According to the 2011 Consumer Financial Literacy Survey Final Report, most Americans do not have financial plans or clear financial goals. Thirty-three percent of US adults, for instance, do not have any non-retirement savings. More than half of US adults do not maintain a budget or track expenditures. With 3.8 million foreclosures in 20106, an average of $25,250 of student debt for 2010 college graduates, and 48% of adults 18 years and older worried about not having retirement savings, many U.S. citizens are financially underwater8. These failures in setting and maintaining financial plans reflect the financial illiteracy in the United States.
Some have blamed economic policy makers on the Hill while others like the Occupy Wall Street protesters have channeled their anger toward large corporate executives. However, a growing number of people point to the educational system, in particular the lack of financial literacy education in the United States. Studies show that people with lower incomes track spending better but are often unaware of other aspects of financial literacy such as basic investing, loans, and credit.
Forty-one percent of U.S. adults gave themselves a C, D, or F on their knowledge of personal finance, a substantial increase from 33% in 2010. In 2011, half of adults who earned less than $35,000 or $35,000 to less than $50,000 had a budget and tracked their spending, compared with just three in ten adults who earn $100,000 or more6. Financial literacy is defined as “the ability to make informed judgments and effective decisions regarding the use and management of money and wealth7.” Currently, only seven states require financial literacy to be a part of the public school curriculum5. Private and public coalitions have made efforts to contribute to the expansion of financial literacy education in the United States, but there is insufficient data about their impact.
A debate continues between professors, policy makers, and business professionals about whether all or any financial literacy education is effective and the potential alternatives to this education. Policy makers also consider what extent the government should have a role in the financial decisions of consumers. Consumer freedom of choice in making decisions must be balanced with the negative externalities that arise from poor financial decisions made by uninformed consumers, which may contribute to a recession. One proposed solution is to insert standard financial options into different markets such as housing or automobile so that financially illiterate consumers do not have to make decisions. Another possible solution is effectively teaching financial literacy in classrooms and the workplace.
Private groups, from large organizations like the National Foundation for Credit Counseling to smaller groups like Mind Your Money, aim to teach financial literacy in schools and the workplace. The non-profit National Foundation for Credit Counseling is the country’s largest financial counseling organization. Mind Your Money is a grassroots campaign based in Brooklyn, NY that provides educational financial workshops for teens and pre-teens in addition to holding forums to engage parents in the process.
Moneythink, founded at the University of Chicago in 2009, trains college students to teach high-school students financial literacy and entrepreneurship curricula in communities surrounding urban college campuses. The organization has chapters at universities across the country, including at the University of Florida and Columbia University. Both Mind Your Money and Moneythink Chicago focus their efforts in low-income communities. Moneythink teaches financial goal-setting through peer-to-peer mentorship. They use pop culture and current news examples to teach important financial concepts. Moneythink University of Chicago president Jennifer McPhillips believes that the organization has made an impact in Chicago.
“When we went into the school [Woodlawn Charter], the students would understand the short term benefits of money but not long-term things like interest on loans,” said McPhillips. She believes that high-schoolers’ concern with short-term gratification is at the root of their lack of financial planning.
Fellow Moneythink executive Brittany Agostino noticed, however, that the students she taught had a remarkable intuition and interest in finance. For instance, her students did not understand the differences between local and national banks, but they had a keen interest for stock portfolios and how to invest.
Moneythink, like many other financial literacy initiatives, does not have much quantitative data about their impact, but they are experimenting with different metrics. They are starting to use a pre-test and post-test in every classroom to gauge the effectiveness of their programs. A strong critique of financial education initiatives is that it is hard to measure quantifiable outcomes because student progress must be tracked throughout their adult lives.
Moneythink’s goal-setting strategy is consistent with research featured in a 2008 U.S. News and World Report’s “The Financial Literacy Crisis,” which illustrated the effectiveness of interactive and competitive programs that focus on “big-picture” concepts like goal-setting. The article also mentioned introducing these concepts at a younger age so that children can have a strong understanding of financial goal-setting as they transition into adulthood5. Business professionals such as Thomas F. Cooley, former dean of the NYU Stern School of Business, also agree that education is necessary. “Clearly, the best way to protect consumers is to educate them. As a society we don’t seem to have figured out how to do that,” he said in his article America’s Financial Illiteracy in Forbes Magazine. “It’s time we did1.”
However, Richard Thaler, a professor of behavioral science and economics at Chicago’s Booth School of Business, does not believe that financial literacy education is effective. “It’s naive to think that we could give high school students one financial course and then make them financially literate consumers,” said Thaler in “The Financial Literacy Crisis.” In the book Nudge, he proposes that consumers be automatically enrolled in budgeting and savings plans with their employers. For instance, he recommends that adults be automatically enrolled into retirement plans and supports allowing consumers to sign up for saving money each time they receive a raise5.
Research on the impact of financial literacy education in schools reveals ambiguous results. One study, conducted by Douglas Bernheim, Daniel Garret, and Dean Maki in 2001, tried to determine whether states with mandatory financial education had more financially literate people. They determined that people with mandatory financial education had larger savings rates2. Additionally, the number of people with larger savings rates from these states increased over time2. However, a study done by Shawn Cole and Gauri K. Shastry in 2008 used the same method but tracked the data over a longer time period. They found that the financial education mandates have no impact on behavior7. The contrasting results suggest that the methodology used to assess the impact of financial education can affect the results and make conclusions about its impact ambiguous.
