Financial education boosts wellbeing
On January 24, UNESCO’s fifth International Day of Education is celebrated, with the theme ‘to invest in people, prioritise education’. Against the backdrop of global recession, growing inequalities and the climate crisis, improving education is more important than ever. At Intrum, we see how education enables consumers to understand and take control of their finances – boosting both economic circumstances and wellbeing.
Good financial education enables consumers to function in society and enjoy their lives without worrying about fulfilling their financial obligations. At a time when the costs of living are rising, it’s crucial that people know how to spend and save wisely.
Intrum’s European Consumer Payment Report 2022 found that, not only are consumers with good financial education better able to withstand the economic downturn, they also feel more optimistic about the future.
Those with an elevated level of financial education report higher levels of financial wellbeing and are significantly less likely to default on their bills, compared with those who say they received poor financial education.
Default predictions linked to education
For example, one in two (49 per cent) with a poor financial education expects to default on a utility bill at least once in the next 12 months, compared with 29 per cent of those with good financial education.
Education has a huge impact on an individual’s ability to cope with difficult circumstances, such as the recession we find ourselves facing in 2023, combined with rising prices and borrowing costs. People who have not been taught how to manage their money are less likely to have the tools they need to weather these storms.Anna Zabrodzka-Averianov, Senior Economist at Intrum
Around seven in 10 respondents with a poor financial education indicate that they are worse off now than they were 12 months ago. This compares with less than half (48 per cent) of those whose education has made them confident in their understanding.
Psychological impact of poor understanding
These customers are also more likely to have a bleak outlook on the future, with 23 per cent believing, without good cause, that there will never be an end to the current period of high inflation. Further, those with poor financial education are more likely to be worried about high interest rates without understanding how they could be affected – 59 per cent said this, compared with 47 per cent in groups with sufficient knowledge.
This also creates difficulty for policy makers. Central banks need to ensure that inflation expectations do not become unanchored, i.e. a situation where consumers believe that inflation is going to remain high for extended period of time or even accelerate. When people fail to understand how inflation and interest rates work, there is higher probability that central banks will need to continue rising interest rates or keep them high for longer in order to tame inflation. In turn, this will weigh down on economic activity even more.
Today’s economic problems mean consumers need to understand how interest rate rises and inflation can affect them today but also in the future and take steps to protect their finances. It’s never too late to learn how to manage money and at Intrum we believe action can be taken at all ages and stages of life. Across our markets we work with people to improve their financial education. For example, in Norway we have a project to work with incarcerated people to equip them for their journey back from prison to society, while our Spendido app is used by teachers in schools.Vanessa Söderberg, Global Sustainability Director at Intrum
Consumers ready to improve knowledge
The good news is that the difficult economy is motivating people to improve their knowledge and skills around money. More than half of the consumers Intrum surveyed are now actively striving to broaden their understanding of personal finance and respondents’ knowledge of key terms has improved since last year. Around two in three (64 per cent) could identify the correct definition of inflation, up from 58 per cent in 2021.
This isn’t the case for all however, with 54 per cent unable to give the right answer to a question about how inflation could affect a hypothetical energy bill over a two-year timeframe. Older consumers are more likely to get the answer right, making it a worrying time for younger consumers who may not have experienced such economic conditions before.
Gender financial education gap persists
Gender disparity in education is a key concern for UNESCO and this gap is mirrored in research findings on financial education.
In our survey, men were more likely to correctly answer a question about the impact of inflation than women (51 per cent compared with 40 per cent). Men are also more likely to request a pay rise than women – 35 per cent versus 26 per cent – despite women being more likely to say their bills are increasing at a higher rate than their income (71 per cent compared to 65 per cent of men).
Better financial education for women should also help reduce gender pay gap, which according to latest data from Eurostat stood at 13% in 2020*. There are however large differences across countries, e.g. in Germany the gap is above 19%, and industries, with finance and insurance sector reaching on average around 26%.
* It measures the difference between average gross hourly earnings of male and female employees as % of male gross earnings.
Boosting financial education for women and girls is an important element of reducing these gender disparities and paving the way to a sustainable future. At Intrum we believe it is important all children learn how to manage money at an early age so they can take those skills into the world and have happy, stable financial futures.Vanessa Söderberg
