PIIN Insights: Financial Empowerment & Literacy Amongst Canadian Youth
Since the 2008 recession, financial literacy has been a priority for public policy, educators, and community groups alike. The objective of this report is to answer the following questions: How financially literate are Canadian youth? What are the existing literacy initiatives – and are they effective? How do we ensure the next generation is well prepared as they enter an increasingly complex financial world?
We begin by providing an overview of Canadian youth financial literacy landscape. The OECD recently ranked Canadian youth as the second most financially-literate group globally, behind China. While this is an acknowledgement of the strong policy support and community financial literacy initiatives in Canada, there is still work to be done. We suggest three reasons to be skeptical of these results:
1. The OECD mainly assesses financial knowledge, and to a much lesser extent, financial behaviour. A student can be very fluent in explaining a financial concept – but it does not necessarily translate into healthy financial behaviour. In fact, studies have found that after 20 months, financial education programs have negligible effects on the individuals’ knowledge and behaviour.
2. The report ranked Canada as a “Level 3” on their scale of financial literacy, which corresponds to a fluency in commonly-used financial concepts. This means the average Canadian youth is under-equipped when it comes to more advanced topics such as saving for retirement, investments, or buying sophisticated items like housing and insurance.
3. While the average Canadian youth is faring well in financial literacy, there are sub-populations within the age group that are performing worse. Studies suggest youth coming from low socio-economic backgrounds exhibit lower financial literacy levels.
Using data from reports performed by the OECD, Ipsos, the BC Securities Commission, the Ontario Securities Commission, and the National Federation of High School Students, we draw several conclusions about the state of Canadian youth financial literacy.
First, Canadian youth are performing well on knowledge about basic money management matters (e.g. budgeting, getting a job, credit/debit cards). This is confirmed by large-scale research reports from the OECD and Ipsos. We were also able to replicate similar results from smaller-scale surveys on BC and Ontario students.
Secondly, amongst youth, fluency in basic money management mostly translates into healthy financial behaviour – although there is still work to be done. For example, although 80% of youth are actively saving money, only 12% have written financial plans.
Thirdly, Canadian youth are doing poorly in both knowledge and behaviour about advanced financial concepts related to planning for the future (e.g. retirement, insurance products) and making financial choices (e.g. investing, buying a house). This could be due to the fact that the Canadian school curriculum has not explicitly taught these topics in class. They have opted to integrate topics such as investing into the mathematics curriculum instead of having a standalone course. Provinces such as Ontario and Quebec have realized this approach is not adequate and have begun implementing changes to include a standalone personal finance course in high school.
We suggest new initiatives should focus on two areas: (1) Equipping youth with knowledge and skills to plan ahead and make financial decisions, and (2) Promoting healthy financial behaviour in basic money management. We give priority to the first issue area, given a serious lack of attention from Canadian education curriculum towards advanced financial topics. In order to increase students’ knowledge about advanced financial concepts, we suggest financial literacy modules – whether they are in-school or extra-curricular – should consider the following “design principles”:
- Just-In-Time: The content should be focused around financial topics that the target population is old enough to worry about, but young enough to adjust and still enjoy the benefits.
- Breadth vs. Depth: Spreading the content out too thin will result in low retention of knowledge. Focus on one or two concepts, and work on understanding how the related products and services can be improved.
- Education-Plus: Increasing knowledge levels will not directly lead to better financial behaviour. Providing opportunities to put concepts into action and creating actionable next steps are characteristics of successful financial literacy programs.
- Scaffolding: Focus on increasing the individual’s internal locus of control. By breaking down the concept into small steps, offering less support over time but increasing opportunities for reflection, the individual feels empowered and more confident towards new concepts.
- Delivery Platform: The platform of delivery influences whether the outcomes are achieved. The recipients of the financial literacy program will all have different preferred methods of learning. It is important for the design of the program to consider the participants’ needs.
We also provide some insights intohow to encourage healthy financial behaviour in basic money management. We draw on behavioural economics – specifically nudge theory – to provide recommendations. Nudges are small tweaks to products or services that encourage individuals to make better choices. Popularized by Richard Thaler and Cass Sunstein in their book “Nudge: Improving Decisions about Health, Wealth, and Happiness”, nudges employ theories from behavioural economics and choice architecture to help individuals engage in certain types of behavior. There has been substantial research on using nudges to improve financial behavior. Most of the experiments have yielded positive results.
Along with these recommendations, we provide several case studies to highlighting what has and what has not worked in the past. Financial literacy is a sophisticated topic that must be addressed jointly by policymakers, the education sector, and external community members. This report provides insight towards how we are faring as a nation, what solutions are needed, and how the interventions should be designed.