A new report suggests that many adults lack the skills to understand and manage difficult financial situations.
According to a new report from the Organization for Economic Co-operation and Development (OECD), only 34% of adults have a minimum level of financial literacy.
This means that most individuals, at least in the 39 countries surveyed, are unable to manage their money effectively, a skill essential to individual and societal well-being.
The OECD report also highlights the vulnerability of those who lack basic financial knowledge, especially at a time when soaring prices are putting further pressure on wallets.
“High inflation and rising interest rates have highlighted the importance of equipping citizens with the financial knowledge and skills needed to cope with the difficult financial situation,” said Chiara Monticone, OECD Principal Analyst.
She told L’Observatoire de l’Europe Business: “The results of our survey show that although most adults understand basic financial concepts, their overall financial knowledge and skills could be significantly improved, including when it comes to digital financial services. »
Who is at the top of the rankings in Europe?
The OECD assigned a financial literacy score to each of the 39 countries surveyed, and the results for the various EU member states are shown below.
Looking at the average scores of different populations, only Ireland and Germany reached the minimum financial literacy threshold of 70 points out of 100.
The latter also ranked first in the wider OECD study.
In addition to examining international differences, the report also notes differences between different population groups at the national level.
Individuals who have higher levels of formal education tend to manage their money better, as do those with higher incomes and those who are employed.
Other contributing factors include gender and age.
In the countries surveyed by the OECD, people aged 30 to 59 generally have higher levels of financial literacy than people aged 18 to 29.
Men also score slightly better on average than women.
Knowledge of basic concepts
When it comes to key financial principles, the OECD reports that 84% of adults understand the definition of inflation, but only 63% can apply the idea of the “time value of money” to their own savings.
To summarize this concept, the time value of money is the idea that a certain amount of money is worth more in the present moment than in the future.
For example, if you were offered €1,000 and had the option of accepting it now or later, the smart choice would be to take the money now.
Why? One reason is inflation and the other is profit potential.
By taking the money up front, rather than waiting 10 years, you give yourself the opportunity to invest and earn more money, which means you can increase your initial lump sum.
Another term that confused OECD respondents was compound interest, which only 42% of adults understood.
Put simply, the term refers to earning “interest on interest.”
By reinvesting the money you earn on your investments, you can accumulate an even larger amount through interest payments.
Fraud resistance and digital skills
In terms of financial vulnerability, 15% of those surveyed said they had been a victim of at least one type of fraud or money fraud.
The OECD found a negative correlation between financial literacy and risk, with around two in three people falling victim to fraud failing to meet the target financial literacy score.
Staying on the lookout for fraud is also linked to digital literacy as many criminals now use online channels to target individuals.
When it comes to the OECD’s assessment of digital financial literacy, it doesn’t bode well.
On average, only 29% of adults surveyed met the target level of digital skills, although these scores increase with education and income levels.
Saving for financial shocks
Given the pressures on household budgets in the current context, the OECD calls for better financial education to improve resilience.
On average, the group says that only 59% of adults surveyed would currently be able to pay large expenses, equivalent to a monthly income, without resorting to outside help.
This can include a loan from the bank, family or friends.
To solve this problem, the group says education must focus on new digital ways of managing money and be accessible to people with the lowest skill levels.