The vulnerability of the financially illiterate


The socio-economic environment for consumers has evolved considerably in recent years. Individuals are increasingly becoming (jointly) responsible for their personal financial well-being (e.g., health care and pension provision), while financial products and the financial landscape are becoming increasingly complex. These social trends not only require higher financial literacy, but also exacerbate the already existing differences between groups with a high and low literacy, making the latter group increasingly vulnerable. Let's take a closer look at the consequences for financial well-being.

Financial Literacy

Financial literacy is all too often used synonymously with financial knowledge. Although financial knowledge is necessary for making informed financial decisions, it is no guarantee for 'desirable' financial behaviour. For example, someone may be perfectly aware of the benefits of fiscal pension savings but lack the self-confidence and motivation to take effective action.

Financial literacy is measured by a knowledge quiz that assesses an individual's ability to calculate simple and compound interest, knowledge of the time value of money and inflation, and basic investment knowledge (e.g., is aware of the relationship between risk and return, and knows the benefits of diversification in financial investments).

Financial behaviour gauges how individuals deal with money in their daily lives: do they have a household budget, do they save, do they think carefully before consuming, do they pay their bills on time, do they closely monitor their finances, do they set a long-term plan, do they save or borrow when their daily budget turns out to be insufficient and how do they behave when they have to make financial decisions? Financial attitudes gauge the attitude towards money matters and specifically the attitude of individuals towards long-term planning, which will significantly influence savings and credit behaviour.

Consequences of low financial literacy

Low financial literacy can be associated with different forms of sub-optimal behaviour. Financial illiterate individuals are not only less likely to save for unforeseen expenses, but also more often lack the skills to develop sound retirement planning. In addition, individuals with low financial literacy experience higher levels of debt and make more use of higher-cost credit. We also see that people with low financial literacy are less inclined to invest in equities.

Wherever you are on your financial journey, below are some ways to improve your financial literacy skills to help you achieve your short- and long-term goals.

Keep a budget.

All the financial guidance from experts won't mean much if you don't know where your money is going every month. Start tracking your income and spending by setting up a budget. Your budget lets you gain a better understanding of your spending habits and how your income is allocated. With this knowledge, you can pinpoint places that may need to be tightened up or opportunities for putting more money toward your savings goals.

Talk to a financial professional.

A financial consultant can be a good advocate to have in your corner when you're expanding your financial know-how. They can answer your financial questions, whether it is about the basic day-to-day money situations or more complex long-term scenarios. You can also work together to assess your current situation and discuss a plan for meeting your financial needs and how to stay on track going forward.

Whatever your level of financial literacy, it's important to keep your knowledge base growing. Be a lifelong learner and continue to seek out new information and strategies that can improve your financial well-being. Every step you take toward getting a better handle on your financial situation is a step in the right direction. Knowledge is power and can help you make more wise and confident financial decisions through every stage of your life.

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