Financial literacy: what do we know, what don’t we know and what do we need to know?

• We need to agree about the outcome we are trying to achieve from financial literacy – both short term and long term.
• We need to focus on the short-term behaviour changes we are looking at as well as the need to undertake more long-term evaluation studies.

"Financial literacy influences behaviour – planning for retirement leads to wealth" - Annamaria Lusardi.

Alison O’Connell, Researcher and Consultant 

• Financial literacy is a complex subject encompassing knowledge, attitudes, confidence, decision-making, actions and behaviour.
• There has been little rigorous, meaningful evaluation of the impact of financial education programmes – evaluation is difficult but will improve.
• Financial knowledge appears to be somewhat associated with age and income, and more strongly associated with the level of general education.
• People scoring highly on financial knowledge appear more likely to be those doing the ‘right’ things to manage their finances.
• A simple model of financial education leading to better financial literacy which leads to ‘good’ financial behaviour is too simplistic.
• Financial literacy in New Zealand can change and, in fact, has improved.
• Although there are few comparable indicators, financial knowledge in New Zealand compares pretty well against other countries.
• Financial education is here to stay as part of the policy mix for many political and practical reasons.
• As in most countries, New Zealand has multiple organisations doing different types of financial education for different audiences. New Zealand’s National Strategy for Financial Literacy is unusual for its high level of partnership.
• New Zealand seems to have the most used non-school financial education compared to similar countries, but it is not spending the most per capita.
• We have some knowledge of what financial education works best from the surveys and everyday experience of all those practitioners.

• We don’t have a prescriptive causal map of exactly how financial education works for different people.
• We don’t know exactly how New Zealand financial literacy ranks against other countries – or whether we can ever make a meaningful comparison.

Annamaria Lusardi, Professor of Economics, Dartmouth College, USA  

• Results are mixed – we don’t know what works, there’s no compelling evidence.
• A lot of the existing programmes have been limited.
• Evaluation is difficult and expensive but rigour and independence are key.
• Short of doing an experiment it is very difficult (self selection).
• What is the outcome we are trying to achieve? We need to be realistic.
• We cannot expect people to change behaviour over the short-term. We need to accept that financial literacy is for the long-term. 

Suzanne Snively, Partner, PricewaterhouseCoopers

• The 2009 ANZ Retirement Commission Financial Knowledge Survey found an increase in knowledge about budgeting, saving, interest rates, mortgages, when to buy life insurance and to ask about a financial adviser’s qualifications and experience.
• Although not specifically surveyed, it is likely that a lot more needs to be understood about the vagaries of financial markets and how to relate these to individual circumstances.

What we don’t know:

• There is a risk for some that knowledge about finances is being learned in a technical way – the key point is about how to apply this knowledge in a way that relates to individual lifestyles and appetites for risk.
• KiwiSaver could do a much better job of this if savers could relate the growth in their savings to individual financial plans.
• This would be a step towards gaining a better understanding about key lifestyle savings/investment choices, e.g. when is the best time to take risks, how do families learn from each other, how do partnerships work during lifetimes and what role could a financial adviser play?

• More research on people’s lifestyles and how this impacts on financial behaviour – how more optimal outcomes would be achieved.
• Fuller understanding of how to teach financial literacy – what skills are required of the teachers?
• How to build experimental knowledge to provide people with the understanding to take risks that provide a higher return to the family – not in financial terms but in terms of overall wellbeing.

There is an irony in this. A focus on accumulating wealth alone is likely to lead to an unsatisfying lifestyle for most people. A focus on gaining the knowledge required to gain wealth, including increased dialogue in families about money, is likely not only to generate net worth, but it will also increase wellbeing at the same time.