Specialists of the Vologda Research Center of the Russian Academy of Sciences (VolRC RAS, Vologda) have been conducting long-term research to measure financial literacy in various socio-demographic groups. The assessment of financial literacy of the Russian consumer revealed links between revenue and expense recording skills and the general levels of education, discipline and organization. The preparation of recommendations on building and improving financial literacy is a contribution to the implementation of financial education activities and tools for people of the country
Personal life experience, attitude to money, budgeting practices and a particular financial behavior model in the family normally become the cornerstone of a person's financial literacy. Investigation of prosperity levels, needs of the public depending on the specific stage in life, and identifying gaps in financial knowledge allow experts to devise an economic policy strategy and develop a mechanism to improve financial literacy of the public.
Scientists in Vologda, under the government assignment to VolRC RAS for R&D work (2012, 2014, and 2016) and the project financed with the grant from the Russian Foundation for Basic Research (RFBR) No.18-010-00919 “Improvement of financial literacy as a factor in reducing socio-economic risks for the public” (2018-2019), are conducting multiple-year research on the public's financial literacy and financial behavior. Following critical assessment of existing theoretical and methodological approaches, specialists have developed a proprietary methodology to assess financial literacy (FL) of the population. Studying various population groups based on characteristics such as marital status, age, children, income level, financial activity, and region of residence allowed the experts to find out how financial knowledge and skills are built and what the typical financial literacy issues are.
Staff members of the Federal State Budgetary Science Institution “Vologda Research Center of the Russian Academy of Sciences” (VolRC RAS) – Olga Nikolaevna Kalachikova, Project Manager of RFBR, Candidate of Economic Sciences, Deputy Director for Scientific Work, Head of the Department for the Studies of Lifestyles and Standards of Living, and Leading Research Officer at IDR FCTAS RAS, and Galina Vadimovna Belekhova, Research Officer at the Laboratory for Research of Labor Potential Issues of the Department for the Studies of Lifestyles and Standards of Living – have shared results of their research and told us what financial literacy was and how it benefited a person today, what the differences in financial behaviors of people of different generations were, why it was easier to build financial culture during grade school years, and what the general level of financial literacy of the Russian population was (based on individual provinces as examples).
“In the modern world, financially comfortable life directly depends on the person’s ability to handle their money efficiently and use financial products correctly. If the person is competent in managing their money, they can align their financial behavior with the resources and conditions at hand, and, ideally, ensure their financial wellbeing and a decent life for themselves today and in the future. However, most Russians are not familiar with the basics of financial literacy, as such classes are not offered on a systemic basis at grade schools (where such classes were first introduced into curricula only in 2015-2016), or at tertiary education institutions. Therefore, ordinary consumers lack sufficient financial knowledge and skills, and often purchase financial services without understanding what exactly they are dealing with and often manage their money inefficiently. Financial literacy is of particular importance to vulnerable groups (families with many children, low-income families, pensioners, persons with disabilities), who have scarce material resources and limited financial practices and are, therefore, exposed to socio-economic risks to a greater degree.
Financial literacy research and monitoring to identify “weak areas” in financial knowledge and skills of the public are needed primarily to develop effective financial education activities and tools. Moreover, regular monitoring of financial literacy levels along with various financial behavior indicators (bank deposits per capita, past-due debt, etc.) is a reliable means of monitoring the performance of executive authorities.” These are Olga Kalachikova’s arguments in favor of conducting financial literacy research and designing activities to improve financial literacy.
How is financial literacy useful, and what is its role in a modern person's life? How should we understand this category?
“Positive effects of financial literacy on various financial decisions and behavior models have been proven multiple times. For instance, foreign studies prove that increased financial literacy has a positive impact on retirement financial planning and life on retirement, participation in the stock market, personal savings, proper use of debt and credit cards. In their papers, Russian researchers often argue that financially literate people are more active on the financial market. Other works show that high level of financial literacy in the population is a strong positive factor in the development of financial institutions and changes in key segments of the financial market in general.
During the course of our study conducted within the RFBR grant “Improving financial literacy as a factor in reducing socio-economic risks for the public” (Grant No. 18-010-00919), a survey performed in four provinces of the North-West Federal District revealed that people with low level of financial literacy were more pessimistic about their current and future financial position, and were more economically passive, including in situations where their financial position worsened. That is, people in this category fix their poor financial situation, causing their standard of living to stagnate, which also affects economic behaviors of people around them, first of all children. This carries both external and internal risks related to dependency levels, poor social wellbeing and, in some cases, deviant behaviors.
