(This post was originally posted on the Money Awareness and Inclusion Awards website.)
How do we define financial literacy? And does it matter?
Given that the two worst ways to start a speech, presentation or even a blog post are probably by asking a question and quoting a dictionary (or Wikipedia), we may have got off to a very bad start.
But we have to start. Like with money and personal finance, starting is always better than not starting.
Because Toby York, a senior lecturer at Middlesex University and founder of accountingcafe.org made a great point in this LinkedIn post: if we really want to spread awareness of money, its problems and solutions, we need to look at how the subject matter is being defined, where people might look it up, and make sure it helps them.
If we care about accessibility, then where people gain their first access is critical – and while there are many paths and entrances to financial literacy, a lot of people are sure to start by finding out what it actually means.
Three of the top definitions of financial literacy (according to google) are the ones on Wikipedia – the one Toby specifically pointed at – as well as the one on Investopedia, and another intriguing one by the National Financial Educators Council, which interestingly quotes at least four other definitions for the phrase!
Wikipedia says: “Financial literacy is the possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.”
Investopedia says: “Financial literacy combines financial, credit, and debt management knowledge that is necessary to make financially responsible decisions—choices that are integral to our everyday lives.”
The National Financial Educators Council own version says it is “possessing the skills and knowledge on financial matters to confidently take effective action that best fulfills an individual’s personal, family and global community goals”, which is the simplest of the ones they quote on their page.
They also quote the President’s Advisory Council on Financial Literacy defining personal financial literacy as “The ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.”
The Definition of Circular
Using the word financial four times in one sentence gets to one of the core problems with these definitions, but the other three also use the word “finance” or “financial” to define financial literacy.
Wikipedia itself calls this a “circular definition… which may be unhelpful if the audience must already know the meaning of the key term”.
If there’s one thing worse than starting a blog post with a definition, it’s starting a definition with the word you’re defining! It’s a particularly bad start for the definition of a term that we know two-thirds of the world fail a simple test.
Before I looked at those, I already had my own definition, because it’s right here in the name of our awards: money awareness.
We felt when naming the awards that the phrase “financial literacy” itself can be off-putting to beginners, to the point where people don’t even want to find out its definition. We wanted to make sure people feel comfortable taking that first step.
For people outside the financial sector, the word “finance” generally has negative connotations, or at least not positive ones, and so just that word can feel exclusionary. To then use that word to define that word compounds the problem.
In addition, while literacy is an obvious positive, the word can sound demeaning to people who feel they may fail such a test. If we want people to become financially literate, to learn the simple things about the money they need to know to start embarking on life using it, they need to feel welcomed, not demeaned.
The History of Marketing
This is where we run into one of the historical central problems of financial literacy: when we have tried to do anything about it all, we tried to teach it, not sell it or market it.
We can start with the history of marketing to understand this. In the beginning, manufacturers of products want to sell their products, and they do so by listing out what makes their thing good. It’s long-lasting, does its job better, can do more, that kind of feature.
For almost 100 years, however, since the intervention of Edward Bernays, not just coincidentally the nephew of Sigmund Freud, good marketers have been reversing the process and thinking about what it is the customers need. Or what they secretly want. They may need a coffee maker that makes a nice coffee and lasts 20 years, but they might secretly want one that makes them look both knowledgeable and attractive. We all know one will sell better than the other.
But although this concept is almost 100 years old (Bernays published his first book “Crystallising Public Opinion” in 1923), many people and companies forget it when it comes to marketing. They immediately rush to list out their benefits. They forget to think about the customer and what it is they really want. They forget to reverse their thinking, using their internal terminology while still speaking to their customers.
A simple example and a personal pet peeve of mine is being invited to the “soft launch” of something. Please. That’s what you call it internally.
As a potential customer, I don’t want to know that you’re not quite yet ready to do your big launch, and you’re experimenting with me. Invite me to your “sneak preview” or your “VIP event”, and I’ll think I’m special. And even though I’m cognisant of the tactic, I’ll still feel flattered.
It’s the same event, but one tells me you’re thinking about yourself and the other tells me you’re thinking about me.
For financial literacy, this is so important. We want people to be welcomed, to feel that the first step is the smallest, easiest one imaginable. We don’t want our “customers” to feel demeaned, in large part because so many of them already do.
We want them to think that financial skills are something they may already possess the beginnings of, if not the full range of skills, so they can start along a path they’re perhaps already on.
The Awareness of Money
That’s why we went with “money awareness” because we all know that we’re aware of money, but we could perhaps develop our skills a bit, with just a few more steps.
So when Toby messaged, I jotted this down.
“Financial literacy describes the understanding of money and its related industry and services, enabling a person to engage with relevant parts of the financial system.”
It’s perhaps a bit simple. It was just my first go.
So I sent it to Professor Annamaria Lusardi, who has much more experience with this than me. She sent me this definition, which she had devised for PISA. Yes, you’re right, it is a bit more impressive than the definition that I had prepared for, erm, me, and perhaps Toby.
“Financial literacy is knowledge and understanding of financial concepts and risks, and the skills, motivation and confidence to apply such knowledge and understanding in order to make effective decisions across a range of financial contexts, to improve the financial well-being of individuals and society, and to enable participation in economic life.”
This is impressively comprehensive (of course; the Prof doesn’t need any plaudits from me!), taking in multiple points I hadn’t considered. Like motivation. Yes. So important. And confidence. 100%.
But it is designed for the Program for International Student Assessment. I found it on page 130 of a 308-page document outlining its 2018 Assessment and Analytical Framework, and it is doing precisely the job required of it there.
The client it is supposed to face is the Organization for Economic Cooperation and Development, the OECD, not a 12-year-old child about to take a life-skills class. Nor a prospective pensioner worrying about their nest egg. Nor a student worrying about the debt they have taken on without ever having had a paid job. Or a mum in a cost-of-living wondering why those ends never meet.
What If they stumble on our definition?
So I wondered if we could combine the two. Take the Professor’s very detailed understanding of the subject, and add a little word-smithery to it, to make it meet a real person living their actual life.
Professor Lusardi added some really valuable points, particularly her emphasis on the application of understanding, and how it leads to well-being and participation. No surprise she’s the world’s leader in this subject.
But, not to be deterred, I thought I could try to re-write the terms that many people don’t understand, so they can know this phrase is about them and their lives. Given that the stated goal of the MAIAs is to “make money better” and that “everyone is invited”, what would, could, should our definition look like?
“Financial literacy is a broad awareness of the role money plays in our lives, leading to the knowledge of financial concepts that improve the well-being of individuals and society. This should include the skills, motivation and confidence to make more effective decisions, enabling greater participation in the economy, and increased benefits from doing so.”
Is it perfect? No, nothing is.
Is it something I think might be more welcoming on Wikipedia? Yes, but that’s for the elders of the internet to answer.
An Invitation for Everyone
In the meantime, I’m going to do two things. I’m going to put it on the MAIA homepage where Wikipedia can see it – and I’m going to ask you to improve it.
In keeping with our belief that “everyone is invited” to the MAIAs, we want to hear if you have a better definition. If we get a few, we’ll post them on the site. If we arrive at a better one, it will go up front and centre.
Send us yours now.
This is how we make money better.
For more information email us at michael@maiawards.org.
Photo by Alice Pasqual from Unsplash.
