In 2015, I helped the Money Advice Service launch a nationwide Financial Capability Strategy, bringing together various different agencies (charities, journalists, educators, financial companies and more) to help Brits to understand how to manage their money and get rich.
I gave opening speech which was on the importance of Financial Capability to the long-term economic future of the UK.
Here’s what I said…
- Why do we need a Financial Capability Strategy?
- How would a financially savvy country help business?
- How would a financially capable populace save the taxpayer money?
- What happens in other countries? Are they better than us at money?
- Would you like to be more financially savvy?
In talking about the importance of financial capability in the UK I’m reminded of news items I used to hear when I was growing up – reports telling us that scientists had found that, staggeringly, smoking is bad for you. Amazing. Who knew? It took years of these astounding discoveries before smoking bans took place.
It seems to have taken just as many studies and as many years for us to come up with a real strategy to deal with the eye-watering levels of financial ignorance in the UK.
As a financial journalist I am constantly getting press releases about the UK’s lack of savings, of its small pension pots, of its unnecessary indebtedness, of its financially-related stress problems and so on. It has taken years of studies and lobbying to get financial education into schools and at the same time, debt charities, consumer groups, MPs and financial journalists have been pushing for adults to be trained in the basics as well.
So we all know that there’s a widespread problem and that some sort of education is needed but while these studies have gone on the ignorance has continued and worsened.
I was amazed to hear from the Money Advice Service that the number of people who can’t pick out the balance on their bank statement has more than doubled in the last 10 years – in 2005 it was 9%, this year it’s 22%.
How did that happen?
Particularly as, in that time, the amount of free financial information available to the public has mushroomed. I know, Moneymagpie.com, is one of them. And it’s an annoyance to me that it’s in a very, very crowded market!
It’s not like the information isn’t out there…it is…every day more money articles are written and videos made…offered free….by people who know what they’re talking about…trying to get the message across to a public that either doesn’t want to listen or, more likely, doesn’t know where to start.
Brits desperately need help understanding money in order to keep them out of unnecessary poverty and debt.
But this increased financial capability would also contribute massively to business and to the State.
Admittedly a more financially capable consumer base would be bad news for payday lending companies, pawn brokers and dodgy PPI sellers…but employers would be net winners if their workforce were more stable financially.
Last year The Office of National Statistics reported that out of the 131 million sick days taken in 2013, 15 million were due to stress, depression and anxiety.
Also, according to a recent Sodexo poll 22% of UK employees said that their financial situation not only causes them stress, but also impacts negatively on their work productivity. This number is higher, for those aged between 18 and 34.
More robust US research from University of Maryland found a significant statistical relationships between employees’ levels of financial stress, pay satisfaction, work time use and absenteeism. Those who were more financially stressed showed lower levels of pay satisfaction, spent more work time on financial concerns, and were more frequently absent from their work even when other variables such as age, work years and education, household situation etc were taken into account.
A 2013 Price Waterhouse Coopers survey found that workers in the UK take more than 4 times as many days off as they do in comparable countries with an average of 9.1 days per year (Compare this to 4.9 days in the U.S. and 2.2 days in the Asia-Pacific region.) This is costing the UK nearly £29 billion per year. Since the 2008 financial crisis sickies have reduced gradually as worries about job security have increased, but there is still considerable absenteeism due to stress..
So a workforce with more control over its finances would be worth billions of pounds per year to business….and therefore to the economy.
Financial literacy is essential to health of the country’s coffers.
For a start, The NHS spends more than £520 million per year treating depression – some of that is due to financial issues…hard to quantify just how much but we know it’s a significant proportion. As I’m sure you know, a number of GPs surgeries around the country now have money advisors from Citizen’s Advice helping patients with their financial crises.
If we can just reduce the depression caused by debt and other financial horrors we will reduce that health bill!
Also, I would argue that a significant proportion of the national debt is down to the electorate’s poor individual financial management, particularly when it comes to saving for retirement and for a rainy day.
