Financial literacy part 2: What can rich kids do that poor kids can’t?
By Blog Editor, IOE Digital, on 10 February 2022
The first blog in this series illustrated how there are substantial socio-economic gaps in children’s financial literacy skills, with these differences emerging before the start of primary school.
But what exactly can rich kids do – in terms of their financial knowledge and skills – that poor kids can’t?
This blog takes a closer look.
Differences in knowledge
As part of the Children and Young People’s Financial Capability Survey, young people age 11 and above were asked whether they knew the correct term for various financial concepts, such as “the money people pay to government” (taxes) and “the amount the price of things in shops does up by”.
The percentage of young people who provided the correct response – stratified by socio-economic group – can be found in Figure 1. This provides a clear and consistent story of there being around a 10 to 15 percentage point difference on each of the concepts asked; young people from disadvantaged backgrounds have consistently weaker knowledge across a range of financial concepts.
How about how money works “in practice”? Young people were also informally tested about their knowledge of how interest on savings work. The exact questions they were asked can be found in Table 1.
Around one-in-three 11-17-year-olds from low socio-economic status families could not work out the amount of money they would have in their savings account with an interest rate of two percent. This is compared to just 14% of children from affluent family backgrounds.
Even more disadvantaged children – around two-thirds – failed to understand the concept of a real savings rate, and how inflation erodes the purchasing power. Again, as Table 1 illustrates, the socio-economic gap here is particularly stark.
Table 1. Inequality in understanding interest rates (children age 11 – 17)
|Low SES||High SES|
|Suppose you put £100 into a savings account with a guaranteed interest rate of 2% per year. You don’t make any further payments into this account and you don’t withdraw any money. How much would be in the account at the end of the first year?||68%||86%|
|If the inflation rate is 5% and the interest rate you get on your savings is 3%, will your savings have more, less or the same amount of buying power in a year’s time?||31%||53%|
But what about the consequences of not keeping up with paying important bills? This may have more salience for young people from disadvantaged backgrounds than advantaged backgrounds, given how their parents are more likely to face such financial difficulties.
Interestingly, in this area, socio-economic differences are a lot less pronounced, as illustrated by Figure 2.
Almost all children, regardless of their socio-economic status, understood that failing to pay council tax has consequences, and that the government won’t simply pay it for you.
But only around one-in-three understood that this is a criminal offence which could result in a custodial sentence, with the percentage actually slightly higher for those from disadvantaged backgrounds. Similarly, only around half of 14-17-year-olds realised that possessions may be seized by a debt collector, with again only a comparatively small difference between socio-economic groups.
Although disadvantaged children’s knowledge of key financial concepts is weaker than their more advantaged peers, they seem to be equally tuned in to the consequences of failing to meet important financial commitments.
Nevertheless, it is somewhat concerning the way there do appear to be significant gaps in disadvantaged children’s financial knowledge. Many cannot work out simple interest rate calculations, with most not understanding that inflation erodes the purchasing power of money. More than half of disadvantaged teenagers also do not grasp the full severity of not paying their taxes due.
Given the potential long term consequences of such weak financial skills, more needs to be done to improve disadvantaged young people’s understanding of money and how it works.
One Response to “Financial literacy part 2: What can rich kids do that poor kids can’t?”
[…] was the title of the financial literacy piece that got me- “What can rich kids do that poor kids can’t?” The idea that wealth and poverty might have an impact on what people are able to do is such a […]