do want to be financially secure, to not be in debt and misery.”
On a damp autumn day in Wales, mist hangs over the seaside cliffs and gentle hills that flank the Pembrokeshire village of Penally. In this overwhelmingly white corner of the UK, hunkered down among the picturesque countryside, sit the old Nissen huts and barbed wire fences of Penally Military Camp. The soldiers are long gone. But the camp is back in use, penning in more than 200 asylum seekers who were moved here in September from elsewhere in the country.
Volunteers who have liaised closely with the Eritreans, Kurds, Somalis, Iranians and Iraqis who were rehoused here say the setting is totally inappropriate. “These are victims of torture, rape survivors who may have been through abduction,” says Blair. Some had been forced into military service. Many have PTSD. “They get woken from where they’re being accommodated in the middle of the night and driven to an old military camp surrounded by barbed wire.” Military exercises and army shooting practice take place across the road. It all makes the trauma come flooding back, say the volunteers.
Abdul (not his real name), a former asylum seeker from Somalia who now works at the camp, insists it’s not so bad. “The guys here have got food and accommodation. It could be better. If you offered them £10,000 they’d be happy. But it’s OK.”
Abdul’s allusion to a dream windfall of money is a throwaway phrase. But it reflects a crucial point. While some tabloid newspapers portray British asylum seekers as scroungers and criminals, the bald truth is that once the basic human rights of food and accommodation have been met, the reality for many will be financial stress.
Fabio Apollonio at the British Red Cross says that, as a migrant with no financial history, it can be particularly hard to establish yourself in a modern data-dominated economy. “Our identities these days are defined by what you buy and how you pay for it. That’s something that refugees don’t have.”
“I never imagined becoming an asylum seeker,” says Carlos Ibarra-Rivadeneira, speaking by Zoom from his spartan flat in Swansea, 30 miles along the coast from Penally — and 4,500 miles from home. Pre-migration, the softly spoken Venezuelan had spent years training young people in everything from self-development to democracy awareness, and was used to putting up with intimidation from loyalists to the hardline socialist government.
“But then I suffered three attacks. I was beaten against the floor with bats and sticks. Two motorbikers accused me of being a traitor. There was another attack with firearms. After that we decided we had to leave.” A plan to fly to Rome was ditched spontaneously during a stopover at Heathrow. “We arrived at 5pm and by 2am we were leaving the airport as registered asylum seekers.”
Thus the teacher-turned-life-coach, his wife and two just-grown-up children began the task of rebuilding their lives. They joined the 30,000 or so migrants who apply for asylum in Britain every year — morphing overnight from property-owning middle-class Venezuelans into survivors of breadline Britain. They subsisted for months on the statutory allowance, which today runs to £39.63 a week (up 3p since October). After paying for pricey internet and a £20 weekly bus pass, Ibarra-Rivadeneira says he had barely £1 a day to live on. “I needed the WiFi and the bus pass to make progress. But sometimes it was that rather than eating.”
Getting by as an asylum seeker is hard enough. But as many migrants will attest, the biggest hurdles — both societally and financially — come after securing asylum. “While you’re waiting for refugee status, you’re in a cushion,” says Ibarra-Rivadeneira. “Then suddenly it’s like parachuting without a parachute.” The issue lies in understanding the financial infrastructure of a new country, as much as understanding finance. Navigating the benefits system has been particularly difficult.
“This is a painful process. It’s a gap. Not many organisations are focused on helping you understand this or cope with the transition,” he says. Having volunteered during his asylum-seeking period, when paid work is banned, he managed to secure a temporary support-worker job at a charity once his refugee status was granted. The coronavirus squeeze means he now works just one day a week.
As a result, Ibarra-Rivadeneira is perilously behind on paying his fees for his masters degree in psychology. Yet despite everything, he is optimistic about his medium-term goals. “In five years or less, I will maybe have some savings, I will apply for a mortgage and I will buy a house. I want to be practising as a professional counsellor, I will have set up my own business.”
Financial literacy can provide a springboard for refugees not only to survive straitened times, but also to thrive as entrepreneurs and make the economy of their host nation more dynamic in the process. “Many migrants have had to fight hard to get where they’ve got,” says Maurice Wren, chief executive of the Refugee Council. “They are by definition entrepreneurial.”
The FT’s Financial Literacy and Inclusion Campaign is in the process of being set up as a charitable foundation. To register your interest in helping, donating or collaborating, please email firstname.lastname@example.org
Everyone has gaps in their financial knowledge. But for migrants and others who are socio-economically disadvantaged, as well as for many women and young people, those gaps are significant. Filling them in will help avert individual misery, maximise individual potential and boost economies.
The FT’s financial literacy foundation is in the early stages of development but the momentum is picking up. We have a shadow board of trustees and a shadow advisory board. I have been delighted by the enthusiasm for the project shown by many experts in finance and financial literacy. A dozen or so of my oldest contacts have been generous enough to pledge seed funding, alongside the FT itself, sufficient to finance our start-up.
Once the charity is established, readers will be invited to back the foundation by donating their money, time and expertise. To reach all the constituencies around the world that need help will be a vast challenge. But if faith in capitalism and finance is to be restored, amid the second global economic crisis in little more than a decade, it is vital that we try.
Patrick Jenkins is the FT’s deputy editor
Quiz answers: 1 More than $102. 2 Less than today. 3 False.
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