Across the U.S., we celebrate financial literacy and awareness during specific times of the year. Last month, for example was National Financial Literacy Month. But many advocates, the government, and even research studies show that one-off or annual pushes for financial education are not enough. Richard Corday, Director of the Consumer Financial Protection Bureau (CFPB) highlighted the idea for continuous financial education in a speech more than 3 years ago. If that didn’t rock the boat, studies now show that the traditional forms of financial education haven’t been very effective. I believe Cinch is the rare company that has been proactive, heeded this advice, and embedded continuous, real-time financial education into their product.
Why should we be putting more emphasis on these two issues of continuous financial education and information that’s directly linked to creating behavior changes? First, high school is where most financial literacy education takes places, but studies have shown that students only retain the information they learn for two years. They also don’t have an immediate need for some of the information they learn such as mortgages and interest rates. By the time they do need it, they’ve forgotten it. To add to this, studies show that things have gotten worse since the recession. The percentage of adults who have basic financial literacy has dropped. The FINRA Investor Education Foundation surveyed about 28,000 Americans in what was the called National Capability Study, and found that in 2009, 42% were able to answer 4 out of 5 questions correctly that tested their basic financial knowledge. By 2015, only 37% were able to answer the questions correctly.
“This research underscores the critical need for innovative strategies to equip consumers with the tools and education required to effectively manage their financial lives,” said FINRA Foundation Chairman Richard Ketchum.
Unfortunately, women, millennials, African-Americans, Hispanics and those with lower educational levels disproportionately have lower levels of financial knowledge. One demonstration of this stark contrast — 65% of graduate degree holders have financial knowledge and skills while 19% of high school graduates have the same. Another is by state — Mississippi, the state with the highest poverty rate in the country, has the lowest financial education level. In the FINRA study, 32% of adults got 4 of the 5 answers correct. In Utah, the 12th richest state, the largest percentage (49%) of people as compared to all other states answered the questions correctly.
Annamaria, Lusardi, a George Washington University economics professor, conducted her own analysis where she found that 1/3 of wealth inequality is actually due to financial knowledge disparities. Her research has also shown that financial knowledge actually does correlate to better outcomes. For example, those with more knowledge usually pay of their credit card balances every month, or they take the time to refinance their homes when it’s profitable. Not having the knowledge you need can lead people down the path of carrying unwanted debt or paying unnecessary fees.
Second, policy makers have promoted general financial education for several years. Three universities – Ersamus University, University of Colorado-Boulder and University of Virginia – teamed together to conduct a meta analysis that would assess the validity of this belief. They looked at the correlation between financial education and financial behaviors. The results proved conventional wisdom to be far off the mark. The researchers found that only .1% of variance in financial behaviors was due to broad financial literacy initiatives. The study concludes that the focus should be on a narrower range of financial education that is shared at a point where it will affect the person’s financial behaviors. In other words, targeted education should be shared when someone is about to make a financial decision to have the greatest impact on changing financial behavior.
More government and non-profit programs are beginning to experiment such as the D.C. Summer Youth Employment Program. This organization provides real-time information. Instead of talking to students about mortgages, they educate them in areas that are immediately relevant to their lives such as student debt.
By the same token of improving the effectiveness of financial education, Cinch directly links tidbits of financial information alongside nudges with behavior change. The great thing is that their product is available and accessible to anyone.
Studies have shown what type of financial literacy can be effective. It’s now up to companies, government and other advocates to embrace the new frontier of financial education so that we can see the improvements in basic financial literacy that we can and hope to see in society.
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