Financial Understanding

Financial PlanningFund ManagementEconomics

Money matters too complicated for most adults

While pensions, tax, and money matters are becoming ever more complicated, fewer ordinary people understand their finances. Research in the UK and the USA reveal that financial understanding is quite low and that providers and governments need to spend more money on education, rather than offering ever easier access to pensions, savings, and investments.

The latest survey, by the US Financial Industry Regulatory Authority Foundation (FINRA), showed that only 37% of adults could answer four or more questions correctly in a financial literacy quiz.

Struggle to make ends meet

These numbers were down from the results of similar quizzes set by FINRA in 2012, when 39% could answer the questions, and in 2009 when 42% passed the test. The conclusion of the research, which looked at how Americans cope with their day-to-day money matters was that although most felt reasonably confident about their finances, millions still struggle to make ends meet.

A fifth of Americans have the millstone of unpaid medical debts and close to 50% of adults with just a high-school education could not scratch together $2,000 in a month for an emergency. In the UK, research into how the over 55s access retirement savings with new pension freedoms found 70% had not bothered and few shop around for the best investment options because they either do not know about or fail to understand their choices.

Moderate take-up

The takeaway is, by introducing more options and adding layers of financial complexity, such as crowdfunding and Bitcoin virtual currency transactions, are only likely to have a moderate take-up among those more educated investors because the rest of the population do not have enough spare cash or money in the bank to care.  In fact, the American research drew a clear correlation between ethnicity, education, and financial awareness.

Disenfranchised groups who are prone to be less educated, such as Hispanics and Afro-Americans were more likely to borrow from payday lenders or pawn shops than other groups.

“This research underscores the critical need for innovative strategies to equip consumers with the tools and education required to effectively manage their financial lives,” said FINRA Foundation Chairman Richard Ketchum. “My hope is that policymakers, researchers, and advocates will use these findings to make more informed decisions about how to best reach underserved populations.”