This Could Be The Best Investment The City Ever Makes
Go into a primary school today and ask how many of them trust major financial institutions like banks and you’ll generally find that less than half do so. Sometimes it’s as low as one-third of the class. At least, that’s what the financial education charity I volunteer with, City Pay it Forward, has consistently found.
This is terrifying on so many levels. As adults, who will they turn to if not the major financial institutions? What sorts of investments will they buy if they don’t trust mainstream ones? How will the City attract the next generation of talent?
There is one thing that could help in all these areas: better financial education. Time and time again, research has shown that people with higher financial literacy are more likely to trust banks, investment companies, insurers – the sector as a whole.
In my view, there are so many reasons why we should tackle the UK’s financial literacy crisis: social ones, moral ones, fairness ones. But, they say that if you want to convince a finance person of anything, you need to show them the numbers. So, here, let’s focus on the financial argument.
A recent academic paper found that, even a small reduction in financial illiteracy, could boost a nation’s household income by billions each year.
The paper found that, if you take 10% of people who are financially illiterate and make them financially literate, you could boost average household disposable income for the population overall by 1.5%. The authors, Professors Giovanni Gallo and Alessia Sconti, focused specifically on Italy – estimating an uplift to average household income of around €285 per year.
In the UK, a 1.5% increase in disposable income could mean a boost of £550.50 per household per year, while also helping to reduce inequality. That’s a total economic shot in the arm of almost £16 billion per year, based on 28.6 million UK households.
Of course there are many reasons why people with low financial literacy are poorer than those with high financial literacy – you can’t really untangle this from education, socioeconomic background, etc. And, by extrapolating data from Italy and applying it to the UK, this is clearly a hypothetical “what if” scenario.
Still, that is a big number – and the authors believe their study underestimates the impact.
A financially literate population with more money in their pockets should also (hopefully) mean more money flowing into long-term savings and investments.
So, improving household incomes through financial education would positively impact the economy, wealth levels and have a positive halo effect on the City. But there’s a more specific reason why it makes sense for the Square Mile to invest in financial literacy. As I’ve already mentioned: many young people do not trust the finance sector.
According to the Financial Conduct Authority’s own research, only 8% of 18 to 24 year olds have confidence in the UK financial services industry – whereas, among people aged 45 to 74, it was more than double that (17%). Education and information create transparency. And transparency builds trust.
It’s no mere chance that we called our campaign The Year Six Dividend. We wanted to get across the idea that this is an investment – and one that will pay you back over time.
The numbers, then, are pretty clear. If anyone in the City remains unconvinced, just remember: we all have children, grandchildren, nieces, nephews or children of friends.
Do we really want to see the next generation go out into the world without understanding how debt works, without the knowledge of how to invest sensibly rather than speculatively, and without much trust in the financial institutions around them?
Surely, any finance professional can see that a financially literate population is the ultimate ROI?