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Financial capability: So important, but still a lot of evidence gaps

The Bottom Line

  • Facing inflation (as well as financial emergencies) can mean tightening your belt. It is also a reminder of the importance of sound personal financial management.
  • There is still limited evidence on the effectiveness of financial capability interventions, but don't let that stop you from taking control of your nest egg!

For the past couple of months, we have been confronted with a general and lasting increase in prices (a phenomenon known as "inflation"). This translates into a loss of purchasing power for consumers. Everything from groceries, gasoline, clothing, mortgages, dining out, and many other products and services are now more expensive.(1)

Facing inflation (as well as financial emergencies) can mean tightening your belt. It is also a reminder of the importance of sound personal financial management. However, navigating the murky waters of the financial world can be complex, especially with the proliferation of financial products and services available...


What the research tells us
A recent and high-quality systematic review examined the effect of educational interventions to improve consumers' financial capability, behaviour and outcomes.(2) The review authors searched for studies published up to May 2020. This allowed them to identify 24 studies on the topic, all conducted in the United States. Most of the participants in the studies were adults (75% of the studies), but several others focused on children.

The review authors defined financial capability as the ability to use knowledge to engage in desirable behaviours to achieve financial well-being. This requires knowledge of, access to, and ability to use publicly available financial products or services. Behavioural changes examined included opening a bank or retirement account, purchasing assets, saving rates, and budgeting. Financial outcomes included the amount of savings, credit score, amount of debt, value of assets, and amount of retirement savings.

The review identified a variety of interventions that targeted people with no assets, no savings, no credit, no retirement savings, no bank account, or no mortgage. The interventions included individual development savings account plans, retirement accounts, adult financial education, counselling or coaching, saving and investing in tax refunds, opening a bank account, and homeownership education and counselling.

Unfortunately, the review found that there is still no clear evidence regarding the effectiveness of financial capability interventions (which include financial education linked to a financial product or service) in improving financial behaviours or financial outcomes. In addition, many studies had significant methodological weaknesses and a high risk of bias.


It's never too late to build your financial capability
There is still limited evidence on the effectiveness of financial capability interventions, but don't let that stop you from taking control of your nest egg! Here are some web resources that may help:

Test your knowledge: Take this quiz to test your financial knowledge!

Learn how to manage multiple financial priorities: It can be difficult to manage a budget while juggling multiple priorities. Get information about your current expenses and potential future expenses.

Learn how to make a budget: Get tips on how to create your budget.

Find help if you are experiencing financial difficulties: The Government of Canada offers a variety of solutions to help people who are experiencing financial difficulties (from mortgage debt relief options to debt management tips).


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References

  1. Evans P. Canada's inflation rate jumps to new 31-year high of 6.7%. CBC News, 20 April 2022.
  2. Birkenmaier, J., Maynard, B., & Kim, Y. Interventions designed to improve financial capability: A systematic review. Campbell Systematic Reviews, 2022, 18, e1225.

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