McPhillips acknowledges critiques about financial literacy education but believes that it can be effective if it is done the right way. “A big critique about financial literacy is that it’s hard to teach financial skills in a short period of time. But our approach is activity and action-oriented. It is not about definitions.” For example, some mentors have students keep goal journals to record financial and personal goals that are periodically checked on and discussed with a peer and mentor9.
Financial education programs implemented in the workplace are more definitively effective. For instance, a 2003 study by Bernheim and Garret found that, on average and accounting for different levels of savings, employees from firms with financial literacy education have significantly higher levels of 401(k) contributions and balances3. A similar study by Annamaria Lusardi in 2002 indicated that financial education had an especially significant impact at the lower end of the savings distribution5.
Some believe that public policy should be utilized to increase financial literacy among consumers. The government’s Consumer Financial Protection Bureau, founded in 2011, regulates some financial institutions, but their jurisdiction is quickly spreading to large banks and credit unions.4. There are suggestions that the CFPB should focus on financial literacy initiatives for consumers rather than regulate these institutions. They have an Office of Financial Education and have set up a website called MyMoney.gov, that provides information to consumers about managing debt and credit. Additionally, the CFPB could go one step further and provide default options for mortgages and credit consumer plans for financially illiterate consumers who are ill-informed about their financial options1.
It is unclear whether it is best to institute a financial literacy education mandate, provide financial options for the financially illiterate, or strongly encourage consumers to make their own financial plans. Research on the effect of the mandate has generated unclear results that may be influenced by the research methodology. Financial literacy education in schools gives everyone access to some basic knowledge of finance. Studies do exhibit financial literacy education’s impact in the workplace, but not everyone will have equal opportunity to this education. Government initiatives like the CFPB started by regulating financial institutions and gravitated toward promoting financial literacy, making it evident that the government is recognizing financial illiteracy as a pertinent issue in the United States.
- Cooley, Thomas. “America’s Financial Illiteracy.” [Internet] [Updated 2010] Available from: http://www.forbes.com/2010/01/12/cfpa-financial-illiteracy-credit-cards-opinions-columnists-thomas-f-cooley.html.
- Bernheim, B. D., Garrett, M. D., and Maki, D. M. “Education and saving: The long-term effects of high school financial curriculum mandates.” 2001 Journal of Public Economics80:435-465.
- Bernheim, B. D. and Garrett, M. D. “The Effects of Financial Education in the Workplace: Evidence from a Survey of Households.” 2003 Journal of Public Economics87:1487-1519.
- Bishop, Martin. “The Consumer Financial Protection Bureau’s first six months: A predictor of the new agency’s growth and expansion.” [Internet] [Updated 2012] Available from: http://newsandinsight.thomsonreuters.com/Legal/Insight/2012/01_-_January/The_Consumer_Financial_Protection_Bureau%E2%80%99s_first_six_months__A_predictor_of_the_new_agency%E2%80%99s_growth_and_expansion.
- Palmer, Kimberly. “The Financial Literacy Crisis.” [Internet] [Updated 2008] Available from: http://money.usnews.com/money/personal-finance/articles/2008/04/02/financial-literacy-101.
- Harris Interactive Inc. Public Relations Research. “The 2011 Consumer Financial Literacy Survey Final Report.” [Internet] [Updated 2011] Available from: http://www.nfcc.org/newsroom/FinancialLiteracy/files2011/NFCC_2011Financial%20LiteracySurvey_FINALREPORT_033011.pdf.
- Gale, William, Levine, Ruth. “Financial Literacy: What Works? How Could it be more effective?” [Internet] [Updated 2010] Available from: http://www.brookings.edu/~/media/Files/rc/papers/2010/10_financial_literacy_gale_levine/10_financial_literacy_gale_levine.pdf
- Lewin, Tamar. “College Graduates’ Debt Burden Grew, Yet Again, in 2010.” [Internet] [Updated 2011] Available from: http://www.nytimes.com/2011/11/03/education/average-student-loan-debt-grew-by-5-percent-in-2010.html.
- Interview with Ms. Jennifer McPhillips and Ms. Brittany Agostino. Moneythink, Chicago. January 30, 2012
- Interview with Mr. Michael Herbst. Morningstar, Chicago. February 1, 2012
- Image (CC-BY-SA): Dugdale, Dave. “Analyzing Financial Data.” [Internet] [Taken October 20, 2010] Available from: http://www.flickr.com/photos/davedugdale/5099605109/
- Image (CC-BY): Gonder, Ted. “Abandoning Mediocrity and Seizing Opportunity.” [Internet] [Updated March 15, 2012] Available from: http://www.whitehouse.gov/blog/2012/03/15/abandoning-mediocrity-and-seizing-opportunity
- Image (CC-BY-NC-ND): HSBC UK Press Office. “Trainee teachers using puppets to teach financial education.” [Internet] [Taken July 1, 2011] Available from: http://www.flickr.com/photos/hsbc_uk_press/5890232927/