The importance of Financial Literacy in the modern UK economy
What is Financial Literacy?
‘Financial Literacy’ is defined by Investopedia as ‘the ability to understand and effectively use various financial skills, including personal financial management, budgeting and investing.’ In today’s economy, the significance of Financial Literacy has surged, driven by the increased complexity of financial products and services which require detailed understanding to engage with them effectively.
Despite the importance of good financial literacy in society, the reality is that people still don’t understand simple everyday financial products. Shepherds Finance performed a study of 2,000 consumers across the UK on the topics of ISAs, investing and personal finance. Just 27% of Brits passed the money literacy test, meaning almost three-quarters struggle with financial literacy. The current cost of living crisis has added pressure to the UK’s Financial Literacy knowledge gap as high inflation levels leave people more vulnerable than ever, which results in larger ramifications if they don’t understand the financial products available to them.
Why is Financial Literacy important?
Financial literacy is vital for various reasons, including making wise spending decisions, safely managing debt, maintaining a healthy credit score, fostering savings for unforeseen circumstances, planning for retirement, achieving life goals such as buying a home or funding education, and providing protection against fraud.
Low levels of financial literacy span across all age groups. This comes into sharp focus when planning for retirement. Financial Capability reported, 61% of people don’t focus on the long term when it comes to money and 21% of people rarely or never save. Interestingly, Standard Life reported in 2023 that on average to maintain a comfortable living standard when retiring, a single person would need £37,300 per year for approximately 20 years. This means you would need to have saved £746,000 in pensions and investment upon retirement to live comfortably. In 2012, the government introduced the auto-enrolment scheme which increased the number of people saving for retirement, however people are still not saving enough. This lack of long-term financial focus not only affects individuals but can strain the broader UK economy. A growing proportion of retirees with insufficient financial resources may result in increased reliance on welfare programs, potentially leading to a drain on public resources.
Low levels of financial literacy can leave the younger generation ill-equipped, with only 52% of 7-17 year olds saying they receive a meaningful financial education in school, at home or in other settings. This emphasises the urgency for financial education initiatives to educate people to plan their finances for the long term.
For a long time, the importance of financial literacy was ignored, however, due to the UK’s low financial literacy levels on the global stage and the recent cost of living crisis, increasing attention is turning towards Financial Literacy. In November of last year, the Education Committee launched a new inquiry into how financial education can be strengthened throughout primary, secondary and further education. It’s encouraging to see the government prioritising these campaigns, with help from a variety of sources, consumers can boost their financial literacy levels and be empowered to save and invest, leading to a financially stable future.
What needs to be done to improve the UK’s Financial Literacy?
Improving financial literacy has the potential to significantly close the wealth gap in the UK. While there are many ways to improve the UK’s financial literacy, the government has a key role to play in how the future unfolds.
Financial literacy is a lifelong journey making it important to develop a collaborative national strategy to improve financial literacy amongst all users.
By making it compulsory for schools to teach topics such as budgeting, spending, and saving this could significantly increase children’s financial literacy and provide better outcomes for their futures.
Not only does the government play a vital role in increasing the UK’s levels of financial literacy but Financial Institutions have a part. Starling Bank and NatWest have introduced debit cards for children which fosters financial literacy by providing hands-on experience, teaching budgeting skills, and promoting digital and financial responsibility.
It is estimated £7 billion could be added to the UK economy by prioritising financial education, highlighting that there is a multitude of benefits to improving financial literacy.
How to improve your Financial Literacy?
Educate yourself – Formal financial literacy learning is the primary step to improving your education on the topic. There is a wealth of knowledge and materials on financial literacy available from books, podcasts, articles, videos and apps that explain a diverse range of financial concepts. For example, Doshi is a learn-to-earn financial education platform aimed at helping users across all ages with building financial confidence. By applying AI-powered learning, gamification, and modern goal setting techniques, they have created a disruptive approach to nudge users to build financial habits. Similarly, YourJuno was created to empower females by providing comprehensive financial knowledge in an easy-to-use app dubbed ‘the Duolingo of money.’
Research – It is important to carry out independent research prior to engaging in new financial products. There are often unknown consequences of engaging in financial products and services which are sometimes concealed at the beginning. However, by thoroughly researching the benefits and potential consequences of new products, you can make informed decisions on whether to engage or not. Some of the many useful resources such as YourJuno, budgeting app ‘Emma’ and The Martin Lewis Podcast are all free resources to help you start your financial literacy journey. Also, Kyle Masterson, Head of our SHIFT Open Finance Community recently shared some of his insights on Notion for effective money management and savings tips. Finally, doing your own financial research can help you become more fraud-aware and allow you to detect scams before engaging in products which could save you from falling victim to sophisticated scammers.
Financial literacy is a lifelong journey and improving financial literacy is a goal that everyone in the UK should strive for to engage in the economy and reap all the benefits. In order to increase financial literacy across the UK, people must acknowledge the power of available digital technologies, educational content and the range of support from financial institutions and government schemes.