Abstract
This paper is a report on a research project that builds on the course readings and interviews regarding financial literacy in ordinary citizens. The goal of the project was to examine the levels of financial literacy in ordinary citizens and their implications for financial literacy education.
The paper incorporates a literature review, methodology, results, discussions, and implications in a single research project. The effects and implications of the respondents’ financial skills and decisions for financial literacy education and regulation are discussed.
The past years were marked with the growing amount of scholarly literature about financial literacy. Professional educators and financial regulators are increasingly concerned about the low levels of financial literacy in the developed world. Thousands of people lack skills and abilities needed to take even the simplest financial decisions.
In the meantime, promoting financial security and raising financial stability and wellbeing in families is impossible without fostering effective, productive, and quality financial decision-making.
Families and consumers that can take relevant financial decisions further contribute to continued economic growth and community development. Therefore, financial literacy is not merely a matter of individual consumers and their families but a reliable factor of sustained community development and economic growth.
Unfortunately, the body of information regarding financial literacy behaviors in individual consumers is rather scarce. Little is known of the modes and patterns of financial decisions in young populations, e.g., students. There is an emerging consensus that financial decisions and behaviors have far-reaching implications for financial literacy education and research.
Yet, how to design effective financial literacy programs is still one of the most problematic questions. The goal of this paper is to explore how ordinary people make financial decisions and read financial documents.
The debate on whether financial literacy is important continues to persist. This paper will create a general picture of financial literacy and its implications for education. The recommendations for the future research will be provided.
Research Aims and Questions
The aim of this research is to examine how ordinary people take financial decisions and deal with the daily financial tasks. This information will help to understand whether or not financial literacy is important for individuals and communities and how financial literacy should be taught. This paper will answer the following research questions:
- What is financial literacy?
- How do ordinary people read financial documents?
- Do ordinary people have abilities and skills needed to successfully cope with their daily financial tasks?
- Education vs. regulation: is it worth teaching individuals the basic financial literacy skills?
- How to develop effective financial literacy courses for individuals and community groups?
Literature Review
Financial literacy remains one of the most popular topics of scholarly research. Much has been written and said about the poor state of financial literacy in the developed world and its implications for social and economic development. Researchers and scholars in literacy studies suggest that financial literacy must become one of the top social priorities for the developed world (Hogarth, Beverly & Hilgert, 2003).
Simultaneously, only a few authors were able to define financial literacy and its implications for education. According to Yates and Ward (2011), financial literacy “is the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being” (p.66).
Simply stated, financial literacy is a complex set of skills, abilities, and knowledge that help to manage financial resources in ways that promote individual and collective financial well-being. Buckland (2010) conceptualized the notion of financial literacy around three different theoretical perspectives: behavioral economics, neoclassical economic theory, and institutional theory.
These theoretical perspectives can become a useful way to understand financial literacy implications for financial knowledge and decision-making in ordinary consumers (Buckland, 2010). Unfortunately, the data on financial literacy in the developed world is relatively scarce (Buckland, 2010).
The argument on whether or not differences in financial literacy contribute to “great social divides” continues to persist (Collins, 1995). Contemporary scholars suggest that literacy is an essentially social skill that produces heavy impacts on the course and direction of social development (Olson & Torrance, 2001).
Literacy is an important predictor of complex social organizations and democratic formations (Olson & Torrance, 2001). Therefore, the impacts and significance of financial literacy for the future of economic stability in the developed world need to be understood.
Education or regulation? – this is one of the most popular topics of professional discussion. More often than not, education is considered as the vital source of financial literacy knowledge and skills for ordinary citizens. Hogarth, Beverly and Hilgert (2003) write that financial education increases financial knowledge and improves financial behaviors.
Financial education courses and programs do not merely provide financial information but support ordinary citizens in setting realistic financial goals, managing scarce financial resources, and promoting lifetime financial well-being (Hogarth, Beverly & Hilgert, 2003).
Financial education programs are a relevant source of peer support that increases individuals’ motivation to manage their cash flows more effectively (Hogarth, Beverly & Hilgert, 2003). This is, probably, why employers in the United States have begun to develop financial literacy programs for their employees (Don et al, 2010).
However, not everyone agrees that education is the best instrument of developing financial literacy skills in ordinary citizens. Financial literacy is impossible without developing and implementing effective regulatory mechanisms.
For example, Canadian Finance Minister Jim Flaherty suggests that financial literacy programs are only a part of the problem, and effective regulation must ensure consumer protection in complex financial decisions (Schmidt, 2009). As a result, financial literacy continues posing a serious challenge to financial literacy educators and regulators in the developed countries.
