Research on Financial and Risk Literacy

Financial literacy plays a crucial role in breaking down significant barriers to financial access for underserved groups.

Financial literacy is the knowledge and skills necessary for making sound financial decisions. Learning how to manage resources, save, invest, spend and care for the environment with consumer and investment choices has never been more impactful. In a volatile, complex and ambiguous environment, such as the one the next generations will face, it is increasingly important to arm individuals and communities with the necessary toolbox to thrive in uncertain times.

Financial literacy – and the skills and knowledge that come with it – helps break the cycle of poverty as it empowers vulnerable individuals with the confidence and power to make better financial decisions and promote long-term planning that ultimately leads to improved socio-economic conditions. Financial literacy is therefore a catalyst for economic mobility – this knowledge opens doors to navigate the financial system –  and for opportunities such as access to credit, entrepreneurship insurance – and even homeownership. This, in turn, helps the next generations be a step ahead in terms of social mobility.

Lack of financial literacy increases the vulnerability of underprivileged groups as it increases the chances of falling victim to predatory financial scams or high-interest loans – which may lead to a cycle of debt and financial insecurity. Therefore, financial literacy fosters long-term financial stability as it empowers individuals to protect themselves against unexpected setbacks, to reduce financial stress, and lays the foundation for a financially secure future.

There is a persistent financial literacy gender gap. Out of the nine questions we asked to assess the level of financial literacy, the mean number of correct responses from women was 3.7 (median 4), while that of men was 4.5 (median 5). Consequently, there is a much higher proportion of women among the respondents with low financial literacy, i.e. with only 0-2 correct answers (30% vs 21%), and a much lower share in the high financial literacy category, i.e. with 7-9 correct answers (11% vs 19%). Many women play the financial game with a squared ball.
“When will the penny drop?” Do you know what compound interest can do to your savings? Or how inflation affects your purchasing power? Is it safe to put all your eggs in one basket? Most of us will find these questions too simple to answer. But you will be surprised at how many of us are yet to completely grasp the basics of financial literacy.
The “Allianz Financial and Risk Literacy Survey”, a representative survey with 1000 respondents in each country was conducted in Germany, Austria, Switzerland, France, Italy, Spain and the US. We asked about experiences with income, consumption, savings and investment, financial literacy and risk during the Covid-19 pandemic.
In the midst of uncertainty, risk literacy can help us make the right decisions in an informed way. Risk literacy is the ability to perceive risks and the aptitude to make appropriate decisions after becoming aware of these risks. To measure risk literacy during the Covid-19 crisis, we asked almost 7,000 people in seven countries questions related to numeracy and risk literacy, as well as about the impact of the pandemic on their finances.
Teaching kids about money. Most parents know the importance of teaching children to read at an early age. However, they are often laidback when it comes to teaching them about money. But even children of savvy savers need to learn the importance of responsible spending. Else, they will learn the hard way that luck favors very few when it comes to riches and ads that encourage you to buy into the ‘buy, buy’ culture are to be avoided.