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Estonian people tend to give a high assessment of their financial well-being, but they invest less in securing their future than their knowledge and incomes would allow of, studies of money wisdom reveal.

An analysis commissioned by the Foresight Centre reveals that Estonian people tend to be optimistic and self-confident in financial matters, and they underestimate the possibility that their incomes may decrease. Men, young people and Estonians give a higher estimation of their financial well-being than women, the middle-aged and elderly, and non-Estonians.

The financial literacy of Estonian people is high in countries’ comparison, but their actual financial behaviour is below the average. Only a few people save and invest. “Making their money grow for the sake of a distant future is perceived by people as losing their money. They are more prone to expect positive events like a pay rise or promotion, and they think less of health risks and negative scenarios,” Leonore Riitsalu from the non-profit organisation “Rahatarkus”, the author of the analysis of financial well-being, commented.

Johanna Vallistu, expert of the Foresight Centre and the manager of the research project analysing the financial well-being of the future elderly, pointed out that while, so far, such objective indicators as saving rate and wealth had been used in studies to estimate financial welfare, recent analyses show that the values and preferences of people are at least equally important.

“Within the context of securing well-being in retirement, readiness to take investment risks and long-term planning of financial matters and a sense of confidence in achieving the desired lifestyle in the future are more important, but they cannot be achieved without knowingly organising financial matters in the present,” Vallistu said.

Economic psychology and behavioural economics researchers point out that people prefer short-term goals over long-term ones. “Future well-being is too abstract and incomprehensible to have it in mind and to refrain from spending money today. If we can visualise ourselves as old, it is also easier to imagine our needs in that stage of life. This in turn makes the planning of financial matters more specific and more clearly understandable for the future,” Vallistu brought an example.

Providers of financial education have so far tried to help people make complicated choices by teaching them the basic truths of investment services and trying to raise awareness of the need to make wise choices. “Unfortunately, this is not enough. To secure long-term financial well-being of people, the knowledge of behavioural economics is worth applying. It also has to be taken into account that, despite the abundance of information and good knowledge, people may not make rational choices in good time,” Leonore Riitsalu, the author of the analysis of financial well-being, stressed. She recommended to take behavioural factors more into account, and also to learn from the experience of other countries.

The analysis of financial well-being, commissioned by the Foresight Centre, was carried out within the framework of the research project on the financial well-being of the future elderly. The author of the analysis is Leonore Riitsalu from the non-profit organisation “Rahatarkus” (“Money Wisdom”) and the Estonian Business School.

The monitoring project on the financial well-being of the future elderly, carried out by the Foresight Centre, will be completed this autumn and, as a result, the scenarios for funding old age will also be developed.

The full text and summary of the analysis “The Financial Well-being of the Future Me. How to Nudge People towards Greater Financial Well-being?” are available here (in Estonian): https://www.riigikogu.ee/arenguseire/tuleviku-eakate-rahaline-heaolu/