The Secret to Success in a Global Economy

For now, no country seems to have a big leg up in the push to raise the financial I.Q. of its citizens. But as mandatory financial education spreads that will change.

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REUTERS/Mario Anzuoni

We’ve been practicing capitalism and embracing free markets in the U.S. for two centuries. But in some ways we’re not so far ahead of nations relatively new to these concepts—especially as it concerns the ability of individuals to manage their own financial affairs.

A case in point is Turkey, a developing economy where many citizens incorrectly still see gold and real estate as their primary investment options. Turkish officials only now are joining the global movement to boost personal financial know-how. The country will soon have a formal national strategy for financial literacy and is pushing for mandatory school lessons in personal finance in grades K-12. Officials generally cite two driving forces:

  • The number of financial products and services available to consumers is exploding, which presents all sorts of challenges for those with access but lacking the knowledge to choose wisely.
  • The country’s savings rate is too low, threatening to push up interest rates, slow growth and leave individuals financially unprepared for retirement.

If those forces sound familiar it’s because they are a big part of what’s driving the financial education movement in the U.S. too. Financial products like prepaid cards and annuities are proliferating and morphing at a dizzying pace; even mutual funds have become more complex. Two in five adults worry they will never be able to retire, according to the 2013 Consumer Financial Literacy Survey,

In the first survey of its kind in Turkey, the World Bank found that only a third of the population had a basic understanding of interest rates while nearly two-thirds were confident they understood budgets, credit, financial planning and financial products. This disconnect—what people think they know and what they actually know—is strikingly similar in the U.S., where only a third of adults can correctly answer three basic quesions about compound interest, inflation, and diversification, according to research by the economists Annamaria Lusardi of George Washington University and Olivia Mitchell of the Wharton School of the University of Pennsylvania.

Such similarities came to light last spring at a financial literacy conference in Istanbul, and they will be highlighted in a forthcoming report from the conference sponsor, Visa Europe. They point up the global nature of the financial literacy movement; individuals in poor and rich countries alike need better personal finance skills in our age of declining safety nets and expanding personal choice. We’re all in the soup together, and for now no one seems to have a significant leg up. Nations that get this right the quickest stand to gain an economic advantage through, among other things, better household debt management and long-term savings.

That’s worth remembering amid the clamor of critics who view personal finance as largely unlearnable and financial education as a waste of time, and prefer the Big Brother approach of stiffer regulation. I’ll take education and personal choice any time. That seems to be the conclusion in a lot of other places too, including the U.K. where beginning this fall financial education will be mandatory for students aged 12 to 16.

One of the U.K.’s chief proponents of financial education, Tracey Bleakley, CEO of the nonprofit Personal Finance Education Group and a fellow speaker at the Istanbul conference, acknowledged that it is not easy to change financial behavior, and doing so has not been widely achieved through financial education to date. But the goal, she says, is not so much for people to avoid financial problems as it is for them to be able to realize their troubles quickly and understand how to do something about it.

“Financial education does not necessarily guarantee a life without financial problems,” Bleakley says in the report. “But it gives individuals the tools to avoid, cope with and solve those problems.” That’s true anywhere in the world.