Life After Full-time Work Blog

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#184 Financial Literacy Is Low, But Highly Desirable

I’ll explain what it is, and why many people wrongly think it’s just higher math


Before I start, let me give you this link to the World Pension Summit’s call for submissions to its Innovation and Excellence Awards, to be presented on October 12 in The Hague. The link will get you to the categories, the process, and (important!) the final date for entries: June 15.


In early April the UK Prime Minister Rishi Sunak said something that got to my heart, announcing his intent to make numeracy an essential element of British education. The specific thing he said that resonated with me was: “We joke about not being able to do maths [the Brits say ‘maths’ rather than ‘math’], but we’d never make a joke about not being able to read.”

Exactly! We’d be embarrassed to confess to being unable to read. And yet numbers are like words, they are the base on which a language of measurement is constructed, and it’s OK to say (I’ve even heard it said with pride) that “that’s a foreign language to me.” Sunak wants to remove the “cultural sense that it’s OK to be bad at maths.”

He wants, therefore, to make math compulsory in school education until the age of 18. (It’s currently 16.) But math encompasses a lot of different subjects. What does he want taught? Not what today is taught for A[advanced]-level qualification, but rather things that are useful in life, “from managing household budgets to understanding mobile phone contracts and mortgages,” and at also specifically at work, so “We’re going to listen to employers and ask them what they say the maths skills are that they need.”

Admirable, was my reaction – even though of course I have no idea what the previous paragraph’s fine-sounding phrases imply in practice. Sunak wanted to create a social media campaign endorsed by well-known people. That didn’t happen. In fact it fell apart almost instantly, because although many people were approached, it was all a last-minute effort and only one person responded – and he was actually against the idea. He wrote:

“While the importance of numeracy skills cannot be overstated, it is just as essential to acknowledge the many other skills and qualities that students need to thrive. Financial literacy, emotional intelligence, compassion and the ability to build healthy relationships are just a few areas where our current education system falls short. To prioritise maths over these skills is short-sighted, out of touch and grossly unfair on students.”

That reminded me that numeracy and financial literacy are not the same thing. Numeracy deals with numbers. Financial literacy applies numbers to a particular context. I’ll get into that in a moment.

But first: what’s essential, and what’s desirable? There’s a difference between surviving and thriving. I remember coming up with the expression “First you survive, then you thrive” when I was a pension fund investment consultant, meaning that you first need to nail down things you identify as essential before you take the risks that you hope will be rewarded and enable you to thrive. And I think that language skills (as I’ll explain, I mean both speaking/reading and basic numeracy) are essential, they’re part of surviving, and should be prioritized over the skills the writer describes as being needed to thrive.

Digits (basic numbers like 1, 2, 3, …) are like letters. Grammar (which some people hate) is about how to use combinations of letters (words) to make ourselves understood when we speak or write; arithmetic is about how to use combinations of digits (numbers) to solve numerical problems. That’s basic, so we clearly need that.

Of course we can go much further, with both language and math. With language we can learn stuff like less frequently used words, syntax, poetry, and who knows what else; we can add literature, which combines an appreciation of language with stories or ideas or explanations. But that’s not basic, and you can be literate without it. Similarly, I think it isn’t necessary to add higher math (like calculus, trigonometry and so on) as being essential until age 18.


Sidebar: Even basic numeracy needs change over time. For example, we have access to calculators now, so we don’t need quite the same skills as previous generations in connection with addition, subtraction, multiplication and division. In fact we need a new skill here: approximation. Let me give you an example.

You’re asked to divide $1,000,000 among 47 people, and your calculator tells you the answer is $2,127.659 each. Done! And wrong! In fact the digits 2127659 are all accurate. What you did wrong was accidentally only use 5 zeroes instead of 6 zeroes in inserting the $1,000,000 – maybe you weren’t counting, or you failed to hit the zero key hard enough once. You need to have a rough idea of what the answer is, before you start. How?

Well, 47 people is not too far from 50 people, and if you’re dividing $100 among 50 people each would get $2. Make it $1,000 to be divided, and that’s adding a zero to the $100, so each person would get an additional zero, meaning not $2 but $20 each. And a million adds three more zeroes, so each person would get $20,000. That’s close to what you expect the answer to be when there are 47 people involved. So clearly $2,127 is way off, and the answer us going to be close to $20,000 – so it must be $21,276.59.

Without the ability to have a rough idea of the order of magnitude of the correct answer, using a calculator is dangerous.


Apart from basic numeracy, what else do you need to be financially literate?

