Watch out! If you answer the following question incorrectly, you may be deemed financially illiterate.

When should you save money?
a) As soon as I turn 18.
b) Only if I have some spare money.
c) Every time I receive money.[1]

Of course, the right answer is c). And c) is wrong. There are definitely situations where it is not advisable to save money – it is precisely for situations such as these that you save money the rest of the time. You might, for instance, want to invest in an education that will pay off later on. Or you have just met the woman or man of your dreams and want to take her or him out for a romantic dinner.[2]

The above question shows two things: First, it is – despite all the studies mentioned in this blog serieshttp://www.iconomix.ch/en/service/blog/category/economic-literacy-en/ so far – not always clear what financial literacy is really all about. According to a summarywww.networksfinancialinstitute.org/... by US economist Sandra Houston on 72 surveys regarding financial literacy, more than 70% of studies did not define the term in question. Second, it is difficult to measure financial or general economic skills.

The first problem – the lack of a common basis – is the reason for the fact that very often a study examines knowledge in a specific financial area, but draws conclusions on literacy in finance as a whole. The following question on investment funds is taken from a study which is currently being carried out in Switzerland:[3]

It is actually true, but 36% thought it was false and 21% did not know. Such results led some journalists to writewww.nzz.ch/... that the Swiss greatly overestimate their financial literacy. It would have been more accurate to conclude that the respondents do not know much about specific features of investment funds.

The second problem arises in connection with the following dilemma. On the one hand, researchers would like to collect data not only on people’s knowledge, but also on their skills and behaviour. On the other hand, due to time, financial and other restrictions, surveys often consist of multiple-choice questions, which makes it difficult to draw conclusions on real situations. That is how questions on saving as the good and spending as the bad behaviour come about. To put it bluntly, one might say that when answering such questions, you can adhere to the rule that ticking something that sounds like fun makes you a financial fool.

Of course, it is easier to identify problems than to solve them. But are there no accepted standards or surveys on financial or economic skills that could be used as templates? We will look at that question in a later blog entry ...

On behalf of the iconomix team
Michael Manz

[1] From an evaluation formwww.operationhope.org/... on financial courses of the Operation HOPE organisation. It is, of course, not our intention to criticise the activities and programmes of Operation HOPE.

[2] Sometimes, it might even be advisable to incur debts. However, iconomix does as usual not take any responsibility ...

[3] Study on behalf of AXA Investment Managers, cf. press release of June 2009 (in German)smtp.market.ch/....