Canadian teenagers are more financially literate than most people their age in other rich countries, but more than one out of eight still fails to meet what the OECD considers a baseline level of proficiency in the topic.
That’s according to a report released this week from the Organization for Economic Co-Operation and Development. Every three years, the think-tank of wealthy nations conducts a survey of 15-year-olds to gauge them on — among other things — their financial literacy.
That’s a catch-all phrase to describe everything from understanding how pay stubs and taxes work, to more complicated concepts such as comparing relative prices of items, and the impact of interest rates on debt and investments.
Known as the Program for International Student Assessment or PISA, it’s the fifth such tri-annual report. This year more than 13,000 Canadian teens from seven provinces participated in the voluntary test. You can take the test yourself here but the results reveal some eye-opening conclusions about how ready the Canadian teenagers polled are to handle money.
Understanding the consequences of spending
On average across the 15 countries who participated, 22 per cent scored below what the OECD considers to be a minimum threshold of financial knowledge. That means almost a quarter of teenagers in the OECD nations that participated can “at best” understand the relation between their spending habits and achieving more affluent lives.
The countries that submitted the financial literacy portion of the survey were: Australia, Belgium, Canada, Chile, Italy, Netherlands, Poland, Slovakia, Spain, U.S., Brazil, Lithania, Peru, Russia and China.
That’s a small number, but nonetheless a big problem, considering the consequences for them and their economies if they aren’t good with money.
“These students cannot even recognize the value of a simple budget or understand the relationship between how much a vehicle is used and the costs incurred,” the OECD’s secretary general Angel Gurria said.
Canada fared better than the OECD average, with just 13 per cent or more than one in eight failing the OECD’s minimum level of financial proficiency. But a closer look at the numbers reveals that Canadian young people have room to improve.
Jane Rooney of the Financial Consumer Agency of Canada said that, while she was pleased with the overall results, financial literacy often starts at home. “You’re never too young to learn about money,” she said in an interview with CBC News.
Some being left behind in financial literacy
The report grades participants on a number of factors and gives them an overall score. Overall, Canadian 15-year-olds achieved a mean score of 533 in financial literacy, which is well above the OECD average of 489.
But the report also found a larger than normal gap between the highest scorers in Canada and the lowest — as much as 295 points between the top 10 per cent and the bottom, meaning some teens know very little. “We have to address that,” Rooney acknowledged.
Not understanding money is bad for these individuals, but also bad for everyone in the economy around them.
“Financial literacy helps individuals to navigate decisions and strengthens their financial well-being,” Gurria said. “It also promotes inclusive growth and more resilient financial systems and economies.”
Four out of five Canadian students surveyed said, if they did not have enough money to buy something they really wanted, they would either save up to buy it or would not buy it — that score is well ahead of other nations.
The report found that overall, Canadian teenagers were ahead of the curve in terms of their likelihood of having a bank account (78 per cent in Canada compared to 57 per cent in the OECD) but they were less likely (55 per cent in Canada compared to 64 per cent in the OECD), to have some sort of income from work outside the home.
Those are two of the simplest factors that tend to correlate with learning the value of money, but it’s clear from the questions asked that the survey was anything but simple.
Are you smarter than a 15-year-old?
Consider the following sample question:
Suppose that you borrow $8,000 at an interest rate of 15 per cent. The repayment plan has you paying back $150 a month, so after a year, you’d have paid $1,800 but still owe $7,400 on the loan.That’s when another company comes along, offering to loan you $10,000 — enough to pay off your original debt, and then some. The best part? The new loan comes with a lower interest rate of 13 per cent, but your monthly payment remains the same: $150 a month.
Should you take it?
The answer is, probably not. Read on to find out exactly why.
The good news is that Canadian teenagers’ high score suggest they were more likely than most to get that one right.
Most Canadian students discuss money matters with their parents between once a month and twice a week, the report found, a habit which has one of the strongest correlations with having good financial literacy.
“The good news is that kids are talking to parents about money, so it doesn’t seem to be a taboo topic,” Rooney said.
People often associate financial intelligence with math, but the OECD report found that fewer than two-thirds of financial literacy is related to having strong math and reading skills. The rest — as much as 38 per cent — comes from other kinds of knowledge or skills.
Math skills would help a respondent realize they are being offered a bad deal in the question above: owing $10,000 is worse than owing $8,000 despite the lower interest rate, and the longer term means the borrower will pay more overall.
But to get full score on the test, the student would have had to consider more nebulous concepts in their answer — the danger of giving more money to someone in debt who might be unable to control their spending in the first place, for example. And whether there might be fees involved with paying out the initial loan.
Put another way, you can be great at math, but horrible with money, which is why the OECD says all countries need to pay more attention to the issue.
“Everyone needs to be financially literate,” the OECD said, “especially those who live on tight budgets and have little leeway in case they make financial mistakes.”