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.