Finally understanding pensions, funds, and mobile phone contracts

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Financial Literacy Initiative Finally understanding pensions, funds, and mobile phone contracts

How does the pension system work? What is a fund? What are the important features of hire purchase contracts? Federal Finance Minister Lindner and Federal Minister of Education and Research Stark-Watzinger want to improve financial literacy in Germany through the Financial Literacy Initiative.

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Federal Minister Bettina Stark-Watzinger and Federal Minister Christian Lindner at the “Financial literacy as a new start” event.

Federal Finance Minister Lindner and Federal Minister of Education and Research Stark-Watzinger have launched the Financial Literacy Initiative.

Photo: BMBF/Hans-Joachim Rickel

Of course, some young people are already finance experts, who don't need to have anything explained to them about investment funds or the small print in loan agreements. However, many young people find opening their first bank account or understanding their first rental agreement a daunting challenge. And how do you calculate compound interest again?

General understanding of financial issues and economic interrelationships needs to be improved in Germany, not only among young people but also among older citizens. A study by the Organization for Economic Cooperation and Development (OECD) found that only just over half of adults understand the concept of compound interest.

"Important aspect of general education"

Federal Finance Minister Christian Lindner and Federal Minister of Education and Research Bettina Stark-Watzinger now want to improve the financial literacy of young and old alike, to which end they have launched the Financial Literacy Initiative in Berlin. According to Stark-Watzinger, understanding finance is "an essential aspect of general education and also a question of equal opportunities." People, she said, must have the opportunity to acquire an understanding of financial and economic interrelations and to apply this in their everyday lives. This, she added, would include everything from understanding one's personal mobile phone contract to starting to plan for retirement early on.

Exploiting financial opportunities

Federal Finance Minister Lindner considers financial literacy "a prerequisite of economic independence" and says that millions of people in Germany were missing out on opportunities because, for example, their pension provision was not as good as it should be. Others, he added, were making investment decisions that probably benefited the investment brokers more than themselves. "And that's something we'd like to put a stop to through financial literacy education and empowering people to make better choices for themselves."

The Financial Literacy Initiative is built on three main pillars:

  • A new National Financial Literacy Strategy will identify the current deficits in financial literacy in Germany, whilst simultaneously deriving concrete recommendations for action. The OECD is supporting Germany in this initiative. Successful financial literacy education strategies already exist in many other countries.
  • A Financial Literacy Platform will bundle different sources of information and prepare them to meet the needs of different age groups. By way of example, Minister Stark-Watzinger pointed out that a 17-year-old apprentice will have a different set of questions and different financial literacy education needs than a single mother or a career woman. The aim of the platform is also to network stakeholders operating in the field of financial literacy education.              
  • Another important part of the initiative is to increase research into financial literacy, the aim being to increase our understanding about the current state of financial literacy. The goal of increasing research in this area is to better reach different target groups and to be able to develop more targeted educational opportunities going forward.

Financial literacy education in schools

The Federal Finance Minister and the Federal Minister of Education both said they agreed that more financial literacy education should be provided in schools. After all, as many as 80 percent of parents have expressed a wish for their children to receive more financial literacy education. Stark-Watzinger pointed out that she was only able to provide supplementary support to schools, for example through extracurricular opportunities to increase financial literacy.

It was particularly important, she said, to address young people in an appropriate way for this target group. Both Stark-Watzinger and Lindner emphasised the fact that there were already many relevant offers from foundations, educational institutions, and social media influencers.

Reaching older people through the initiative

According to the Federal Finance Minister, it is equally important that the initiative also reaches the elderly, and he said that many of them were still uncertain about some newer financial terms.

Lindner added that it was also important for him to counter certain prejudices, for example against an additional funded pillar in the statutory pension system. In this context, he said, many believed that "pensions are gambled with or that this is just something that concerns the wealthy", but that was by no means the case. He added that he was convinced that this highlighted the necessity of  more financial literacy education on these aspects.

Federal Minister of Education and Research Stark-Watzinger addressed another target group: women, who she said still cared less about financial issues than men on average, but pointed out that studies had shown that women could deal very well with the subject. "So that’s a lot of potential that we can still tap into," says Stark-Watzinger.

Financial literacy as an education in democracy

The purpose of the Financial Literacy Initiative is to remove barriers to dealing with financial issues, improve financial literacy, and create new opportunities for the accumulation of wealth and assets. Given the greater access we now have to information as well as misinformation, Lindner also pointed out that, among other things, financial literacy helps people to "make democratically sound decisions".