Only 34% of adults have minimal financial literacy, according to a new report from the Organization for Economic Co-operation and Development (OECD).
This means that, at least in the 39 countries studied, the majority of individuals are unable to effectively manage their money, a skill essential for individual and societal well-being.
The OECD report also highlights the vulnerability of those without basic financial knowledge, especially at a time when price increases put extra strain on wallets.
“High inflation and rising interest rates have highlighted the importance of equipping people with financial knowledge and skills to cope with challenging financial conditions,” said Chiara Monticone, senior policy analyst at the OECD.
“The results of our survey show that while most adults understand basic financial concepts, general financial knowledge and skills can be significantly improved, including when dealing with digital financial services,” he told Euronews Business.
Who is at the top of the rankings in Europe?
The OECD assigned a financial literacy score to each of the 39 countries studied, and the results for various EU member states are shown below.
Looking at average scores across populations, only Ireland and Germany reached the minimum financial literacy threshold of 70 out of 100.
The latter also ranked first in the OECD’s broader study.
In addition to looking at international inequalities, the report also highlighted differences between different population groups at the national level.
People with higher levels of formal education tend to be better at managing their money, as do those with higher incomes and those who are employed.
Other contributing factors include gender and age.
Across the countries studied by the OECD, people aged 30 to 59 generally have higher levels of financial literacy than those aged 18 to 29.
On average, men also score slightly higher than women.
Knowledge of basic concepts
In terms of basic financial principles, the OECD says 84 per cent of adults understand the definition of inflation but only 63 per cent can apply the idea of the ‘time value of money’ to their own savings.
To explain this concept, the time value of money is the idea that an amount of money is worth more now than it will in the future.
For example, if you are offered €1000 and you have the option of taking it now or later, the smart option would be to take the money now.
From where? One reason for this is inflation, the second is earnings potential.
By getting the money up front, instead of waiting 10 years, you give yourself the opportunity to invest and earn more money, meaning you can grow the initial lump sum.
Another concept that surprised OECD participants was compound interest, which only 42% of adults understood.
Simply put, this term refers to earning ‘interest on interest’.
By repurposing the money you earn from your investments, you can save an even larger amount through interest payments.
Fraud resistance and digital skills
When it comes to financial vulnerability, 15% of survey respondents say they have been the victim of at least one type of financial fraud or fraud.
The OECD found a negative correlation between financial knowledge and risk; because nearly two out of three people involved in fraud fail to reach the target financial literacy score.
Being alert to scams is also related to digital competence; because some criminals are now using online channels to target individuals.
This does not bode well for the OECD’s assessment of digital financial literacy.
On average, only 29% of adults surveyed reached the target level in digital skills, but these scores increase with education and income levels.
Saving against financial shocks
Given the pressures on household budgets in the current context, the OECD advocates for greater financial education to increase resilience.
The group reports that, on average, only 59% of adults surveyed are currently able to cover a large expense equivalent to a month’s income without outside support.
This may mean taking out a loan from a bank, family or friends.
To tackle this problem, the group argues that education should focus on new, digital tools for managing money and should also be made available to those with the lowest skill levels.