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What’s this project about?

We will transfer crucial knowledge about personal finance to the general public and to students in higher education programs related to personal finance, such as finance and economics.

Saving for retirement is a high-priority topic of both the European Union and its member states, as – due to rapidly changing demographics and persistently low interest rates – legislators and pension systems everywhere are struggling to prevent old-age poverty, and to ensure the stability of public finances and economic growth. For the people themselves, it is therefore highly important to use their working years and save for retirement not only through regular (mandatory) contributions to public and occupational pension systems, but also through personal (voluntary) saving for retirement. This includes, among others, the acquisition of real estate, the optimal investment of disposable wealth over the individual’s life-cycle, the insuring of unforeseeable risks and in general all decisions aimed at ensuring sufficient wealth when entering retirement, which prevents old-age poverty and allows people to maintain a standard of living that is as high as possible given their circumstances. Typical questions within the topic of life-cycle saving and investment are:

• How much (e.g., as a fraction of current income) should be saved for the future?
• How should these savings be invested (real estate/stocks/bonds/etc.)?
• How should these investments change over the investor’s life-cycle in order to best reach the investor’s goals?
• What are the main risks associated with these investments, and how should they be managed?
• What are the advantages and drawbacks of home-buying vs.renting?

In a previous project, the project team has developed online courses with the overall goal to help both European citizens and students in higher education programs understand different forms of pension systems, as well as the topics of interest rates, inflation and the determination of optimal pension payments. Closely related questions, which were not the focus of this previous project, are related to the savings phase, and have to be addressed long before retirement even starts. This phase in life will be targeted in this new project: Optimal saving over the life-cycle becomes increasingly important given the shift in many European countries towards funded pension systems in general, and towards increased reliance on the second and third pillars of pension finance (occupational and private pensions).

The field of life-cycle saving and consumption can be viewed as a subfield of financial literacy. According to the OECD “Financial education has always been important for consumers in helping them budget and manage their income, save and invest efficiently, and avoid becoming victims of fraud. As financial markets become increasingly sophisticated and as households assume more of the responsibility and risk for financial decisions, financial education is increasingly necessary for individuals, not only to ensure their own financial well-being but also to ensure the smooth functioning of financial markets and the economy” (OECD, 2005, p. 177). Many recent studies have shown that knowledge about financial matters in general shows considerable room for improvement. Regarding the knowledge in the area of life-cycle planning in particular, the situation is complicated further by the fact that a solid understanding of the topic requires some understanding of risk and insurance basics, a long-term rather than a myopic view on personal finances, an understanding of the risks and the benefits of owning vs. renting real estate, as well as an understanding of interest rates, investment returns and the overall personal investment portfolio.

However, also in higher education programs there is ample room for improvement in this regard: Aside from programs where personal and life-cycle finance is at the core (e.g., portfolio management, real estate finance, insurance mathematics), the vast majority of students even in closely related programs like (general) finance, economics, or business and management, will only partially make contact with the topic of life-cycle saving and investment. This implies a need for including long-term investment and life-time utility maximization also in programs at this level. Hence, our proposed new project has two target groups:

1. European citizens, who want to understand the basics of personal finance and long-term saving and investment to make informed decisions about financial planning over their own life-cycle.
2. Students in higher education programs in fields related to life-cycle financial planning, such as finance and economics.

Carrying out the project transnationally is essential for two main reasons: First, the culture of saving as well as owning vs renting real estate differs markedly across countries. Having project partners from several countries with different cultures brings first-hand experience into the project. Second, the project requires both academic and industry expertise from different areas, some of which would not be available in Liechtenstein.

What’s our contribution?

We will set up high-quality online courses teaching as many people as possible how to make informed financial decisions and plan over their live-cycle.

Recent years have seen an increase in the popularity of online courses and corresponding platforms like Coursera and Udacity. Such online courses have been used successfully to reach both target groups that are addressed by this project (the general public and students in higher education). A major advantage of such courses is that a very large number of people can be reached at comparatively low costs. Surprisingly (given the importance of the topic), up to now there is only a small number of EU projects and online courses on various platforms that are explicitly targeted at increasing financial literacy and educating about personal financial planning. However, none of these projects/courses is concerned with the big picture of optimizing financial decisions over the entire life-cycle of an individual, and therefore take financial decisions with this long-term perspective in mind. However, this long-term perspective is crucial: Academic research clearly shows that young people tend to over-consume (not save enough), whereas older people, shortly before their retirement, have to cut back on consumption (sometimes drastically) to make ends meet after retirement. The topic of this project is relevant for everybody. For this reason, an educational format like an online course, which has the potential to reach a large number of people, seems most appropriate to us. This format ensures the broadest possible dissemination and access, and it allows to serve both target groups through a modularized approach: Modules in the two courses described below as the first two intended intellectual outputs from this project range from basic competencies in personal financial planning, which can easily be acquired by everyone, to more advanced topics, which are treated in the course targeted at higher-education students, and which require a certain level of (high-school) mathematics and statistics. Future users of these online courses will be able to learn about the topics covered in the courses at their own pace, whenever and wherever they prefer.

The third intended intellectual output of this project are online (software) applications, which will allow users to experience „hands on“ the interplay between different financial instruments, as well as the effects of decisions to be made by people during their working lives. Aspects of personal financial planning covered in the online courses will be implemented within these applications, which will allow users to derive optimal decisions regarding their own long-term financial planning for various different goals, also to be chosen by the users. The online applications will be integrated into the online courses, i.e., course participants will use the applications first to solve guided examples, which will enable them to use the apps for their own financial planning.

Hence, the innovative aspects of the project can be summarized as follows: As of now, neither online courses on long-term personal financial planning or life-cycle saving and investments are available, nor is there a tool publicly available that allows users to ex-ante assess the impact of various decisions to be made in long-term financial planning. Both are intended intellectual outputs of this project. In a previous project (UNPIE: Understanding Pensions in Europe), we already touched upon the topic of life-cycle saving and consumption in the context of pension finance. There, however, the focus was clearly on different pension systems, the three pillars of pension finance, and generally on the spending (or retirement) phase. In the new project, we want to focus on the savings phase and provide a holistic perspective on personal finance during this period, which is not limited to pension savings, but includes all forms of wealth generation during an individual’s working life.

What do we expect to accomplish?

By providing easy and free access to knowledge about personal finance, we hope to increase financial literacy among the general public, thereby improving the financial decision making over an individual’s life-cycle.

Aside from the intellectual outputs, which are the main results of the project, increased awareness of personal finance and long-term saving and investment and the importance of these issues will be reached through media presence and information about the project provided to universities throughout Europe. Increased awareness and better understanding of personal finance should contribute to the EU’s agenda of improving the financial literacy of its citizens. After taking the online courses, members from both target groups will be in a better position to make informed decisions regarding their own personal life-cycle saving and investment planning. As a result of information on the project provided to higher education institutions, we hope that more universities and related institutions will consider the addition of personal finance modules to their curricula for related programs in subject areas like finance and economics. Many higher education institutions nowadays offer online courses as part of their curricula, or are in the process of adding such courses. For them, a major incentive provided by our project is the free availability of the online courses together with their modular structure, which will allow other institutions to select from a range of learning goals to tailor a corresponding course to their curricula (according to the their students‘ background, related modules in their programs, and the intended size of a new module in this area).