Having reviewed a vast amount of Russian and foreign works concerning financial literacy of the public, we saw that the authors often fail to set clear and unambiguous boundaries between concepts such as “knowledge”. Literacy”, “abilities”, and “competence”, since these concepts are closely related to each other and are therefore often used as equivalent.
Based on the existing Russian tradition for researching personal finances and financial literacy and taking into account the approved Strategy for Improving Financial Literacy in the Russian Federation for 2017–2023, in our study we are using a broad approach to understanding of financial literacy and believe that it encompasses financial knowledge, skills and attitudes used in particular financial actions to ensure material wellbeing. Financial literacy is built with three components: financial knowledge (basic and advanced); financial skills – actions characterized by a high level of mastery; financial attitudes – a tendency to certain perceptions and behaviors towards objects and situations concerning personal finances. However, we should remember that differences in the definitions of certain concepts may lead to issues with interpretation and comparison of the results of individual studies,” – Galina Belekhova detailed.
How is financial literacy built?
“Financial literacy develops primarily as parents share their personal experience with their children by example, the second channel being education, including self-education. In our study, we measured effectiveness of educational programs for the adult population. However, teaching financial literacy from childhood is preferable for building sustainable practices,” the scientist clarified.
The approaches to investigating financial literacy that exist in the research sector today, represent vast experience in theoretical and methodological products and empirical application thereof.
As Olga Kalachikova remarked, “measuring financial literacy is a complicated task due to complexity and multicomponent nature of the phenomenon itself and its close links to psychological and social processes. Some foreign scientists believe that in practice, it is hard to produce reliable results when studying how people process financial information and make decisions on the basis of their financial knowledge. It has also been pointed out that questions widely used to measure financial literacy were never verified in terms of how accurately they reflect components of financial literacy. However, despite the lack of a common way of measuring financial literacy, there is no doubt regarding the order of the measuring work, focused on knowledge, skills and attitudes (whatever the content of each of the components).”
According to the Vologda scientists, “to measure financial literacy of the public, the modern science and practice mostly use the sociological approach, which includes tools for polling and index building. Examples include works by T. V. Vaschenko, Y.Y. Ivanova and I.V. Sokolnikova; O.Y. Kuzina, L. I. Nivorozhkina, Y. N. Alifanova and T.G. Sinyavskaya; Y.A. Fyodorova, V.V. Nekhaenko, and S. Y. Dovzhenko; A. Lusardi, O. Mitchell; A. Zait, P. Bertea. One should also mention major research projects of the Organization for Economic Cooperation and Development (OECD) – the International Survey of Adult Financial Literacy Competencies in G20 countries and the Programme for International Student Assessment (PISA survey) focused on 15-year-old students, and Russian nationwide surveys by NAFI Research Center (NAFI), in particular the Financial Literacy Rating of Russian Regions of 2018 and 2019.”
Most of the methodologies we reviewed have some things in common. Firstly, financial literacy is assessed broadly, i.e. as a set financial knowledge, skills, and attitudes. Secondly, all those methodologies envisage application of sociological tools and involve designing questionnaires with various levels of detail. Thirdly, the most common FL subject areas are: basic knowledge of money management (budget and financial planning, understanding of inflation and interest rates); specifics of financial products and their use (deposits and savings, investment, loans); risks and protection against them. Fourthly, the methods used to measure components of financial literacy and financial competence are either criteria-based tests or self-assessment, but mostly both methods are combined as complementary. Besides, partial indexes (by FL component) and composite indexes (total FL level) of financial literacy of the population are calculated.
Considering the dynamic nature of socio-economic life resulting in constant adaptation of people’s behaviors to new conditions, building a financial literacy assessment methodology that is based on empirical data collection methods, adequate to modernity, and takes into account relevant issues of interaction with the socio-economic sphere, faced by the population, is still an important task.”
The specialists of VolRC RAS emphasize that “according to the proprietary conception, we view financial literacy broadly, i.e. as a combination of financial knowledge, skills and attitudes. A summary assessment of financial literacy of the public using these components, which naturally differ reflecting people’s life circumstances and material resources, still allows a sufficiently reliable assessment of the level of financial literacy of the population, and enables us to identify FL development issues and develop justified tools and measures to improve financial literacy.”
The scientists investigated the personal finance management knowledge and skills of the population and measured their level of financial literacy. The sample covered respondents over 18 years of age in four regions of the North-West Federal District: Vologda (in 2012, 2014, 2016, and 2018), Arkhangelsk, Kaliningrad and Pskov regions (in 2018).
