The Financial Brand does a great job of addressing the question “Does financial literacy work?” The article concludes that the answer is:
No, at least not at their primary stated purpose — financial literacy and teaching Americans how to establish and maintain healthy financial habits.”
I agree. Well, for the most part. Financial education efforts may, in fact, be teaching Americans how to establish healthy financial habits, but they certainly fail in changing behaviors.
And from that perspective, the odds of financial education efforts working are slim to none. There’s too much psychology involved. Here’s an example: I got an email from the National Foundation for Credit Counseling reporting on a consumer survey in which respondents were told that the average annual personal income tax refund in the U.S. is more than $2,000, and then asked if they would rather have a) A once-per-year income tax refund of $2,400, or b) An extra $200 in their pocket each month.
An overwhelming majority — 72% — chose the latter.
It doesn’t take a lot of sophisticated financial education to figure out that if you: 1) save every penny of the $2,400 (regardless of how you take it), 2) get 2.5% interest on the money, and 3) get the lump sum no later than June of a given year, then you end up with more money from the lump sum than with the $200 per month.
But $200 per month feels better than a lump sum, no? And what would many Americans do with that lump sum of $2,400? For all the talk of the “new frugal consumer”, I’m betting many would spend it — on that 3D TV they’ve wanted, or on a much-needed, well-deserved vacation.
Here’s the bottom line: No amount of financial education is going to change that. I don’t care how many pages on your Web site you devote to it, I don’t care how clever the iPhone or iPad app you develop to support your financial education efforts.
And entities like those mentioned in the Financial Brand article can measure literacy levels until they’re blue in the face. It’s the wrong metric. Metrics that capture things like debt-to-spending, debt-to-saving, or saving as a percentage of spending — at the household level — are probably better measures of not just literacy, but measures of whether or not financial education efforts are working.
Education efforts out of context never work. Instead of focusing on one-off efforts, or developing (or re-using) educational material and putting them up on their Web sites, financial institutions should be focusing on providing the tools that will help consumers manage their financial lives — thus providing the context for education efforts to work.
This is one reason why I’m so bullish on PFM (personal financial management) tools as a platform for customer engagement. These tools don’t just help people track, categorize, and budget. They provide a basis for making smarter financial decisions. Financial education is the what, PFM is the how.
I agree with you on one point (mostly) – financial education is not a “one-off effort” – it’s a commitment to behavioral change. As a financial educator, this is what I teach the participants in my workshops. I encourage them to attend multiple workshops, to meet with a financial and/or credit counselor, to talk to tax and financial advisors, and to continually learn more about their finances. And I follow up, follow up, follow up!
I think we disagree only on a definition of financial education. The way I see it, financial education IS a long-term commitment to change the unhealthy financial behaviors that plague our country. PFM helps take it to a new level, but that doesn’t mean that financial education doesn’t work. It works if you work it!
The studies cited in my article only look to see if people grasp financial literacy concepts. They found that financial literacy programs in the U.S. are not “teaching Americans how to establish healthy financial habits.” It’s probably reasonable to assume that debt-to-spending, debt-to-saving, or saving as a percentage of spending would reflect anything positive or healthy if people are scoring an F- on basic financial concepts. (Anecdotally, we all know Americans relationship with money is sick.) I’m guessing that these financial literacy researchers assume literacy and behaviors are linked. But you’re right, the bottom line is, “Are behaviors improving.” That answer is also clearly “no.”
Dawn: Thanks for commenting. I suspect we don’t really disagree all that much on the definition of financial education. I do think though, that regardless of how many FIs define financial education, many FIs provide financial education in a way that isn’t persistent over time, nor is it oriented towards changing behavior — and measuring that behavioral change.
Also, I don’t mean to imply that simply providing PFM or driving PFM usage delivers financial education. I’m not even sure I’d say that PFM “takes it to a new level.” Sorry for the sports analogy, but it’s like the difference between showing your team plays on the chalkboard in the gym, and running through those plays in the field outside. Web pages with financial educational material are “chalkboard in the gym”, PFM is “drills in the field”.
JP: I think you’re being generous by allowing that the researchers are assuming literacy and behaviors are linked. I think they’re narrowly focused on measuring conceptual awareness and understanding. And completely ignoring the behavior aspects.
I’m sure you didn’t think you’d go without a comment from me Ron on a topic like this. As you know, I think that financial education plays a key role in how banks communicate to their clients in today’s day and age. But saying that, I do agree that this type of education alone is not the answer to changing ones behavior. The only true way to do so is by having direct dialogs with a financial professional. Ultimately every goal of every bank should be to build stronger relationships with their customers. This requires a combination of tools that are out there today, you mentioned PFM which I agree 100% should be one of these tools. And financial education, used right, can be a great dialog starter and can lead to more qualified referrals for the various sales professionals within an institution. Whether it be for investments, insurance, mortgage or commercial departments.
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