The Gender Gap in Financial Literacy Levels and Why It Matters
Mind the gender gap!
- Globally, women are 5% less financially literate than men.
- This difference has an incredibly negative impact on female participation in investment, and their financial situations as a whole.
Financial literacy forms the bedrock of good financial decision-making. The more financially literate someone is, the more likely they are to make informed saving, borrowing and investing decisions, and making smart investment decisions is the key to long-term financial wellbeing. Unfortunately, women and men are unequal in the world of financial literacy, which is also a huge reason as to why they are unequal in the world of investing! Understanding this gender gap is the first step to changing this inequality, so read on for the breakdown.
How is financial literacy measured?
Financial literacy is a complex topic, and to make matters worse, a standard measure doesn’t exist. But, don’t despair, as there are a few main concepts that leading experts agree upon. To be considered financially literate, a decent understanding of these four key concepts are necessary:
- Interest rates
- Interest compounding
- Inflation
- Risk diversification
Through data from a Standard and Poor’s Survey published by the Global Financial Literacy Excellence Center (GFLEC), we can view financial literacy from a global perspective. In the survey, participants were simply asked multiple-choice questions based on the four key concepts. If three out of four were answered correctly, the person was crowned as financially literate. It may seem easy, but the results reveal shockingly low levels of global financial literacy for pretty much everyone, but particularly amongst women.
We challenge you to test your own level of financial literacy by completing the questions at the end of this article!
The Data
Percentage of Financially Literate Adults
Included 150,000 participants, from 140 economies.
As shown, the gender gap in financial literacy exists across both the major developed economies (8%), and the major developing economies (5%). Regardless of the differences in countries’ income levels, the gender gap remains a persistent and serious problem.
Why is it serious and what does it mean for women?
Financial illiteracy presents a significant problem for all adults, but the relatively greater levels in women present an issue that deserves closer inspection as it has many consequences that contribute to the gap in investment, as well as overall gender inequality.
Financial illiteracy leads to inefficient investing, which over time leads to greater wealth disparity between men and women
Since the earliest studies on the topic, it has been proven that a lack of knowledge of the fundamental concepts of finance leads to poor investment decisions. These poor decisions could, for example, involve investing in high-risk assets with little knowledge about them or alternatively leaving money in cash, allowing the money to lose relative value. Whatever these decisions may be, they significantly affect the long-term acquisition of wealth. Women already face issues of lower income during their careers, which are additionally lower-paid, shorter and more interrupted than men’s, so smart investment decisions are of utmost importance to attain long-term financial wellbeing.
- Studies conducted in the US in the early 2000s reveal the more “financially savvy” a person is, the more likely they would be to invest in the stock market.
- They also revealed that investment in risk-free assets, instead of stock market participation, would amount to significant differences in wealth accumulation over the long term (which is somewhat obvious).
- Leading Dutch economist Lans Bovenberg claimed the differences between the pursuit of an “optimal” investment strategy vs non- participation in the stock market and other kinds of savings results in an average difference of 12% in annual earnings after retirement.
Women have less money for retirement, leading to higher incidences of old-age poverty in women
The S&P Survey data revealed there is a strong correlation between financial literacy rates and saving for retirement. The greater the illiteracy, the greater the failure to set aside funds for one’s golden- years. These golden- years also happen to last longer for women, due to both higher life expectancy and shorter career spans.
As seen in the graph, there’s a positive correlation between financial literacy and saving for retirement in women. Countries like the UK and Canada, where the financial literacy rates for women are exceptionally high, then also see higher percentages of women saving for old age. Countries like Turkey and India, where the financial literacy rates are exceptionally low, then see lower percentages of women saving for retirement- just 9% of women save for retirement in India!
Women have a greater inability to handle financial shocks
Women are also significantly less likely to be able to absorb financial shocks, due to poor spending and saving patterns caused by financial illiteracy. Therefore, when faced with a shock, such as an emergency requiring a large sum of money or sudden unemployment, women are much less likely to be able to absorb it.
- Survey participants were asked to report if they would be able to immediately come up with an emergency fund, which is money stashed away that people use in times of financial emergency.
- Again, countries with high rates of female illiteracy recorded high rates of women reporting they would be unable to come up with the emergency fund.
- Brazil and Italy were among the worst, with 48% of Brazilian women and 30% of Italian women reporting they would be unable to. Those countries also recorded low rates of female financial literacy, just 28% and 30%, respectively.
- Contrasted again with countries like the UK, where financial literacy in women stands at 68%, and Canada, at 60%, we can see it has a positive correlation.
- Just 8% of women in the UK and 16% of women in Canada could not come up with emergency money.
Conclusion
Because of the gender gap in financial literacy, a wider gender gap in investment and wealth is created. It doesn’t paint a pretty picture for women's futures, does it? But don’t despair! The gender gap may not be as wide as we think it is… so there’s hope for us yet!
WOMEN AND FINANCIAL LITERACY. COMPLETED. ✅
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