As regards FL strengths and weaknesses of the young generation and how young people develop their financial behavior skills, Olga Kalachikova reported:
“The young generation are one of the “drivers” of development processes, and an indicator of society’s ability for transformation. Young people are mobile, they learn and master new tools quickly, and have the chance to use the knowledge and skills acquired for a long period of time. This is why studying young people’s financial literacy is of particular scientific and practical interest.
We investigated financial literacy of the young population within a financial behavior study in Vologda Region, through a poll conducted in 2016 (total sample size – 1,500 persons). We found that the young people of Vologda Region did not have a lot of financial knowledge and skills. The main “weaknesses” of their financial literacy were: lack of regular building of financial reserves (i.e. lack of a saving attitude); fragmentary and irregular cashflow control and lack of a regularly maintained written personal (or family) budget; and low inclination to look for advantageous financial products. These financial literacy issues are characteristic of both young people and older age groups in Vologda Region (the “middle aged” – aged 30 to 55(60), and “senior citizens” – aged 55(60)+). Young people are somewhat lower in strict family budgeting, the habit of comparing services, and reading agreements carefully. One possible explanation for these problems could be not so match the low income level as the lack of long-term financial goals (i.e. short planning horizon).”
Are there any fundamental differences from the older generation on this issue?
“The most serious issues with older generation in Vologda Region are: incomplete recording of revenue and expenses; issues with the payment of current bills; high probability of becoming a victim of financial fraud, especially with regards to banking cards and bank deposits. We believe that the causes of these problems include socio-economic (income, employment, accumulated assets, etc.) and cognitive (knowledge level) factors, as well as the high level of older people's mistrust of most financial institutions. Moreover, the mistrust barrier is of a dual nature: older people’s mistrust of banking and insurance institutions is impeding the development of adapted banking and insurance services for this population group,” the researcher clarified.
How receptive to FL training are grade school students?
“As regards financial literacy of grade school students, we have studied various educational practices, used in Russia and abroad. In the long-term, financial literacy training for young children and adolescents is more effective than it is for adults. There are several reasons for that. First of all, many habits and preferences are hard to change in adults. There is also the banal issue of attendance: the whole training process for grade school students could be organized within their school, while adults, being busy, may find it much harder to make time for the training. Besides, schools could cover all socio-economic groups. The opportunity of using socio-psychological characteristics specific to children and adolescents is important – incentives to cognition developed at a young age make it easy to process new information afterwards. Training could be made more effective through engagement of the parents. Enhancing adults’ financial literacy, joint budgeting with children, financial planning, choosing financial products, and other practices will reinforce skills and build financial culture in young people,” the scientist remarked.
In addition, the researchers have identified correlations between financial literacy and demographics according to family life cycle phases.
According to Galina Belekhova, “the results of the survey performed in four regions of the North-West Federal District (Arkhangelsk, Vologda, Kaliningrad, and Pskov regions) in the fall of 2018 within the RFBR grant “Improving financial literacy as a factor in reducing socio-economic risks for the public” (Grant No.18-010-00919) show that the most financially literate groups are the middle aged population (aged 30 to 55 (60)), people who are formally married; people who have children; highly educated people; employed population.
If we have a look at the results in more detail, taking into account the whole combination of demographics (age, marital status, and children) in accordance with the family life cycle phases, we will get more detailed findings. In particular, “family groups”, i.e. families of middle aged people with or without children, families of young people with children, and middle-aged single parents, have a higher composite financial literacy index (FLI). Young single parents show the lowest FLI, while childless single young people and senior citizens do somewhat better. Thus, financial literacy appears to be higher in groups living through maturity phases characterized by stable employment, parenting and a broad range of consumer needs.”
Adding to her colleague’s response, Olga Kalachikova says, “members of the “poorly performing” group of single young parents tend to have issues with: understanding inflation (i.e. with assessing price changes correctly, which makes it harder for them to plan their lives); complete budgeting; both saving and building a reserve fund “for a rainy day”; calculating interest gain, loan and tax payments; taking personal responsibility for loan repayment, and frequent debt delinquency; understanding and using insurance, retirement and investment products.
The problems of young and senior single people without children who are also low in FLI are: firstly, basics of communication with financial organizations (failure to read agreements carefully; often, failure to compare different terms and conditions of services; poor knowledge of financial products themselves, especially insurance and investment products); secondly, borrower behavior issues (poor understanding of criteria for choosing a suitable loan; choosing monthly payments above the level recommended, which leads to late payments; errors in calculation of the amount of a loan); and thirdly, issues with financial arithmetic (in addition to loan-related issues, people make significant mistakes when evaluating deposit income and personal income tax).
