[Exclusive] Koreans Who Can't Calculate Compound Interest or Diversify Investments [Essential! Financial Education]②

First Financial Capability Survey After Enactment of Financial Consumer Act
'Asset Management' Most Lacking Among 6 Financial Capabilities
"Lack of Understanding of Interest Rate-Bond Price Relationship and Compound Interest Calculation"
Difficulty in Expense and Risk Management
Core Competency 'Household Budgeting' Insufficient
Youth Financial Literacy Also Problematic
Score of 64.64 out of 100

Editor's NoteRecently, the issue of incomplete sales of financial products has continued to occur, becoming a social concern. Naturally, the fault lies primarily with banks and financial companies that engaged in incomplete sales. However, financial consumers are also at fault. If they do not understand financial products well, they should not subscribe to them, and if they do, they should listen carefully to explanations and ask questions, but often they do not do so out of convenience. When significant losses occur, they blame everything on the financial companies' incomplete sales and take collective action in the streets. To avoid repeating such outdated practices, proper financial education from an early age is necessary. We examined the current state of financial education, overseas cases, and expert opinions to identify desirable financial education.

As a result of investigating the financial capabilities of our citizens, it was found that they lack the ability to manage their assets. In particular, knowledge about the relationship between interest rates and bond prices and compound interest calculation was the most deficient. It also revealed difficulties in setting expenditure plans in household financial management.

According to the ‘2023 Financial Consumer Financial Capability Survey Results’ received by Oh Ki-hyung, a member of the Democratic Party of Korea, from the Financial Supervisory Service (FSS) on the 17th, the FSS conducted a financial consumer capability survey targeting 3,000 adults aged 18 to 79 from October to December last year. Under the ‘Financial Consumer Protection Act,’ enacted to prevent incomplete sales by financial companies, the FSS is required to conduct this survey every three years. This survey was the first conducted since the enactment of the Financial Consumer Act. The FSS provided a summary excluding detailed figures, noting that as this was the first survey, there is no comparison group, which may cause confusion in interpreting the results. Since November 2021, the FSS has conducted research and operated a task force, selected survey agencies, and conducted preliminary surveys before carrying out the survey. The questionnaire consisted of 76 items covering six financial capabilities (household financial management, asset management, credit management, risk management, financial utilization, and life-cycle financial planning).

Among the six financial capabilities, credit management was the strongest, while asset management was the weakest. Among the 19 core competencies that make up the detailed contents of the six financial capabilities, ‘awareness of microfinance and debtor relief systems’ was the strongest, but ‘establishing a household budget’ was the weakest.

First, in the asset management area, knowledge about the relationship between interest rates and bond prices and compound interest calculation was the most lacking. Most respondents were aware of the risks, returns, and principal loss possibilities of their assets. The highest response rate was saving 20-30% of annual income, but more than half of respondents saved less than 20% of their annual income. Regarding investment principles, the proportion adhering to the principle of diversification was low, and the proportion of respondents who ‘invest after understanding product characteristics’ was also low.

In household financial management capabilities, the basics of expenditure management, such as understanding expenditure plans and scales when setting household budgets, were insufficient. However, more than 50% of respondents had a concrete understanding of their income size.

Financial consumers also showed deficiencies in risk management. More than half of respondents reported that the period they could maintain their lifestyle with financial assets in case of income shocks, such as sudden income reduction, was ‘less than one year.’ Many mistakenly regarded insurance as a retirement fund, and some citizens misunderstood the method of fulfilling the disclosure obligation before subscribing to insurance. For example, they believed that verbally informing the agent of major disease history was sufficient to fulfill the obligation.

They also failed to properly plan financial goals throughout their lives. Although they had financial goals to achieve within five years or plans to prepare retirement funds, the specifics of these plans were insufficient. Here, insufficiency means that the majority responded with ‘having a rough plan,’ ‘vaguely thinking about it,’ or ‘not thinking about it at all.’

The areas where our citizens showed strengths in financial capabilities were credit management and digital finance. For example, most were aware of microfinance products and systems. They had vigilance before financial fraud occurred (ignoring phone loan solicitations, checking for fraud before using financial services) and showed good utilization of online banking and financial product subscriptions. However, many citizens mistakenly believed that checking their credit score would lower it, and many did not make concrete loan repayment plans.

Meanwhile, young people showed lower financial understanding compared to other generations. According to the ‘Youth Financial Status Survey Report’ received by Lee Jung-moon, a member of the Democratic Party of Korea, from the Korea Inclusive Finance Agency, the average financial literacy score of youth (aged 19 to 39) was 64.64 out of 100. The survey items were the same as those used by the FSS and the Bank of Korea in the 2022 nationwide financial literacy survey, where the nationwide average (aged 18 to 79) was 66.5 points. The average score for young men was 67.27, and for women, 61.77. Among the youth, the lowest average score (62.52) was for the youngest group (aged 19 to 24). The question with the lowest correct answer rate (42.9%) among seven items was the ‘calculation of the account amount after 5 years of a fixed deposit.’