Financial Literacy Part 1: How unequal are children’s financial literacy skills?

John Jerrim, UCL Social Research Institute
This blog post first appeared on the IOE blog.

In an increasingly complex financial world, it is important that we ensure young people develop a sound knowledge of financial issues and possess key financial skills. This is particularly important for young people from disadvantaged socio-economic backgrounds who, unfortunately, are the most likely to struggle financially during adulthood and become entrapped in a cycle of poverty and debt.

Yet, in the UK, we know relatively little about children’s financial capabilities, including differences between socio-economic groups, and the age when such gaps start to develop.

Along with Jake Anders and Lindsey Macmillan, I have tackled this issue in a new academic paper. This uses data from the 2019 Children and Young People’s Financial Capability Survey – based upon responses from 3,745 children from across the UK.

Spoiler alert! The gaps are pretty big, and emerge pretty early.

How big are the socio-economic gaps in children’s financial knowledge?

As part of the survey, young people were asked a series of questions that tested their financial knowledge (further detail about the questions asked are provided in the next blog post in this series). We have converted this into an overall score, and then compared the average percentile ranking of children from advantaged and disadvantaged socio-economic backgrounds (where 100 = top 1% of children in terms of their financial skills and 1 = the bottom 1% of children).

Figure 1 presents one of our key findings, plotting results for children from advantaged and disadvantaged socio-economic backgrounds, and illustrating how this changes as children age.

Three key results emerge.

First, the socio-economic gap in children’s financial skills is pretty big. For instance, at age 17, there is a difference between socio-economic groups – on average – of around 14 places in the financial skills rankings (low SES = 55^th percentile versus high SES 69^th percentile).

Second, the gaps emerge early, and then are sustained – but do not seem to grow bigger. For instance, at age 11, there is a difference between socio-economic groups of around 13 places in the financial skills ranking (30^th versus 43^rd percentile). This is essentially the same gap as observed at the end of secondary school.

Finally, the financial skills of 15-year-olds from socio-economically disadvantaged backgrounds are approximately the same as those of 11-year-olds from the most advantaged backgrounds. In other words, poor kids have similar financial skills just before they are about to leave secondary school as rich kids do just after joining.

Clearly, then, the root cause of inequalities in young people’s financial skills is taking hold before children enter secondary school.

But just how early such differences emerge we still don’t really know…

Figure 1. The financial literacy skills of socio-economically advantaged and disadvantaged children (age 11 to 17).

What might be driving this gap?

Figure 1 in many ways replicates what we know about socio-economic inequalities in educational achievement more broadly – gaps emerge early in life and are then firmly maintained.

A later blog in this series will look into the inequalities in the inputs into children’s financial education, both by schools and by parents. This may, in turn, provide some suggestions of the potential factors underpinning this gap in schools.

But at the same time, it’s important to understand that there are unlikely to be easy solutions to such problems. Rather, coordinated action by schools, parents, policymakers, financial service providers and society is likely to be needed if such socio-economic differences in financial skills are to get meaningfully reduced.