The strong connection between financial problems and mental health issues is well known. A new study from Lund University in Sweden shows that only one in five young adults could correctly answer three basic questions about inflation, interest rates and risk diversification. At the same time, they are getting more into debt. This, the researchers argue, is a worrying development.
We now know that debt and mental health issues are connected. In a new study, researchers asked 2,050 young adults between the ages of 18 and 29 questions about their mental wellbeing, financial circumstances and economics to see how well-equipped they are to deal with their personal finances.
"Financial literacy is a basic skill that everyone ought to have in order to get along and feel ok in society," says Henrik Levinsson, senior lecturer in Psychology at Lund University.
The questionnaire asked three quick, basic questions about inflation, interest rates and risk diversification, i.e. things that are worth keeping an eye on for the sake of good household finances.
"Despite the questions being very straightforward, only 20 per cent answered all of them correctly. More than 20 per cent answered all of them incorrectly. Only a third answered the question on inflation, correctly" says Henrik Levinsson.
Education played some role in how well the young people were able to answer the questions, and women got fewer correct answers. More women than men were unsure of their answers. Half of all those questioned reported having financial difficulties, a quarter had consumer loans and ten per cent stated that they had turned to local government budget and debt advice services.
Has young people's financial knowledge got worse over time?
"Knowledge has been at a low level for quite some time, as statistics from the Financial Supervisory Agency show. But this lack of knowledge is more alarming today, given how easy it is nowadays to get payday loans and unsecured loans," Henrik Levinsson continues:
"It is crucial that we start talking more about 'financial health' and how the risk of excessive debt early in life can be reduced. Schools have a central role in providing more teaching about personal finances. This is a very topical issue, and is being raised both nationally and internationally."
In the next stage, researchers want to follow individuals over time, in order to better understand the relationships between financial literacy, personal financial situation and mental health.
Three questions about basic finances
The Big Three* questions which questionnaire respondents had to answer were about 1) interest rates, 2) inflation and 3) risk diversification.
1. Suppose you had SEK 100 in a savings account, and the interest rate was 2 per cent per year. After 5 years, how much do you think you would have in your account if you let that money grow?
a) More than SEK 102 (correct answer)
b) Exactly SEK 102
c) Less than SEK 102
d) Don't know
2. Suppose that the interest on your savings account was 1 per cent per year, and inflation was 2 per cent per year. After 1 year, how much would you be able to buy with the money in that account?
a) More than today
b) Exactly the same
c) Less than today (correct answer)
d) Don't know
3. Is the following statement true or false? "Buying shares in a single company usually gives safer returns that an equity fund."
a) True
b) False (correct answer)
c) Don't know
