• Sun. May 26th, 2024

Financial illiteracy and its impact on prosperity

“Money can’t buy happiness”, so the saying goes, but I think most people will agree that financial security is the foundation for success, stability, and peace of mind. If we use Maslow’s hierarchy of needs – money enables us to buy not only the most essential requirements at the base of the triangle, but also facilitates the achievement of the higher levels further up the diagram. From ensuring basic needs are met to enabling opportunities for personal development and fulfilment, money profoundly shapes every aspect of our lives. Yet despite its fundamental importance, the significance of cultivating sound financial habits from an early age is often overlooked.

 

Developing financial literacy in childhood is essential. It begins the process of equipping individuals with skills they will need as adults to budget effectively, save for future purchases, and make wise decisions about investments. It lays the groundwork for a lifetime of financial well-being and can provide sound reasoning for living within one’s means rather than beyond them – the short term glamour of which can certainly be appealing, but can often lead to an increased likelihood of falling into debt or being dependent on expensive, debilitating credit.

 

Getting to grips with policies and politics

However, managing personal finances is not just about controlling spending and saving. It also requires a more general understanding of many other external factors in the wider economy such as inflation, interest rates, and personal and corporate taxation; and how they affect us. Armed with this knowledge, individuals can plan their working and family lives efficiently.

Getting to grips with fiscal policies such as taxation also supports informed choices about allegiance to political parties and their policies. Financial measures are always key aspects of every manifesto, affecting disposable income, public services, business operations, and economic growth. A basic understanding of such monetary issues, including personal and corporate taxation allows citizens to critically evaluate different tax agendas, taking into consideration how they align with their own financial goals as well as broader ethical values.

In an era where tax has become highly politicised, it is more important than ever that voters read between the lines of election promises and question the underlying viability of financial predictions and calculations. Revenue from taxation is used to pay for resources that everyone in the community benefits from, such as healthcare, education, and infrastructure. So there’s a direct link between paying tax (and therefore any tax cuts) and the extent of these provisions being made available and to whom they are available to. It could be argued that, while no one wants to pay more tax, everyone wants improved services and a higher standard of living.

Therefore, reaction to taxation policies often heavily influences voting behaviour and in the coming UK election, it is likely to be no different. An outright winner will get a mandate to set the fiscal direction, impacting the economy and society for years to come.

 

How financially literate is the UK?

But making decisions based on these policies requires a broad understanding of what they mean. So it’s interesting that recent surveys suggest most of the UK is financially illiterate, with the problem most prevalent among the younger generation. It suggests that in the 18 to 24 age group, 26% seek financial advice from TikTok, and 36% of those aged over 55 obtain the majority of their financial “education” from TV shows. The UK population’s knowledge about inflation, taxes, pensions, and savings, is also considered inadequate when compared to other similarly developed countries, like France, Canada, and New Zealand. In light of this, it is not surprising that the UK ranks 11th in the world for having the highest household debt, measured as a percentage of net disposable income.

 

When it comes to whether people understand or even care if businesses pay the right amount of tax, the picture is mixed. New research by Tax Systems, in partnership with YouGov, looked at the reaction of various age groups to companies that are trying to minimise tax payments through tax havens and loopholes in regulations. Overall, it found that 47% of the adult population would be less likely to engage with a business minimising its corporation tax payments, but nearly a third said it didn’t matter. This could be symptomatic of the current cost-of-living crisis – understandably, if you are struggling with energy and food bills, you are highly unlikely to be able to afford to choose ethics over value for money. Then, there were 16% who didn’t know if it made a difference, and 8% who said they were more likely to do business with those reducing their tax bills.

It was noticeable that Gen Z appeared to be less concerned than older respondents about how corporates behave, with just 30% less likely to engage with organisations minimising tax payments. This is in direct contrast to what I expected to be honest – given the importance this cohort places on morals and ethics in the workplace and society as a whole. Interestingly, a significant proportion, 28%, said they didn’t know if it would make a difference, which to me is either possibly indicating a lack of faith they have in the current political system, or an insufficient appreciation of how corporate tax revenue supports vital public services. Perhaps, if more emphasis was placed on the billions of deficit resulting from tax avoidance, it would help younger generations to form an opinion, instead of not knowing whether it matters.

 

Prosperity on the line

Critically, financial literacy isn’t just beneficial for individuals, it would also drive the prosperity of the UK. A financially literate population, making informed decisions about saving, investing, and managing debt, would contribute to overall economic stability and resilience. They are more likely to participate actively in the economy by increasing productivity and encouraging innovation and entrepreneurship. This in turn drives growth and social mobility. Improved financial knowledge also creates a more engaged society, capable of distinguishing between political rhetoric and credible facts and figures.

So the mission to improve financial literacy must be a shared responsibility. It requires concerted efforts from governments, educational establishments, financial institutions, employers, and parents alike.

The government will need to play a crucial role in determining financial education policies and providing resources for implementation. Mandating financial literacy lessons in schools as a first step, then looking at establishing national standards. Additionally, more collaboration with financial institutions would enable governments to offer sponsored programs such as online resources or face-to-face workshops aimed at improving financial knowledge and skills among the population.

 

Making financial education accessible to all

Promoting financial literacy from an early age will also help break generational cycles of debt. Incorporating financial education into the school curriculum will ensure that students acquire these essential skills that are proven to be so very valuable. Using modern, interactive teaching methods would make financial concepts more accessible, relevant, and engaging for students.

Financial institutions also have a vested interest in promoting financial literacy to foster responsible financial behaviour and develop long-term customer relationships. Educational resources and programs to help individuals make financial decisions would be hugely beneficial, as would simplifying the language used to explain financial products and services to enhance transparency and comprehension among consumers.

More recently, there appears to be increasing demand from employees for financial education initiatives with 68 per cent of HR professionals saying they received a request. Employers have a great opportunity to include financial planning, investment advice and debt counselling within their staff welfare benefits, and as part of recruitment incentives to attract new talent.

Parents of course, play a pivotal role in forming children’s attitudes towards money. Research indicates that almost a third (31%) of parents and carers don’t talk to kids openly about money, missing out on this vital early stage of learning. As well as demonstrating responsible practices, such as budgeting, saving, and avoiding debt, parents could also have regular conversations with children about money management. Involving them in household financial decisions and encouraging appropriate goal-setting from a young age will prepare them for a better future. Otherwise, the stress of financial insecurity in adulthood can extend way beyond economics, affecting mental and physical health, relationships, and overall quality of life.

 

By taking collective responsibility, the UK could reverse the trend of financial illiteracy. Educating all age groups to navigate the complexities of the financial landscape would help to secure their well-being and improve the prosperity of society for generations to come.

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