Does ‘Financial Literacy’ Work?

No one had ever heard of the term “financial literacy” when researchers first started measuring it back in the late 1990s. Today, hundreds of organizations promote financial literacy, Congress introduces bills supporting it, a Federal commission promotes it, serious research is being published on the subject, and thousands of banks and credit unions are pushing financial education programs.

According to the data from Callahan & Associates, a credit union data analytics firm, by the end of 2009:

  • 24% (1,868) of credit unions offered financial counseling
  • 24% (1,869) offered financial education in some form
  • 13% (989) hosted financial literacy workshops
  • 4% (324) were involved in with in-school branches

In 2000, The Jumpstart Coalition for Personal Financial Literacy began promoting April as Financial Literacy for Youth Month, and in 2003, Congress made it an official national event. Banks and credit unions across the U.S. now use April as a month-long excuse to celebrate their financial literacy programs.

But do these initiatives really work? No, at least not at their primary stated purpose — financial literacy and teaching Americans how to establish and maintain healthy financial habits. Financial education programs may help organizations glean a little positive PR and attract some new business, but research clearly shows financial literacy programs are not making Americans any more financially literate. In fact, things are getting worse.

In 2009, the Jumpstart Coalition published its most recent findings and the trend is unsettling. In 1997, the average financial literacy score was 57.3% — a failing grade, but that’s the best it has ever been, and it has fallen consistently ever since. By 2008, the average financial literacy score plunged to 48.3%. That’s a 9.0% drop over 11 years. The Jumpstart Coalition says that today 75% of young Americans are likely to lack the skills needed to make smart financial decisions.

Other studies confirm these troubling findings. In 2007, Indiana State University found that little more than half of U.S. adults were familiar with financial literacy concepts, and fewer than 30% of U.S. adults viewed their personal financial knowledge as “very good” or better.

Another study in 2009 by the FINRA Investor Education Foundation suggests one possible explanation for the low levels of financial literacy. Apparently Americans think they are more financially savvy than they really are. They found a huge disconnect between people’s self-perceptions and their actual banking behaviors — you could call it “unjustified arrogance.” FINRA further concluded that young adults exhibit much lower levels of financial literacy than older individuals.

The Jumpstart Coalition wonders if financial literacy programs might be wasted on those who are too young to grasp key concepts. In their study, they found that financial literacy for high school students was only 48.3%, while the average score for college students on the same 31-question exam shot up to 62.2%. The Jumpstart Coalition implies that kids aren’t interested in- or are incapable of taking money management issues seriously until they are in their late teens and early twenties. Concepts like income tax, withholdings, insurance, the economy, investments and even basic checking accounts are difficult for young teenagers to absorb because most of the subject matter is abstract and lacking in immediate relevance. For instance, how much did you learn about taxes the first time you used Turbo Tax?

“There is a ‘halo effect’ surrounding education programs, which you can use to strengthen your brand and attract new business throughout the community.”
— Morgan Vandagriff, Co-Founder
Banzai financial literacy tool

“The current financial crisis began with sub-prime mortgages that were marketed primarily to those with less income, education, and presumably less financial literacy than those who were eligible for prime mortgage,” observes the Jumpstart Coalition in its 2009 report. “Financial literacy clearly has ongoing macroeconomic ramifications.”

Key Questions: Why offer a financial literacy program? Is it because consumers are asking for help? Or is it because your financial institution thinks people need it and you want to make a difference? Are you doing it to build trust? Glean some positive PR? Or is it to bring in new business?

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