The current body of literature regarding financial literacy, education, and regulation is very scarce. There is no consensus on how to define financial literacy (Roseman, 2009). Also, whether or not financial literacy education must occur over entire lifetime or operate through a well-developed system of programs and courses is difficult to define (Roseman, 2009).
No single set of instruments to measure financial literacy has been developed so far (Lusardi & Mitchell, 2009; Yates & Ward, 2011). These are just some of the reasons why the picture of financial literacy and its implications for education/ regulation remains uneven. Obviously, there is a need to define and conceptualize financial literacy.
The need to develop a system of objective, reliable financial literacy measurements is urgent. Financial literacy has far-reaching implications for the social and financial well-being of the entire societies, and it is imperative for governments and institutions to make a collective effort and develop complex financial literacy programs and lifetime education courses for ordinary citizens.
Methodology
For the purpose of this research, the benefits of qualitative methodology were used. Interviews were used to develop a clear picture of financial literacy and the ways ordinary citizens use their knowledge and skills to manage their financial resources. Interviews served the main instrument of primary data collection. Interviews as the method of data collection can benefit any study.
First, interviewing exemplifies “a certain style of social and interpersonal interaction. […] in-depth interviews develop and build on intimacy and resemble the forms of talking one finds among close friends” (Gubrium & Holstein, 2002, p.104). Interviews favor the discussion of the issues of literacy and possible barriers to literacy education in ordinary citizens.
Face-to-face interviews are the best way to develop in-depth knowledge of the issue and obtain relevant information directly from subjects. Interviews favor the development of trust and rapport between researchers and interviewees; they allow creating a complex picture of the interviewees’ reactions and emotional responses to various issues and questions.
Certainly, face-to-face interviews are not without limitations. They are extremely time-consuming and do not allow anonymity (Gillham, 2000). Interviews are unsuitable, whenever sensitive information and questions need to be discussed (Gillham, 2000).
However, interviews present excellent research opportunities in the context of financial literacy. This is, probably, why contemporary researchers use interviews to look deeper into the issues and implications of financial literacy problems and their effects on social development (Buckland, 2010; Lusardi & Mitchell, 2009).
The sample of participants included 10 ordinary citizens of different socioeconomic status, education background, and cultural belonging. Face-to-face interviews were conducted, to explore and measure respondents’ financial literacy skills and evaluate their implications for education and regulation.
Each interview included standard questions and a simple financial task. The latter was borrowed from Lusardi and Mitchell (2009). Each interview lasted between 30 to 50 minutes. All participants had the fullest information about the purpose and objectives of the study. Participation in the study was voluntary.
All participants had the right to withdraw at any stage of the research project. All participants had the right not to answer any question they deemed inappropriate.
The goal of the interview was to decide whether the participants could read financial documents, take financial decisions, make investments, and whether or not they were mislead by the information in the simplest financial documents. The questions for the interview are included in Appendix 1.
Results/ Discussion
In total, 10 participants agreed to participate in the study. All participants were ordinary citizens, who had never dealt with professional finance and had no experience working in financial industries or institutions. All participants were randomly selected and their participation was voluntary.
None of the participants withdrew from the study. None of the participants refused to answer any interview questions. Interview questions had been distributed among all participants before the actual interview took place. As a result, all participants had enough time to prepare for the interview.
None of the research participants had professional financial knowledge or a degree in financial studies. 8 participants (80%) confessed that they had the basic knowledge of finances from the school/ college/ university. 7 participants (70% of the sample) categorized themselves as low-income citizens; 3 others (30%) called themselves “middle-class” citizens.
At the beginning of each interview, all participants had to resolve a simple financial task. The task had been borrowed from the study by Lusardi and Mitchell (2009), who explored the patterns of complex economic decisions in ordinary consumers. The task was as follows:
“Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in account if you left the money to grow: more than $102, exactly $102, or less than $102?” (Lusardi & Mitchell, 2009, p.5)
Only one out of ten answers was correct. Using the task as the measure of financial literacy in ordinary citizens, it is easy to see that the level of financial literacy in ordinary people is extremely low and does not depend on the level of their income or education.
Regardless of the presence or absence of the basic financial skills from college/ university/ school and irrespective of their income and socioeconomic status, 90% of the research participants failed to cope with the discussed financial task. These results are further supported by Lusardi and Mitchell (2009), who confirmed that respondents’ performance on this financial literacy question was strikingly low.