2014 research from Prudential shows that 1 in 7 people will retire without a private pension – only relying on the state pension. Financial ignorance comes into play here, with 2 in 5 not knowing what the state pension is worth or thinking it will pay them more than it actually does.
As far too many rely on the State to fund their increasingly long retirement lives, the State already can’t bear the burden – and that burden is increasing, as we know
It’s essential for the State’s coffers that individuals save a lot more for retirement and therefore, are able to fund themselves rather than relying on the tax payer.
Funding long-term care is also an impossibly huge bill for local and central government.
According to The Money Advice Service’s own research, less than a third of people at retirement age have any form of plan for funding long term care.
As the population ages and we all selfishly refuse move on at the designated three score years and ten, individuals need a lot of guidance in saving for themselves.
A 2012 study from the Centre for Economic and Business Research has claimed that financial education could help reduce the unemployment subsidy by £600 million.
Out of interest, the study also found that people who are unable to save enough for retirement cost the government £6.2 billion in income subsidies, and financial education could potentially cut this by 1.8 billion each year.
Across the world, people are being asked to assume more responsibility for their financial well-being. Changes in the pension landscape across the West mean people are being given more responsibility for their retirement savings and other financial cushions, while at the same time we’re having to deal with ever more complex financial products from credit cards to SiPPs and more.
Looking at levels of financial capability around the world, it’s kind of comforting to know that we’re not the only ones that are bad at money. Many countries have citizens who don’t know the first thing…particularly Italy, Portugal and some of the Baltic states.
The USA is perhaps vaguely comparable to the UK although they are more advanced than us when it comes to investing and the stock market. 2/3rds of Americans rely on Social Security as their sole source of income after retirement. About 20% of government spending there goes to pensions (about $1.3 trillion predicted for 2015). 20% is the same as the UK – £150 billion pounds
However, they are ahead of us when it comes to a financial capability strategy. In 2003 they established the U.S. Financial Literacy and Education Commission, which was tasked to develop a national financial education website, MyMoney.gov, and a national strategy on financial education. Sound familiar? It seems to have had some effect, certainly according to a USA Today article “Only 40% of adults surveyed in 2012 gave themselves a grade of C, D or F on their knowledge of personal finance — down from 65% in 2010”
Not surprisingly, though, many other countries do much better than us and, interestingly, it seems that a country’s impressive financial capability tends to go hand in hand with a savings culture – and creating a savings culture is something that the Financial Capability Strategy will be particularly aiming for.
Australia, for example, which is good at saving and also regularly comes up with innovative financial solutions, has a populace that is generally confident about money. According to a recent survey there, over half of Australians describe themselves as ‘confident at managing their money’. You wouldn’t get that in the UK.
A comparative study by FINRA (the Investor Education Authority) in 2012 looked at financial capability in Germany, Netherlands, Japan and the USA. Germany – a traditionally saving culture – won hands down.
Annoyingly they didn’t include the UK in that study but they are this year apparently. I will be fascinated to see what they come up with when the results come out…I haven’t seen them yet.
Chinese students came top of the list of 18 countries in a financial literacy study run by the OECD (weirdly it didn’t include the UK either).
Like Germany, China traditionally has a savings culture. I have a young Chinese woman working for me at the moment who says she’s rubbish at managing her money. But when I asked her about saving she said ‘well of course, I save…everyone in China saves because they have to. It’s not like in Britain,’ she said, ‘where the State will pay if you run out of money. We don’t have that in China. There are too many people to look after so we know we have to save.”
So perhaps that’s another reason why we in Britain haven’t pushed ourselves to learn about money – for decades we’ve believed that the State will pick up the tab. It’s taking us a while to realize that we’re in a whole new economic environment now.
There will be a lot going on in the next few years to get people of all ages in all situations to understand money better.
If you would like to get involved, or get some training yourself, let me know in the comments below and I’ll be in touch.