Financial literacy cannot fix poverty when people have no financial room to choose.

Whether from policymakers, financial experts, the media, or international institutions, the message is remarkably consistent: financial literacy is the key to eradicating extreme poverty.

Save more. Budget carefully. Avoid unnecessary debt. Invest early. Build an emergency fund.

The advice is sensible. The problem is that it assumes something that many Malaysians simply do not have: room to choose.

In fact, Bank Negara Malaysia’s 2024 Financial Capability and Inclusion Demand Side Survey found that 61% of Malaysians would struggle to come up with RM1,000 in an emergency. At the same time, financial knowledge among Malaysians had improved from 60.2% in 2021 to 62.9% in 2024. Yet only 58% actively saved for the future.

This should make us pause.

If people knew more about managing money, but many still do not have enough financial buffer to withstand a RM1,000 emergency, perhaps the problem is not simply a lack of knowledge.

Perhaps it is a lack of money to work with.

Poverty is not simply an inability to make the right choices.

There is a tendency, sometimes explicit and sometimes subtle, to treat poverty as a consequence of poor individual decisions. If someone is in debt, perhaps they should have budgeted better. If they have no savings, perhaps they should have started earlier.

But this overlooks a fundamental question: what choices were actually available to them?

Consider two people who receive the same financial advice about building an emergency fund. One earns RM5,000 a month and has RM1,500 left after necessities. The other earns RM3,000 and has only RM100 left. Both may understand the importance of saving, but only one has a realistic opportunity to do so.

The difference is not necessarily financial knowledge. It is financial capacity.

We make financial decisions every day, and those decisions gradually shape our futures. But our freedom to choose depends on what we have left after meeting our basic needs. Someone with financial security can decide whether to save, invest, pursue further education, or take a better but lower-paying job. Someone struggling to make ends meet may instead be deciding whether to pay the electricity bill, buy groceries, or repay a debt.

The question shifts from “What is the best decision for my future?” to “How do I get through this month?”

That is not a failure of financial literacy. It is a lack of room to choose.

People living in poverty are not necessarily poor because they are lazy, irresponsible, or financially illiterate. Often, they are making the best decisions they can within very constrained circumstances.

Sometimes what looks like a bad financial decision is actually a constrained one.

Not long ago, the Credit Counselling and Debt Management Agency (AKPK) reported that 28% of Malaysian working adults had borrowed money to purchase essential goods.

If someone borrows to pay for an essential expense, telling them simply to “manage their money better” misses the point. They may be making the best decision available within a very limited set of options.

There is a difference between borrowing because you want something you cannot afford and borrowing because you need something you cannot afford.

This is where our understanding of financial literacy needs to become more nuanced.

Financial stress also consumes mental space.

There is another reason why financial literacy alone is insufficient: poverty does not only constrain people’s wallets. It can also consume their mental bandwidth.

When someone is constantly worrying about whether they can afford groceries, repay a loan, pay rent or handle the next unexpected expense, their attention is inevitably drawn towards immediate financial problems. Planning five or ten years into the future becomes much harder when today’s problems keep recurring every month.

We are not saying that people experiencing poverty are without aspirations. However, aspirations require room to act. It is difficult to invest in skills, start a business, or save for retirement when today’s bills and emergencies consume what little is left.

Financial literacy can explain why these things matter, but it cannot create the financial room to make them possible.

This is where financial support matters.

If financial literacy is to contribute to poverty reduction, it needs to be paired with something that financial knowledge alone cannot provide: financial room to act.

This is not a new idea. The World Bank has specifically advocated for integrating financial literacy into cash-transfer programmes in the past. However, as of now, not many studies have been made to examine this approach.

An example of a cash transfer programme in Malaysia would be the Bantuan Rakyat 1 Malaysia (BR1M), which was later changed to Bantuan Sara Hidup (BSH). Based on a study from Universiti Teknologi MARA, BR1M/BSH recipients found that cash transfers did provide additional financial capacity to meet necessities and plan for the future to an extent.

Building on the above, we (ASEAN Research Center) are studying a similar “cash-plus” approach with ARUS Academy. Launched by FWD Insurance Berhad and Arus Academy, the Fun(d) for Life – University Edition (FFL Uni) financial literacy programme combines financial literacy training with a RM3,000 cash grant for Malaysian youth from low-income households.

We are asking a simple but important question: does having both knowledge and financial support change how people make decisions about their future?

For young people entering adulthood, these decisions can be particularly consequential. The cash grant may free up some mental bandwidth for longer-term aspirations. It may allow young people to save, invest in skills, pursue an opportunity, or simply plan ahead without every decision being dictated by their most immediate financial need.

We do not yet know the answer. But this is precisely the question worth asking.

Financial literacy still matters. But, perhaps its impact depends partly on whether people have the resources and autonomy to act on what they learn.

The goal is not simply to teach people to make better choices. It is to give them enough room to have meaningful choices in the first place.

Chin Jia Wei is a Principal Research Associate at the ASEAN Research Center (ARC), Asia School of Business (ASB), Kuala Lumpur. The views expressed are her own and do not necessarily reflect those of ARC or ASB.