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Financial literacy continues to be a topic of concern, exacerbated by the great recession of 2008 and, more recently, the COVID-19 pandemic and inflationary crisis. In response, there have been growing efforts to improve financial literacy in the U.S., including many governmental and private sector campaigns. But progress remains slow. It’s time to examine the menu of potential solutions offered by other countries with higher rates of financial literacy than the U.S.
What Is financial literacy?
There is no generally accepted definition of the term “financial literacy,” but the World Bank broadly defines it as “the level of aptitude in understanding personal finance.” The U.S. Financial Literacy and Education Commission defines it as “the skills, knowledge and tools that equip people to make individual financial decisions and actions to attain their goals.”
Financial literacy in the U.S.
The Milken Institute issued a 2021 study in which it reported that “many U.S. adults [still] lack the basic knowledge and skills required to engage in sound financial decision-making.” To get a measurable level of financial literacy, however, requires more specificity. That study referred to the 2014 S&P Global Financial Literacy survey for specific parameters. In the S&P study, financial literacy was assessed by measuring knowledge of at least three out of four basic financial concepts: risk diversification, numeracy, inflation, and compound interest. The S&P study found that 57% of U.S. adults were financially literate, though it also noted that financial literacy varied significantly across demographic groups.
Financial literacy abroad
The S&P study revealed that, around the world, the Scandinavian countries ranked highest in terms of financially literate populations. Denmark, Norway, and Sweden tied for first place with 71% rates of financial literacy. Next were Israel (68%), Canada (68%), the U.K. (67%), the Netherlands (66%), Germany (66%), Australia (64%), and Finland (63%). Outside the top 10, New Zealand (61%), Singapore (59%), and the Czech Republic (58%) also outperformed the U.S., which tied for 14th place with Switzerland, both having a 57% rate of financial literacy. By way of reference, Yemen finished last among over 140 countries at 13%.
While the U.S. ranked in the top 10% of all countries surveyed, a 57% rate of financial literacy is too low. Why is it so low and what can be done to improve it? As to the former question, according to a 2022 CNBC/Acorns/Momentive survey, 83% of parents said they are responsible for teaching their children about finance, but 31% said they never even talk to their children about the topic, and 40% said they only do so once a month or less. Are our schools teaching the subject in place of parents? Not sufficiently, according to the non-profit Next Gen Personal Finance: most states still do not require students to take a standalone course in personal finance to graduate from high school.
Lessons from the leaders
What is it that the countries ahead of the U.S. are doing right, and can we adopt some of their measures to make our country more financially literate? Let’s begin by looking at some of the European countries. Denmark makes financial education mandatory for grades seven through nine, with Danish adolescents participating in an annual event called Global Money Week (GMW) held by the International Network on Financial Education (INFE). This organization supports public authorities to design and implement national strategies for financial education, while proposing innovative methods for enhancing financial literacy among the populations of partner countries.
Norway, also a member of INFE, offers its youth financial education through programs that are funded by the national bank. Similarly, in Sweden, students are taught personal financial education concepts, numeracy, and similar life skills.
Here’s where it gets even more interesting.
Denmark has approximately 700 participating organizations in GMW, having reached over 20,000 children and young adults, while Sweden has reached over 40,000 young individuals directly. In contrast, the U.S. has only one participating organization in GMW, having reached under 100 people directly.
Australia has also focused its efforts on younger people, though this focus is as much cultural as it is formal. In Australia, 79% of 15-year-old students have a bank account, and, perhaps not coincidentally, Australian students score above average among the top 10 most financially literate countries. In contrast, in the United States, eight in 10 teenagers do not maintain a savings account, even though studies have shown that children with savings accounts are six times more likely to go to college and four times more likely to own stocks as young adults.
Then there is Canada, which has adopted an even more holistic approach. Our neighbors in Canada have implemented a program that engages the public, private, and non-profit sectors to improve financial literacy in their country. It aims specifically to educate Canadians of all ages to manage their finances and debts, plan for savings, and learn to protect themselves against fraud and financial abuse.
Conclusion
How can we get our citizens to become more financially literate? We can implement some of the practices followed by the most financially literate countries in the world. We can make secondary education in personal finance compulsory. We can offer financial, tax, and other incentives for young people to begin taking control of their own savings at an early age, even with the smallest amounts of savings. We can energize the public, private, and non-profit sectors to create and coordinate financial literacy programs that substantially exceed those in place today. Lastly, we can increase our focus on educating adults as well as children. Employers, for example, can be encouraged to arrange financial learning programs and short courses on personal wealth planning and fraud prevention.
No simple solution will improve financial literacy in the U.S., or it would already have been implemented. Yet, others have achieved greater levels of financial literacy than us, and while all countries have their challenges, it’s time to look at others for solutions.
Michael Nathanson is the chair and chief executive officer of The Colony Group, a national Registered Investment Advisor. Anuja Patil is an intern in the firm’s advisory practice.
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