Britons suffer from low Financial IQ

30 November -0001

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Money is something that people have to deal with nearly everyday, yet millions of Britons continue to struggle when managing their finances. The latest research from online bank Egg has discovered that this could be the result of them having a low Financial IQ or FIQ.

Egg worked with Professor Alan Lewis, economic psychologist at Bath University, to compile a test to measure the level of financial understanding amongst UK adult consumers. The test covers basic economic knowledge, comprehension of financial information and psychological reactions towards money. The test was then used to assess the nation's competency levels in everyday money matters and decisions.

To find out how you compare against the nation click www.financial-iq.co.uk to take the FIQ test and then compare your results with that of an Accountant or Hairdresser (view the table below for their results)

Egg discovered that the overall level of financial comprehension in the UK is very low. The average score amongst the population was 56 out of a possible 120. Surprisingly only 1% of the population achieved the highest possible score of 120 and 3% scored 0.

Egg tested the financial competency levels of five different professions: hairdressers; doctors; accountants; estate agents and teachers. Overall this group scored higher than the national average, with an FIQ of 82. Hairdressers scored below the other professions in all questions however they still achieve an average FIQ of 61.

Accountants, doctors, estate agents and teachers are usually above the national average in all questions but perhaps not surprisingly accountants have the highest FIQ of all, 99. More surprising is that the supposedly financially savvy accountants do not score 100% in any one question, more often than not they are 90% correct.

Professions league table

• Profession Average FIQ
• Accountant 99
• Doctor 85
• Estate Agent 85
• Teacher 81
• Hairdresser 61

Females, younger and older age groups, were likely to score lower with females having an average FIQ of 52 compared to men 60. And the most financially competent age group was the 35-44 year olds with an average FIQ of 62.

One of the things that is letting the nation down is basic economic knowledge. When asked how the government raises money over half of the respondents (54%) thought that the government's main source of funding for services such as education and the NHS was income tax. Only 18% were aware that they raise approximately equal amounts from both income tax and tax on goods and services.

Comprehension of financial information was another problem for respondents for example it is not the abbreviation of APR that causes confusion amongst consumers, it is how it's applied. In fact 83% selected the correct answer when presented with four possible options. However, in a further study by Professor Lewis, when ask to apply an interest rate most people made the assumption that an APR of 8% would mean that 8% is taken from the loan amount and simply added on, in fact nearly half of those questioned (44%) thought this to be the case.

The same with inflation; whilst two thirds (64%) correctly identified the definition of the word, nearly three quarters thought it better not to spend when faced with an inflation rate of 4% and an interest rate on their savings of 3%.

Psychologically there is a real sense of immediacy amongst consumers; they want money now not later. People would rather take £50 in the near future than £100 later, reflecting a perceived inflation rate of approximately 200%. This short-sightedness affects even people who are otherwise financially sophisticated.

Professor Alan Lewis said: "I was surprised by how low financial competency is in the UK today. On this evidence I am worried that many people could be making the wrong financial decisions, especially when arranging credit or paying off loans appropriately. We must continue to encourage the teaching of everyday financial skills in schools and also in higher education where young people are thrown in the deep-end often weighed down by student loans.

Many people also suffer from financial short-sightedness: there is evidence from this study that young people are the most financially impetuous. People must be persuaded and helped to plan for the future: as the proportion of older people rises there will be increasing emphasis placed upon individuals to take financial responsibility for old age and health needs."

Andy Deller, director banking and insurance at Egg said: "The financial services industry has historically played a role and benefited from keeping the nations Financial IQ low. Generally people are uninterested in financial services and so are unwilling to take action that will improve their understanding of money matters. There is a clear need for the industry to provide consumers with more than just good value products and services - we also need to provide them with information that will help them make decisions about their own money."

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