Published On: Fri, Jun 19th, 2015

Learning to Make Sense of Dollars and Cents

(Photo: tattoodjay/Flickr)

The Great Recession has, for years now, served as a flashpoint for public discussion about Americans’ finances, exposing their poor financial health and limited financial knowledge. In addition to systematic failures in financial regulation and misconceptions of risk, some observers place blame for the crisiswith individuals with limited financial knowledge, claiming that the recession’s effects would not have been as wide or as deep if those individuals had simply possessed or acted upon the right financial information. And recent research findings are increasingly bringing the issue of financial education to the forefront of policy discussions about how to create and sustain financial capability in communities across America.

Financial education isn’t a panacea or a waste of time; however, an approach to financial education is needed that understands the environmental contexts in which individuals make financial decisions. In a complex financial world where responsibility is increasingly shifting toward individuals, financial education—apart from the socialization around finances that occurs within the family—is often put forward as a way to improve Americans’ financial health. This kind of education involves passing on financial knowledge either individually or in groups through workshops, seminars, trainings, and planning sessions in school or employment settings.

The Great Recession aside, there are good reasons to be concerned about the level of Americans’ financial knowledge. While teaching financial education is not a guarantee of any individual’s financial competency in the real world, financial education is a key ingredient to such competency. And right now, only nine percent of 15-year-olds in the United States demonstrate the type of competency on advanced financial knowledge questions that would be necessary for making informed decisions for breathtakingly common but life-altering financial decisions, such as taking out student loans, interpreting mortgage agreements, or comparing investment portfolios.

If these assumptions are true, then an individual’s financial knowledge gained through financial education should be a strong determinant of their financial behavior.

In other words, individuals may make healthier financial decisions and behave in more financially optimal ways when they are better educated. This conclusion may seem obvious, and, indeed, much of the research and discussion on financial education makes the assumption that financial education can improve financial knowledge and that improved financial knowledge translates into financial competency. These assumptions need to continue to undergo empirical testing.

If these assumptions are true, then an individual’s financial knowledge gained through financial education should be a strong determinant of their financial behavior. However, a recent review of over 200 studies has raised questions about the effectiveness of financial education, revealing that its influence on behavior may be relatively small and that any measurable effects disintegrate over time. Proponents of financial education raise legitimate critiques and explain these small and disintegrating effects as a lack of studies’ rigorous evaluation or consistent implementation of financial education. Many of these studies also do not measure or capture any data about financial knowledge gains that develop cumulatively during the course of a person’s life.

It’s not hard to understand why general financial education covering topics like insurance and interest rates might have little measurable effects on such behaviors as saving for emergencies, purchasing a home, or saving for retirement—because the specificities of such decisions are so particular to an individual’s life. Nor is it difficult to pinpoint why there is excitement about the potential effectiveness of financial coaching and other interventions that tailor education to needs arising from individual financial decisions. But we must remember that these interventions are costly and laborious—and therefore are difficult to scale.

Another challenge for financial educators is that the financial world can be an individualized, complicated, and unpredictable place. Could even the best advisor or accountant have adequately prepared for the financial domino effect experienced by so many during the Great Recession: becoming unemployed, exhausting their limited emergency savings, losing their home, and cashing out their 401(k)? Even older Americans, who had enjoyed sufficient resources and shown good forethought by diligently saving for their retirement years saw dramatic declines in their nest eggs, and many postponed their retirement as a result. Moreover, estimates predict that the lost incomes of younger Americans who were blocked from entering the labor market during the recession (something beyond their individual control) will translate into thousands of dollars less in earned income and retirement savings later in life. Financial education will not alter their realities.

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