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Making financial literacy effective: How banks can help
A recent survey revealed that many young people in the US are not receiving adequate financial education. What can banks do to help improve financial literacy?
September 12, 2018
A blog post by Val Srinivas, Banking & Capital Markets research leader, Deloitte Services LP
I consider myself "literate" in financial matters, yet I often wonder how my self-perceived expertise has translated into personal financial judgments. Am I any more effective in my financial decision-making than someone whom I might view as less financially literate than myself? I do wonder, having made my share of financial mistakes over the years!
Recently, these questions have taken added importance, as I begin contemplating how best to prepare my oldest child (a sophomore in high school) for her financial future.
According to the Parents, Kids & Money Survey1 from T. Rowe Price, "Financial education in schools and at home happens too infrequently, too late, and with a focus too narrow." The most recent edition of this survey found that a little over half of young adults in the US who were exposed to financial education feel "unprepared" to make responsible financial decisions, and three-quarters (78 percent) of young adults receive financial education only in 12th grade or later.
These findings are hardly comforting. But the big question is what more should be done to improve financial literacy.
Financial education: Starting early is key
I think you will agree that exposing kids to financial education at an early age is a good thing. In a recent National Endowment for Financial Education survey, nearly three-quarters of adults in the US said, "Financial education in K-12 schools would get the best results in creating financial well-being."2 Otherwise, it could be a major detriment to financial health in adulthood.3 Sadly, the survey noted that many Americans "are living on the edge of financial fragility," even now, when the disastrous effects of the financial crisis have receded in many ways.
Another reason to start early is that kids today are making financial decisions at a younger age. If you are the parent of a teenager, you know what I am talking about. Their attitude toward money is different. With easy access to cash through digital wallets, for example, spending money—even though it might not be theirs—is not a foreign concept to teenagers.
So as kids adopt new spending behaviors, are they learning the right things about financial decision making?
Consider the following statistic: Only 17 states in the US require high school students to take a course in personal finance, according to a biennial survey conducted by the Council for Economic Education4. The 2018 study concluded that personal finance education has stalled in recent years.
Obviously, K-12 schools by themselves can only do so much to move the needle on financial literacy. We need sound government policies, healthy budgets for education, rigorous research, involved parents, and generous private sector support.
On the face of it, though, we do seem to have many of these things in place.
In the US, the guiding vision for financial education is set by the federal National Strategy for Financial Literacy5. And we have agencies like the US Treasury and the Consumer Financial Protection Bureau focused on the topic. There are at least a few educational associations dedicated to the cause. I can't speak for budgets, but there are also tons of research (in academia and outside). And, of course, we also have visible private sector support.
In the banking industry, the American Bankers Association6, through its foundation, supports financial education programs and provides other resources. And many banks, from large institutions like Bank of America7, Wells Fargo8, and Capital One9 to small community banks like the Community Spirit Bank in Red Bay, Alabama10, offer grants, support various programs, and work with educators in their communities. These are certainly laudable efforts. Other financial institutions that are not yet active in this space might consider becoming so.
Yet there is growing evidence that financial literacy has only a marginal effect, at best, on financial behaviors. Most tellingly, a meta-analysis of nearly 188 different research studies showed that the causal links between financial literacy and positive behaviors "are only slightly" related.11
Improving financial literacy
So, I go back to my original question: What more can we all do to improve financial literacy, if we believe it is not having the intended effect?
One of the problems, it seems to me, is that we don't have a common understanding of financial literacy, how to measure it, and how it affects financial decisions in adulthood.
Take one example from the National Financial Educators Council, which defines financial literacy as "possessing the skills and knowledge on financial matters to confidently take effective action that best fulfills an individual's personal, family and global community goals."12
There are other similar definitions, but one may ask what constitutes "knowledge." Does it include understanding simple concepts like compound interest, stocks and bonds, or does it also include how financial markets work, which is a complex topic? How does one measure effectiveness? Does it encompass beliefs, attitudes, and behaviors?
It seems like the debate over the effectiveness of financial literacy remains unresolved. Inconsistent definitions, use of different constructs, imperfect measures, and lack of rigorous data have contributed to this debate.13
Also, in my opinion, the financial services industry could make financial literacy a more forceful platform and put more energy into an industry-wide effort to increase attention, shape policy, fund new research, experiment with new learning techniques like gamification, and encourage their customers, whether they be businesses or individuals, to take a more active role in boosting financial literacy among kids in their communities.
I realize this is easier said than done. But the long-term benefits of a more concerted action by all types of financial institutions to boost financial literacy can far outweigh any short-term costs.
1 T. Rowe Price, Parents, Kids & Money Survey, 10th edition, March 2018. https://www3.troweprice.com/usis/corporate/en/press/t--rowe-price---adulting--is-harder-without-any-financial-educat.html?id=1476
2 National Endowment for Financial Education and Right About Money,"Where Financial Education Has the Greatest Impact, 2017." https://www.nefe.org/What-We-Provide/Research/Search/Topic/0/Type/0/Year/0
3 Raveesha Gupta, Andrea Hasler, Annamaria Lusardi and Noemi Oggero, Financial Fragility in the US: Evidence and Implications, Global Financial Literacy Excellence Center, The George Washington University School of Business, 2018. https://www.nefe.org/Portals/0/WhatWeProvide/PrimaryResearch/PDF/Financial-Fragility-Final-Report-04-15-2018.pdf?ver=2018-04-16-105237-563
4 Council for Economic Education, Economic and Personal Finance Education in Our Nation's Schools, 2018. https://www.councilforeconed.org/wp-content/uploads/2018/02/2018-SOS-Layout-18.pdf
5 Financial Literacy and Education Commission, Promoting Financial Success in the United States, National Strategy for Financial Literacy, 2016 Update. https://www.treasury.gov/resource-center/financial-education/Documents/National%20Strategy%20for%20Financial%20Literacy%202016%20Update.pdf
6 American Bankers Association website, accessed on August 31, 2018. https://www.aba.com/Engagement/Pages/financialed.aspx
7 Bank of America website, accessed on August 31, 2018. https://about.bankofamerica.com/en-us/better-money-habits.html#fbid=QwxhBgKdQi_
8 Wells Fargo website, accessed on August 31, 2018. https://www.wellsfargo.com/financial-education/
9 Capital One website, accessed on August 31, 2018. https://www.capitalone.com/financial-education/financial-literacy-programs/
10 Rishika Dugyala, "U.S. banks teach financial literacy with hands-on experience," Reuters, August 16, 2018. https://www.reuters.com/article/us-money-banking-literacy/u-s-banks-teach-financial-literacy-with-hands-on-experience-idUSKBN1L111J
11 Daniel Fernandes, John G. Lynch, Jr., and Richard G. Netemeyer, The Effect of Financial Literacy and Financial Education on Downstream Financial Behaviors, Working Paper, June 2, 2013. https://www.nefe.org/What-We-Provide/Primary-Research/Effect-of-Financial-Literacy-on-Financial-Behavior
12 National Financial Educators Council website, accessed on August 31, 2018. https://www.financialeducatorscouncil.org/financial-literacy-definition/
13 Angela A. Hung, Andrew M. Parker, and Joanne K. Yoong, Defining and Measuring Financial Literacy, WR-708, RAND Corporation, September 23, 2009
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