There are a slew of skills considered necessary for “being an adult.” Some, like the ability to apply for jobs, pay bills and prepare (or procure) meals, are widely recognized, while others, like financial literary, do not attract the attention they deserve. In the UK, far too many people are entering “the real world” without the information they need to make smart financial choices. Financial inclusion remains a major obstacle in the UK, but surveys of Britons[1] have revealed that money remains a taboo subject — it is considered the top conversation killer. To make substantive progress towards full financial inclusion and a financially literate population, we have to stop sweeping financial literacy under the rug. It’s time to talk.
The problem Nearly two million adults in the UK do not have a bank account. According to a report from the Financial Inclusion Commission (FIC)[2], up to 8.8 million people (18% of the population) are over-indebted and 15 million people (31% of the population) report one or more signs of financial distress. 13 million people (26.8% of the population) do not have enough savings to support them for a month if they experienced a 25% cut in income. Meanwhile, the UK does not have a national financial inclusion strategy, and the FIC found that there is not “enough momentum and coordination” across sectors to address these problems. Banking, credit and insurance services are not meeting the needs of low-income consumers. In addition, financial “capability” is a pervasive problem, and one with stark implications for the future. 15 million Britons say that they never received formal financial education[3] but wished they had; Over 4 million feel out of their depth when it comes to managing money on a day-to-day basis and for the future.
Most people do not understand the basics of personal finance, and research conducted by the U.S. government shows that[4] “low levels of financial literacy are associated with high levels of indebtedness, lower wealth accumulation and less retirement savings.” The cost of financial illiteracy on individuals and the economy is high, and signs show that it is only going to get worse. Today’s graduates are leaving universities with minimal knowledge of how the financial system works and how to manage their own personal finances. A PriceWaterhouseCooper study revealed that only 8 percent of millennials have high financial literacy and 24 percent of millennials have basic financial understanding[5]. As a result, millennials are already falling into bad financial habits -- including accruing long-term debt, regular overdrafts on checking accounts, outstanding student loans and credit card debt -- that could have disastrous effects on the economy if gone unchecked.
We have to start putting more effort into teaching future generations how to manage their money responsibly. This requires having open, honest and informative conversations about money, as well as equipping millennials with the information and tools they need to make smart financial decisions.
How can we make sure we are creating future financially literate adults? Education is the first step towards greater financial literacy and inclusion. Money management is something every British adult will have to deal with at some point, and it needs to be prioritized accordingly as part of a well-rounded education. According to research from the University of Cambridge, children have developed several basic “finance” behaviours (such as counting) and have developed an understanding of the value and exchange of money, by the age of seven. Therefore, it is critically important to begin teaching smart money management skills early[6]. To really sink in, these skills need to be reinforced consistently over time. The chance that a teenager will go out of their way to procure these vital skills is small, which is why schools need to take on at least some of this duty and teach financial literacy along with math and history. However, research from the World Bank shows that financial lessons have the greatest impact when taught during “teachable moments” — when an individual is faced with making a big financial decision[7]. These moments are powerful because they make the lessons seem relevant and give learners the opportunity to apply them in their own life. You are not just learning about credit, but actually going through the process of opening a credit card. Many of these teachable moments arise during postsecondary education, when students are faced with independently making large financial decisions, such as opening a bank account, for the first time. The information and resources young people absorb in these moments will help them make sound financial decisions throughout their rest of their lives. It will also prevent them from developing bad habits that will be heard to break. Once someone has begun taking on credit card debt, it only becomes harder to overcome that tendency and start spending responsibly.
A broader, more comprehensive approach to financial literacy education will only drive meaningful results if it is coupled with accessible, affordable and easy-to-use tools. Millennials grew up in the “there’s an app for that world.” They are used to Googling when they need information, receiving constant responses to texts and social media posts, and accessing on-demand services with a tap. This comfort with and interest in technology has shaped their banking habits. According to a study from FICO, 80 percent of millennials use digital banking and are twice as likely to use a bank’s mobile application than Generation X or Boomers[8].
In addition, millennials came of age during the global financial crisis, and are understandably more distrustful of large financial institutions than previous generations. The fact that they are not married to traditional financial institutions means they are more willing to look at nontraditional providers to meet their financial needs. For example, the FICO report revealed that millennials are 10X more likely to use peer to peer (P2P) lenders. These preferences are prompting traditional financial institutions and tech companies alike to explore a wide range of new opportunities to engage millennials over their finances.
Apple, Google and PayPal are duking it out to become the go-to mobile wallet. Alternative lending is now pegged as a trillion dollar market[9]. Robo-advisors are making wealth management capabilities available to a broader, younger spectrum of people. Personal finance management (PFM) apps are helping users with tasks like budgeting and bill payment. In each of these cases, data is being leveraged to help consumers make the decisions that are right for them. Personalization is key because no two individuals have the same set of circumstances, needs and goals. The reason why teachable moments are so powerful is that they take financial literacy lessons from the general to the personal. This is also why data analytics will play such a critical role in the future of personal finance.
The most effective money lessons are neither boring nor isolated from “real life.” Beyond financial literacy education itself, people need to hone the lessons they learn over the course of their lives. They also need support when they are faced with major life events, like attending university, accepting a job, buying a house and getting married. Technological advancements like mobile technology and data analytics create invaluable opportunities to provide that support to more people in a more personalized and objective way. The combination of better education and better technology has the potential to ensure every child and adult in the UK has ability to make healthy financial decisions. However, before any of that can happen, we have to break through the “massive money taboo” and bring financial illiteracy to light, in order to then put it to rest.
[1] http://www.legalandgeneralgroup.com/media-centre/nigels-blog/index.asp?newsid=62 [2] http://www.financialinclusioncommission.org.uk/pdfs/fic_report_2015.pdf [3] http://nsandi-corporate.com/15-million-britons-wish-they-had-received-financial-education/ [4] https://www.whitehouse.gov/sites/default/files/final_toolkit_employers.pdf [5] http://www.pwc.com/us/en/about-us/corporate-responsibility/assets/pwc-millennials-and-financial-literacy.pdf [6] https://masjumpprdstorage.blob.core.windows.net/cms-production/the-money-advice-service-habit-formation-and-learning-in-young-children-may2013.pdf [7] http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTGLOBALFINREPORT/0,,menuPK:8816192~pagePK:64168176~piPK:64168140~theSitePK:8816097,00.html [8] http://images.email.fico.com/Web/FICO/%7B7a2b6f48-8262-4491-91c5-995d4480d774%7D_fico-millennial-insight-report-v16.pdf [9] http://www.slideshare.net/foundationcap/p2p-lending-presenation