The groups with the highest total financial literacy index – families of young and middle-aged people with children – are showing medium level of knowledge and skills in a number of subject areas. Their strongest subject areas are: loan use, risks and financial security, insurance and pensions, and consumer rights protection. In addition, the knowledge and skills of people in these groups are more even compared to those of other socio-demographic groups.”
The survey the scientists conducted in the regions of the North-West Federal District, based on criteria such as location, socio-demographic and economic characteristics, enabled measuring the financial literacy index.
In this case, according to Galina Belekhova, “we’ve managed to produce science-based estimates of financial literacy, including by region, and economic and socio-demographic characteristics of the population. The public's financial literacy is below the average level, as shown by the estimated composite financial literacy index of the population – 0.396 (within the range of 0 to 1). FLI is the highest in Arkhangelsk Region (0.434), followed by Kaliningrad Region (0.407), and noticeably lower in Pskov Region (0.389) and Vologda Region (0.376).
The highest sub-indices are observed in subject areas that are more often practiced by the population (“budget and planning”, “savings and deposits”, “loans”, “investment and taxes”); these sub-indices are the highest in Arkhangelsk and Kaliningrad regions. The partial knowledge index turned out higher than the partial skills index; the partial knowledge and skills indices are the highest in Arkhangelsk and Kaliningrad regions.
The reason for Arkhangelsk and Kaliningrad regions having good financial literacy indices (including by group, based on economic and socio-demographic characteristics) could be their long history of participation in the joint project of the Ministry of Finance of the Russian Federation and the World Bank to improve financial literacy (starting in 2011 and 2013 respectively), and the implementation of regional financial literacy programs. On the other hand, Vologda and Pskov regions, with no such large-scale projects and special regional programs, received the lowest financial literacy indices.”
The results presented were produced by the researchers using their own index-based methodology for measuring financial literacy in the “knowledge” and “skills” components.”
Olga Kalachikova disclosed the essence of the proprietary approach offered by the specialists of VolRC RAS: “The basis of our proprietary index-based methodology for measuring financial literacy in the population is the toolbox designed and used by the Organization for Economic Cooperation and Development, which we adapted to specific features of today's Russian society. The index-based methodology for measuring financial literacy we developed involves calculation of sub-indices by subject area, partial indices for knowledge and skills, and the composite financial literacy index. The raw data are collected through a survey, wherein respondents’ financial knowledge and skills are tested using 33 questions. The numerical values of the partial and composite financial literacy indices are produced by dividing the actual number of respondents’ correct answers by the highest possible number of correct answers (FLI range: from 0 to 1). The polling allows assessment of several subject areas of financial literacy at the same time: revenue and expenses; family budget and financial planning; savings and bank deposits; loans; investment and taxes; insurance and pensions; risks and financial security; and consumer rights protection.
The partial index for knowledge reflects the level of the person’s financial knowledge such as understanding of inflation, buffer reserve, family budget, characteristics of a loan, risk-yield relationship, types of insurance, signs of a Ponzi scheme, risk distribution principles, and awareness of additional retirement provision methods, the deposit insurance system, and civil rights organizations.
The partial index for skills reflects the person’s financial skills regarding income management, family budgeting, expense planning, the use of bank deposits and loans, maintaining payment discipline, calculation of interest and taxes, using credit cards safely, obtaining information on financial products, services and the situation in the economy, and protection of one’s own consumer rights.
The Composite Financial Literacy Index (FLI) reflects the degree to which the person’s financial knowledge and active personal finance management skills matches the model of a financially literate citizen.”
What is the novelty of your approach, compared to known methods?
“There isn’t a complete equivalent to the methodology developed by our authors. The arrangement of questions to measure knowledge and skills in every subject area and determine the composite financial literacy index for the population is original.
The distinct feature of the research conducted is the alignment of financial literacy components being measured with the notion of a financially literate citizen as formalized in laws and regulations of the Russian Federation. The representative breakdown of the indices calculated should also be mentioned – the sub-indices for subject areas, partial indices for knowledge, skills and arithmetic, and the composite literacy index – no equivalent to said breakdown has been found in any previous studies.
The methodology for measuring financial literacy and the relevant tools have proved their scientific consistency: the initial financial literacy scores are consistent; the specifics identified are in line with the logic of a justified theoretical and methodological approach.
The level of detail used in the methodology is sufficient and moderately high, which allows finding “problematic” subject areas (gaps) and assessing the knowledge component and financial skills. The toolbox allows measuring financial literacy on the individual level as well as on the population and sub-population levels (population and individual socio-demographic groups), which makes the toolbox applicable in scientific and applied research as well as in practical work,” Galina Belekhova argued.