Investopedia defines financial literacy as “the ability to understand and effectively use various financial skills, including personal financial management, budgeting and investing.” This is a lot more than just numeracy, which (as I mentioned) simply involves familiarity with numbers. Financial literacy requires the base to also include financial concepts like money (e.g. earning and spending it), budgeting (e.g. making a plan that compares what is earned with what is spent, and also tracking actual earning and spending to see how they compare with the plan), banking (e.g. placing surplus money in a safe place to make it available in the future, and also borrowing money that you don’t have in order to spend it now), and investing (e.g. placing money in opportunities, which may be safe or risky, in the hope or expectation that it will increase in value over time; this involves, among other things, compound interest, inflation and risk diversification).

Well, all of that goes far beyond numeracy, which is simply familiarity with numbers. Financial literacy involves using your numeracy in the context of money. So it requires education about all the things I placed in brackets in the previous paragraph (and more than that, of course, because there are so many other related topics and concepts).

Do you think it’s a good idea, or at least reasonable, for that to be a basic part of education? I ask it as a genuine question to you. My own answer is: yes.

Now let’s show what this might look like in practice.


Drs Annamaria Lusardi and Olivia Mitchell wrote a fundamental paper on financial literacy in which they set three questions that are now the “big three questions” that have been used around the world. The questions involve very simple notions of (as stated above) compound interest, inflation and risk diversification.

1) Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

More than $102**
Exactly $102
Less than $102
Do not know
Refuse to answer

2) Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?

More than today
Exactly the same
Less than today**
Do not know
Refuse to answer

3) Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”

Do not know
Refuse to answer

The correct answers are shown with twin asterisks. Be honest: how many did you get right? In the US (as in most countries) roughly half the population gives the right answer to all three questions. Two general observations from Dr Lusardi: first, countries with very strong education systems tend to do better; second, the groups with low financial literacy tend to be the same in all countries: the young, the old, and women.


I was also taken with an article in The Times (the UK newspaper) of April 18, 2023 by Tom Whipple, in which he challenges readers to test how much they know, via a set of five questions (all taken from the examining board of a group that sets questions for ordinary and advanced level school-leaving exams) to reflect how he interpreted Sunak’s goal. And he shows how he would answer them. (The questions are in a British framework. But that’s irrelevant. They would be exactly the same if prefaced by the remark: “There’s a fictional country in which the following [stated] conditions apply.”)

The first question is about calculating interest and repayments on student loans, and comparing the initial liability for the loan with the liability after two years of payments.

The second question is about income tax and national insurance payments, involving allowances that vary with the level of your annual income and payment formulae that involve three different rates for three different earnings levels.

The third question is about a person who sells a product online, and is thinking of changing her supplier.  She knows the cost of packaging (65p) and the cost of delivery (£3.00) from her existing supplier and her prospective supplier (95p and £3.20). She knows the proportion of products that arrive damaged and have to be replaced (6.5%), and at what cost (£18.00). She guesses what would be a smaller proportion of damaged arrivals from the new supplier (4%) and the replacement cost (£18.75). (That’s right: the new packaging costs more, but is less likely to break.) Now two questions. First, verify that the expected cost of using the new supplier exceeds the cost of the current supplier. Second, she negotiates, and the new supplier offers to reduce the packaging cost to c pence per order, with no change in the delivery or replacement cost. What does c need to be, to result in a breakeven between old and new supplier?

Whipple observes: the numbers swim before your eyes, but understanding those numbers is the difference between profit and loss.

Fourth question: this involves probabilities, with a polygraph machine that tells you whether the person answering the question is telling the truth or a lie. But of course the result on the polygraph isn’t always right. You are told the known probabilities of error, when the person is actually telling the truth, and also when the person is actually telling you a lie. There’s a group of participants testing the machine; and 80% of them are told to answer a question truthfully, the other 20% by lying. You are then asked to answer three questions. I’ll reproduce the third one, as an example. It’s as follows. “One [participant] is chosen at random. When this person answered the question the polygraph showed ‘Truth.’ Work out the probability that this person did tell the truth.”

The fifth question involves the formula v = exp(0.12t), relating the total number of views (v) of one post t minutes after being posted on social media. But the model is only a good predictor for certain values of t. With no further information … when might this model not be a good predictor, and why? And … use the model to estimate the number of minutes it would take the post to reach one million views.


Personally, I think the first three questions are legitimate in connection with financial literacy. It may be tedious to work out their answers, but they’re all logical and only require you to convert the questions about the various financial situations into various add, subtract, multiply or divide routines.