Ordinary citizens lack financial literacy abilities and skills and cannot take relevant financial decisions. However, that the respondents cannot make simple calculations does not mean that they cannot cope with other financial tasks. Structured interviews included questions regarding respondents’ financial decisions, the use of financial services, financial accounts, bills, and credit cards.
Structured interviews had to facilitate understanding of the most important financial mechanisms, including credit mechanisms, investment decisions, and institutional practices affecting their incomes.
Seven out of ten respondents (70%) said that they used their knowledge, intuition and family advice as the principal sources of financial decisions and support. Simultaneously, 90% of respondents confessed that they had never used outside financial services and would never trust their financial resources to outside professionals.
Even if reading and understanding financial documents was a serious problem, the participants would never ask for professional help. Three study participants (30%) said that they found it shameful and inappropriate to ask for external financial assistance. These findings have far-reaching implications for the future of financial literacy education in the country.
It is clear that the respondents are aware of the low level of their financial literacy skills. Simultaneously, they experience the fear of stigmatization for being unable to cope with even the simplest financial tasks. Yet, the fear of stigmatization and the lack of appropriate financial literacy skills are just one side of the coin.
Pringle (2005) suggests that, apart from the need to develop comprehensive literacy skills, ordinary citizens require readable information. According to Pringle (2005), hard-to-read documents for people with low financial literacy are essentially the same as steps for handicapped people in wheelchairs.
Therefore, low financial literacy is a serious challenge for educators, financial and credit institutions, and the society in general. The latter, instead of letting illiterate people improve their financial skills, isolates and separates them from available education opportunities.
Why ordinary citizens refuse from using financial services is yet to be discovered. In the meantime, it is important to analyze how ordinary people use their knowledge to deal with various financial tasks and take financial decisions on a daily basis.
Questions in the structured interview forms were roughly divided into three basic categories: (1) questions related to cash flow decisions; (2) questions related to savings; and (3) questions related to investments and institutional policies.
In terms of cash flow decisions, all respondents had to answer questions regarding their accounts, credit cards use, and budgeting planning and decisions. 100% of respondents confirmed that they had a bank account and a credit card. However, only 3 respondents (30%) said that they paid monthly credit sums in full.
Six respondents (60%) said that they knew of the fines and penalties for late credit payments but did not know how much money they would have to pay. Only 2 respondents (20%) said that they planned their budgets long-term. All respondents said that they calculated their taxes on their own, and 80% of them faced considerable difficulties with reading tax regulations and requirements.
Whether the lack of financial planning is the result of poor financial literacy skills is difficult to define. The future research must focus on the analysis of financial planning difficulties, the complexity of the regulatory documents and financial language.
Most respondents are absolutely satisfied with the quality of family advice in financial decisions. Moreover, they accept difficulties with reading financial documents for granted. Low-income respondents suggest that they do not need relevant financial skills, since their financial resources are scarce and even professionals cannot manage them effectively.
These results contradict to those of Buckland (2010), who found that low-income citizens could successfully diversify their activities, use these activities to raise their income, and constrain the use of credit. By contrast, all respondents, irrespective of their income and status, use credit card opportunities but rarely pay their credit obligations in full.
They may be unaware of the penalties and other punitive measures that are used by banks to deal with irresponsible clients.
Financial education and comprehensive regulatory guidelines could help citizens to develop better awareness of the banking and credit mechanisms and their effects on the individual budgeting decisions. Financial literacy education could help ordinary citizens to plan their limited budgets in ways that minimize the use of credit resources and help them to cope with their financial obligations on time.
In terms of saving, 100% of respondents said that they tried to save their money. However, 8 respondents (80%) confessed that they lacked knowledge and abilities needed to save money effectively. One female respondent told a story of her financial literacy endeavors: she said that she tried to enroll in financial literacy courses, trying to improve their financial decisions and family wellbeing.
However, her husband was against her decision to improve her financial education. This story supports Horsman’s (2006) thesis, which suggests that gender and violence prevent women from improving their financial literacy skills. All respondents confessed that they wanted to improve their financial decisions but did not know how to do it.
Based on these results, (a) ordinary citizens want to develop better financial literacy skills; (b) ordinary citizens are aware of the lack of financial literacy abilities; (c) it is not enough to develop effective financial education programs and complex regulatory mechanisms – rather, it is essential that the most serious barriers to improved financial literacy are eliminated.
Ordinary citizens need better knowledge of saving schemes proposed by banks. They must be able to weigh the pros and cons of various financial mechanisms. They must take relevant decisions about their financial resources and the ways to improve their wellbeing.