What was your conclusion following the research?
The most common financial literacy issues we identified are about basic financial attitudes, knowledge and skills, namely: lack of focus on saving – people are more focused on consumption to meet their current needs; lack of a holistic view of the deposit insurance system; fragmentary nature of cashflow control and lack of complete written family budgeting; moderately low predominance of practices of searching for advantageous financial products and comparing them; low percentage of those with savings for contingencies, sufficient to live on for a long period of time; difficulties with understanding loan obligations and compliance with the payment schedule; low level of knowledge and skills in investment, retirement provisions, and insurance; low awareness of how to protect one’s rights in the financial market.
We also found a high level of threat to financial security of the population, due to the following aspects of their behavior: 1) the low percentage of the respondents who correctly identified all situations that put the security of the money on their banking cards at risk; 2) around a half of the respondents do not know the key signs of a Ponzi scheme.
The respondents’ self-assessment of their financial literacy is mostly moderate (satisfactory – 49%; unsatisfactory – 21%). This distribution of the respondents’ assessments is quite consistent with the estimated composite financial literacy index of the population – 0.396 (within the range of 0 to 1).
Our research also found that people who had been exposed to regional financial literacy programs were more aware of their need for further learning. That is, the financial education programs offered externally in Kaliningrad and Arkhangelsk regions resulted in higher scores for financial knowledge and skills and increased willingness of the public to participate in such programs.
Financial literacy has multiple components and is, therefore, influenced by a very broad range of factors – economic, infrastructure-related, socio-demographic, psychological, cultural, etc.,” Galina Belekhova detailed.
Would it be safe to say that FL in Russia has its specific features due to special historical and socio-economic conditions?
“In our opinion, the local features of financial literacy in Russia are: lower level of knowledge and skills with regards to investment and insurance vehicles; lack of financial advice culture (including in low- and middle-income population groups); high risk aversion in the majority of the population; and high level of mistrust towards many financial organizations. No doubt that all this is part of the consequences of the socio-economic transformations of the 1990s, which objectively made people cautious and mistrustful (following the loss of savings, the change in the institutional environment, and the novation of the financial market),” the Vologda scientists opined.
What recommendations could you offer regarding solutions to existing financial literacy problems, a strategy/mechanism to improve it, and regulation of financial behavior of the public?
“100% financial literacy could not be achieved for objective reasons; it is, however, unwise not to use existing opportunities to improve it, including the opportunities to eliminate FL disparities based on area of residence and across socio-demographic groups, or fill the gaps in knowledge/skills in any subject areas.
During the course of our research in 2018, we identified the need for higher financial literacy – one in three respondents believed their knowledge and skills in finances needed improvement, while the same percentage did not think they needed financial education and had not given the issue any thought. Therefore, an important task is to promote the advantages of improving personal financial literacy among Russian citizens.
Numerous activities have been implemented in the Russian Federation for over ten years (both systemic and based on private initiatives) in order to improve people’s financial knowledge and skills. For example, there is the ongoing Financial Education and Financial Literacy Project for the Russian Federation, jointly run by the Russian Ministry of Finance and the World Bank since 2011; in September 2017, the Strategy for the Improvement of Financial Literacy in the Russian Federation for 2017 – 2023 was developed and approved for implementation. Training events are held on a regular basis: contests for grade school and college students; the All-Russia Savings Week; the Family Financial Festival, etc. There are online resources (the website and newspaper Druzhi s Finansami (Be Friends with Finances), Finansovaya Kultura (Financial Culture), Hochu. Mogu. Znayu (I want. I can. I know), etc.). Based on the data of our 2018 survey, we have identified formats of financial literacy events that are the most interesting for the public, namely specialized consultations, training seminars and courses (virtual and face-to-face), and special publications.
The key principles of success in the FL sector are: building motivation, systemic work, and availability of tools (including specialist’s consultations). Ideally, the FL basics and principles should be taught to children at an early age, after which the set of skills and knowledge should be expanded and made more sophisticated gradually. This is a task for the family and the education system. As for the provision of complete and accurate information on their products, and design of such products to meet the needs and abilities of various socio-demographic groups – these are tasks for financial organizations,” the specialists of VolRC RAS believe.
Thus, the financial literacy research conducted by Vologda scientists for a number of years, including the breakdown by area of residence, socio-demographic and economic characteristics of the population, has allowed measuring the current financial knowledge and skills of Russian citizens, identifying typical financial literacy problems, and determining possibilities to improve financial literacy in order to reduce threats to financial security of citizens and their material wellbeing.
All photos and illustrations are provided by O. Kalachikova and G. Belekhova
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