April is National Financial Literacy Month in the US and a recent study uncovered the staggering cost of financial illiteracy. The National Financial Educators Council (NFEC) conducted a survey asking American adults to estimate how much money they had lost during the year 2022 because of a lack of financial knowledge. 3,001 people responded to the survey between October 23rd and December 5th, 2022. The average estimated amount of money that lacking knowledge about personal finances cost people was $1,819. Extrapolating the results to represent the 254 million adults who live in the U.S., lack of financial literacy cost Americans a total of more than $436 billion in 2022.
This issue is not unique to the United States. An older study conducted in the United Kingdom for Money Savings Expert by the Centre for Economics and Business Research found that people who do not save enough for retirement cost the UK government £6.2bn in income subsidies and that financial education could reduce this by £1.8bn a year.
As the NFEC report notes, the simple result is that financial illiteracy costs money.
Although it’s difficult to quantify the exact cost of global financial illiteracy, the economic and social impacts are profound:
- Lower savings and investments since financially illiterate individuals often lack knowledge to make informed decisions about savings and investing, which can have an impact on economic growth at the national level, and limited access to financial services.
- Higher debt and bankruptcy rates for people with limited financial knowledge who are more likely to make poor borrowing decisions. Again, higher bankruptcy rates and loan defaults can not only affect individuals but have negative effects on the financial system.
- A wider wealth gap, since financial illiteracy often disproportionately affects lower-income and marginalized populations. This in turn perpetuates poverty and exacerbates income inequality.
Keith Hall, the Assistant Governor (Banking and Payments) of the Reserve Bank of Australia, summarized it well in an address at the Conference on Deepening Financial Capacity in the Pacific Region: “The costs of financial illiteracy – of ‘being bad with money’ – are equally apparent. Those who go through life making poor financial decisions will inevitably end up with a far lower standard of living than was otherwise achievable.”
What’s also clear from the surveys above is that the cost of financial illiteracy affects not just the financial illiterate individuals, but society as a whole.
Financial education programs and initiatives aimed at improving financial literacy can help address this problem. As we noted in our 2021 article, Promoting Financial Literacy: Professional Accountancy Organizations Take On the Challenge, the accountancy profession can advocate for and facilitate financial education to help improve financial literacy as part of its public interest responsibility. Various professional accountancy organizations across the world have developed programs to improve financial literacy. Governments and businesses are also developing innovative programs.
This month, we call on our PAOs and their members to take on the challenge. Let us know if you are aware of a program to help address financial illiteracy in your jurisdiction or region. Together, we can all work to provide access to important financial education programs and make all individuals financially literate.