Literacy Low levels of financial linked to anxiety

NEW research shows that financial stress and anxiety is tied to low levels of financial literacy. Building on data from the US National Financial Capability Study, researchers from the Global Financial Literacy Excellence Center (GFLEC) reached this conclusion through interviews with focus groups at the end of last year.

“Even prior to the pandemic, more than half of American adults were experiencing financial anxiety,” said GFLEC academic director Annamaria Lusardi. Needless to say, this worsened over the past year.

During our first lockdown, the Financial Planning Institute of Southern Africa conducted a survey to assess the impact of Covid-19 on Certified Financial Planners (CFPs) and their clients. Almost 80% of CFPs who responded described their clients’ stress levels at the time as “high” or “very high”.

While we would expect the pandemic to exacerbate financial anxiety and stress, the US research also revealed less obvious findings – single women and young adults were particularly badly affected, and almost 60% of respondents in higher income groups experienced financial anxiety. Further, there are knock-on effects in the financially stressed and anxious… they are more likely to use high-interest debt and less likely to plan for retirement.

The researchers used a common measure of financial literacy: the “big three” questions on interest, inflation and risk diversification. Respondents who answered these questions correctly were “significantly less likely to feel financially anxious or stressed”, strengthening the researchers’ assertion that “financial literacy matters”.

Bringing it home to South Africa, financial literacy has long been a policy focus of the government.

Claire Klassen, consumer financial education specialist at Momentum Metropolitan, says that in 2013 the National Treasury highlighted the need for consumer financial education to empower the vulnerable and marginalised to participate knowledgeably and confidently in the financial marketplace. This was recognised after a 2011 baseline study revealed that a

more structured approach to financial education was needed. They developed the National Consumer Financial Education Strategy, with a vision of increasing the financial capability and well-being of all South Africans.

Since then, the Financial Sector Conduct Authority has monitored financial literacy levels to inform its policies and consumer education programmes. Between 2011 and 2017, the financial literacy score remained about 54 on the index of 0 to 100.

The Human Sciences Research Council’s 2018 Financial Literacy Study (for the FSCA) went far beyond the “big three”, but few adults answered an arithmetically based question on inflation correctly, although they were aware of the rising cost of living, and only about a third were able to perform a simple compounding calculation.

Beyond government-initiated research, Unisa and Momentum have partnered since 2012 on research, including the Household Wealth, Household Financial Wellness and Consumer Financial Vulnerability indices. Their Household Financial Wellness Insights 2020 report points to the value of help from professional financial advisers. This could mitigate the effects of poor financial literacy. However, there are too few of these professionals, and they are perceived as expensive.

Also, there’s the question of trust. “We would like people to engage with professional advice, but our research shows that people do not trust financial advisers or financial service providers, because they think they are out to charge commission, which is not the case,” says Klassen. “We are trying to change that mindset.”

The Consumer Financial Vulnerability Index (CFVI) considers the financial components affecting consumers’ cash flow: income, expenditure, savings and debt servicing.

The first-quarter 2021 CFVI showed an improvement on the fourth quarter of 2020, although consumers are still at high risk of becoming financially vulnerable or insecure. This was prevalent across income groups, which shows that financial behaviour, not only income, influences financial well-being.

Despite consumers’ ongoing financial vulnerability, survey respondents (bankers, insurers, credit providers, retailers, municipalities and researchers) credited consumers with “adaptability and resilience”, and even optimism. However, they said consumers need support in the form of job creation and skills development, particularly in poorer communities.

In line with the US research, about two-thirds of those surveyed for the latest CFVI perceived the youth as the most financially vulnerable, and women as more financially vulnerable than men. Klassen says women have seen a disproportionate loss of income during the pandemic because many are in service industries.