Improving the state of financial literacy is impossible without a complex effort that involves financial literacy programs, financial support, and comprehensive regulations that can be easily understood by ordinary consumers.
That respondents lack sufficient financial literacy skills and cannot take relevant financial decisions is further supported by the fact that only few (20%) respondents make investments and only few (30%) respondents are aware of the institutional policies affecting their incomes. Both respondents who had ever made investments categorized themselves as middle class citizens.
The resources they had invested in bonds, stocks, and various projects were not significant and would not cause any serious impact on their wellbeing. All study participants recognized that making investments was often an unachievable task, since they did not feel optimistic about their chances to earn additional profits. Two respondents said they lacked knowledge and awareness of the investment law and legal requirements.
Most respondents (80%) said that they had a fear of losing their scarce financial resources as a result of improper financial decisions. When asked about the lack of professional financial support, most respondents (90%) said that they needed such a support but did not think that any financial agency or institution would provide such assistance for free.
These results have far-reaching implications for financial literacy education and regulations. First, most ordinary citizens encounter serious difficulties with reading and interpreting even the simplest financial documents. This is particularly the case of credit cards: individuals apply to credit cards as the source of additional financial resources but fail to meet their credit obligations on time.
Many of them are unaware of the penalties and fines that may follow. Second, most respondents fail to cope with the simplest financial tasks but do not feel optimistic about using outside financial agencies and support. The fear of stigma, the lack of trust and awareness about the institutions providing such support explain these results.
Third, most respondents never make any investments and are unaware of the institutional policies impacting their incomes. Contrary to Buckland’s (2010) findings, ordinary citizens have little knowledge of the institutional and financial policies that can help them to improve their financial wellbeing.
These results do not support Hogarth, Beverly and Hilgert’s (2003) findings with respect to education and its implications for financial literacy. The results of the present study suggest that education is hardly a reliable correlate of saving and investment decisions and most respondents, irrespective of their education status, express similar financial literacy concerns.
It goes without saying that this research is not without limitations. First, the sample is too small. Second, given the difficulties with measuring financial literacy, the interview questions and financial tasks may not provide an adequate picture of financial literacy in ordinary citizens.
Third, when ordinary individuals recognize problems and difficulties with reading and understanding financial documents, it is not always clear whether these difficulties are the product of low financial literacy or are due to the complexity of financial language. Nevertheless, these results could change the future of financial literacy, literacy education and research.
To begin with, no financial literacy program is effective, unless it helps to reduce the public stigma of financial illiteracy and eliminates the barriers to enrolling in financial literacy programs. Financial literacy education alone cannot suffice to move ordinary citizens to a more advanced level of financial literacy.
Roseman (2009) writes that there is plenty of useful information published by banks, investment dealers, and credit unions that must help take relevant financial decisions, but it is essential that this information is communicated to people at times, when they are willing to hear it and use it to improve their financial wellbeing.
A balanced combination of education and regulation is the key to improving the state of financial literacy in society. The future research must focus on the analysis of financial language in financial documents and the effects, which the complexity of financial language produces on the quality of individual financial decisions.
Conclusion/ Recommendations
The aim of this research paper was to explore the levels of financial literacy in ordinary citizens, the ways they deal with daily financial tasks and read financial documents. The research had to facilitate public understanding of the difficulties, which ordinary citizens encounter while reading financial documents. The results of the research suggest that ordinary citizens are aware of their poor financial skills.
They want to improve their financial literacy but do not know how to do it. The fear of stigma and shame are the principal barriers to obtaining financial literacy education in ordinary citizens. Thus, regulation alone cannot improve the quality of financial decisions and contribute to sustained economic growth in society.
Effective financial literacy education must eliminate barriers and stigma and help ordinary citizens to improve their financial decisions and skills on a lifetime basis. This is the best way to ensure that ordinary citizens can understand the meaning and complexity of financial regulations and manage scarce resources in ways that improve their financial well-being.
This research paper is not without limitations. First, the sample is too small. Second, the results of the study analysis do not help to understand how exactly financial literacy courses must be designed and delivered. That ordinary citizens face serious barriers to obtaining and improving financial literacy education is obvious.
Yet, how to remove these barriers is not always clear. Nevertheless, the results suggest that regulations alone cannot improve the quality of citizens’ financial decisions. Regulations and punitive measures will not help ordinary citizens to solve their daily financial problems. Given that financial literacy contributes to economic and social growth, financial literacy education must become one of government’s top priorities.
References
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