For people to ensure the best financial outcomes for themselves, and to minimise the dangers of getting into a hole they can’t get out of, financial literacy is critical. However, a significant gap still appears to exist between how much people think they understand about money and the reality, according to research by Pay.UK, the operator of the Current Account Switch Service.
While 78 per cent of UK adults consider themselves financially literate, a similar proportion (71 per cent) don’t know how a savings account works, Pay.UK found.
Financial literacy alone doesn’t always safeguard individuals from financial difficulties. Among those who view themselves as financially literate, a fifth (19 per cent) run out of money every month. This figure climbs to 41 per cent for those who don’t consider themselves literate. Even among respondents who feel confident in their ability to manage finances, over a quarter (27 per cent) find themselves running out of money up to every two months.
While these findings paint a dire picture, 28 per cent of UK adults still manage to save regularly with a play for rainy days and just six per cent don’t save any money.
Thirty-five per cent of Brits use a manual approach to manage their finances (such as notebooks and spreadsheets) and 30 per cent have taken the initiative to learn about financial terms like pensions and taxes outside of school. There is strong demand for more support with personal finance education within school years with 86 per cent of UK adults agreeing it should be on the national curriculum.
John Dentry, product owner at Pay.UK, commented: “These findings highlight the gap between perceived financial literacy and practical knowledge, as well as the strong desire for more financial education. In a challenging economic environment, it is more important than ever to ensure that people across the UK have access to the education and resources so they can feel more assured about managing their finances effectively. From understanding the basics of savings accounts to navigating more complex products like ISAs, there is a clear demand for better financial literacy initiatives across all age groups.”
Wide-reaching challenges
Furthermore, the findings show that only 32 per cent of those who consider themselves financially literate could correctly calculate compound interest on £1,000 invested at a five per cent annual rate. Twenty-nine per cent of these respondents could not define what a savings account is, while 35 per cent struggled to explain what an Individual Savings Account (ISA) is.
Pay.UK also highlighted a generational divide regarding financial literacy. While 88 per cent of those aged 55 and older feel financially literate, only 57 per cent of 18 to 24-year-olds share the same confidence. In addition, 35 per cent of men feel confident managing finances, compared to 25 per cent of women.
This research from the Current Account Switch Service also shows that managing personal finances is a source of anxiety for many, with 23 per cent of respondents reporting that managing money makes them feel stressed.
Dentry also offered advice to those wanting to take a first step towards improving their knowledge of their finances: “A good starting point for building confidence when managing your day-to-day finances is considering whether your current account meets your needs. Researching the right account can help you learn more about managing your money. Switching to a bank that offers better tools, support, or even rewards can help people feel more in control of their money and encourage better financial habits.”
Big changes are needed
“Everybody should know their EAR from their APR, and their BACS from their CHAPS – and teaching children how to borrow, save and spend would put them on the front foot when leaving school,” explains Alastair Douglas, CEO of TotallyMoney, a UK-based independent credit broker. “Without it, millions of young people are exiting education without the financial knowledge they need to get by, meaning many will learn the hard way.
“A key problem is that while it should be simple, personal finance isn’t. For years, the big banks used people’s data for their own benefit, and it was never clear how or why they made the decisions they made. They need to improve transparency, rebuild trust, and put people in control of their financial futures.
“It’s also the duty of the government and financial institutions to make sure that products and services are simple, comparable, and secure. Only that way, people will be able to make the right decisions, and avoid those which impact their financial lives for years to come. However, current account switch offers are becoming ever-more complicated, mortgage arrangement fees continue to make products harder to cross-compare, and we’re still waiting for buy now pay later regulation.”
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