The fourth one involves probabilities, and I think that’s more than a little bit advanced. I’d agree that some fundamental notions about what probabilities mean is highly desirable (e.g. if the probability of some frequent event is 25%, it implies that, over a long period, roughly one-quarter of the time the event will actually occur). But I think the knowledge of how to combine probabilities is an advanced topic and too difficult to be included in any course purporting to teach basic math. And also there’s nothing financial about the question, it’s more a question about advanced math.

The fifth one also has nothing to do with financial literacy. And it involves an exponential mathematical function. I’m guessing you wouldn’t come across this in everyday life!


Finally, I have recently seen a report on financial well-being and literacy in a high-inflation environment (with Dr Lusardi one of the co-authors), and I reproduce the following conclusions regarding the great value of financial literacy:

  • Compared to those with a very high level of financial literacy, those with a very low level are more than four times as likely to have difficulty making ends meet in a typical month; nearly three times as likely to be debt constrained; three times as likely to be financially fragile; more than four times as likely to lack emergency savings sufficient to cover one month of living expenses; and more than three times as likely to spend 10 hours or more per week on issues and problems related to personal finances.
  • The same relationship between financial literacy and financial well-being holds across demographic groups. Among both men and women, among each of the four racial and ethnic groups, and among each generation, there is typically a double-digit decrease in the percentage experiencing a poor outcome with each financial well-being indicator when comparing those with relatively high financial literacy to those with relatively low financial literacy.
  • Additionally, financial literacy tends to be strongly related to inflation-induced changes in individuals’ personal finances. Employed adults with very low financial literacy were more than four times as likely to stop saving for retirement in 2022 because of inflation’s impact on their finances, compared to those with a very high level of financial literacy.


I cite all of this because I think it supports my views that (a) financial literacy is highly desirable, (b) it should be a basic and compulsory part of school education, and (c) many people confuse financial literacy with advanced mathematics, and surely that isn’t what Sunak intended.



Financial literacy involves applying basic numeracy (the ability to use numbers) in the context of financial situations. It is highly desirable, I believe, that this should be made an essential part of high school education, because it is fundamental and brings great benefits to those who possess it.


I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.

8 Responses to “#184 Financial Literacy Is Low, But Highly Desirable”

  1. Cindy Deere says:

    Don, I heartily agree with your position on financial literacy. I definitely think it should be part of our normal education system and then offered again especially to at risk groups who might not have benefitted sufficiently the first time around. Thank you for pointing out the differences between financial literacy and math, and thank you also for making the point around the need and benefit of this education.

    • Don Ezra says:

      Thanks, Cindy. My posts are usually addressed to individuals, but I couldn’t resist this one because I feel so strongly about it and the subject made the news in the UK. Plus, of course, it’s so relevant for creating and understanding financial security.

  2. Ted Harris says:

    In my last year of elementary school we covered the basics of financial literacy. It was considered an essential life skill you needed before leaving school, which you could do after grade 10 or age 16. Also, in the last three years of elementary school and the first two of high school it was compulsory to take a practical course such as woodworking, metal working, plastic working and drafting. Back then, in less liberal times, these were for boys – and girls learned various aspects of home economics. Phys ed was compulsory all through.

    Financial literacy is a critical life skill. Indeed, I wonder how well many could cope today if they were temporarily deprived of electricity and the technologies that make our lives so convenient. It doesn’t have to be a conspiracy theory – merely an ice storm.

    I digress. Basic life skills should be included in any curriculum, and financial literacy is one such skill. With so much information and disinformation available, I am encouraged to see that more boards of education are introducing critical thinking into their curriculum. In my view, critical thinking is part of financial literacy.

    To me “compulsory” is the operative word. You wanted to know what we think – so there you are!

    • Don Ezra says:

      Thanks very much, Ted — very comprehensive and clear. I understand it still isn’t compulsory in all schools in Canada. I liked one response to a 2018 survey of students aged 12 to 17: “If high schools offered a drama class, why can’t they do the same on finances?”

  3. Arvind Rajan says:

    Awesome post, Don!

  4. Franklyn Williams says:

    My kids are 12 and 9 .They own shares ($500 ea) in a large bank .Have a savings account and save all the money they get and I talk about financialy literacy at every opportunity .I studied to year 12 and learned the importance of financially literacy at an early age and it worked even though I don’t like math or maths . Schools in Australia fail to understand this leaving kids in financial strife at a later stage .
    Well done in bringing this up

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