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Assessing Financial Literacy
Jeanne M. HogarthFederal Reserve Board
Marianne Hilgert in the Division of Consumer & Community Affairs, assisted with preparation for this presentation. The analysis, comments and conclusions set forth in this presentation represent the work of the authors and do not indicate concurrence of the Federal Reserve Board, the Federal Reserve Banks, or their staff.
Goals
What is financial education?What are others doing in this arena?What works, and how do we know?How do we “triage” financial education -- matching people’s financial education needs with program resources?
Why is financial education important?
Increased sophistication of financial products and services
Shifting responsibility away from institutions and towards individual
Demographic changes affecting the US marketplace
Long-term economic situation
Why is financial education important?
Well-educated families make better financial decisions
Increased economic well-being
Better able to contribute to thriving communities
Foster further community development
Financial education is important to households & communities
What is financial education?
Economic knowledgeWhen the Fed raises interest rates, what happens to your credit card interest rate? To you savings account interest rate?
Consumer knowledgeIf you lease a car today and change your mind tomorrow, can you take it back, since it’s within the 3-day cooling off period?
What is financial education?
Stock market knowledgeOver a 25 year period, which instrument has performed better: stocks, bonds, treasury securities, or savings accounts?
Money management knowledge
How does paying your bills late affect your credit record? If you make only the minimum payment on your credit card, how long will it take you to pay it off?
Knowing vs Doing
Help families attain “financial security”
Ability to meet future needs while keeping pace with day-to-day obligations
What financial education is going on out there?
Vitt - 91 programsJacob – CES, credit counseling, employers, financial institutionsNEFE – 150 program resources
New funding for 36 programs out of 810 applications
FRB-San Francisco – 56 programsJump$tart – more than 100 partners
“Everyone is doing it”
What’s new & emerging?
Financial Literacy & Education Commission
Mymoney.gov web site1-888-my-money
NEFE public awareness campaign
Who are target audiences?
YouthMilitaryLow-income familiesFirst-time home buyersEmployees
Church membersPre-retireesRetireesWomenMinority groups (Blacks, Hispanics, Native Americans)
What topics do programs cover?
Cash-flow managementBasic budgeting/financial managementBanking, check-book management
Saving and investingAsset building
Credit managementHome buyingRetirement planning
For & in retirement
What works, and how do we know?
NEFE High School Financial Planning Program
Increased knowledge, skills, and confidence Improved behaviorsMeasured before, after, & 3 months later
Financial/consumer education in high school
Financial education in high school associated with higher savings and net worth as an adultBernheim, Garrett, & Maki, Journal of Public Economics, June 2001, 435-465
What works, and how do we know?
Credit counselingImproved credit scores, better credit management, lower delinquencyhttp://www.federalreserve.gov/communityaffairs/national/CA_Conf_SusCommDev/pdf/statenmichael.pdf
Homeownership counselingLowered 90-day delinquency rateshttp://www.federalreserve.gov/communityaffairs/national/CA_Conf_SusCommDev/pdf/zornpeter.pdf
What works, and how do we know?
Retirement planningSave More Tomorrow
Increased participation in 401k, increased rates of contribution, high retention after 3 yearshttp://gsbwww.uchicago.edu/fac/richard.thaler/research/SMarT14.pdf
Members of TIAA-CREFRevised retirement savings goals, plan to modify saving & investmenthttp://www.federalreserve.gov/communityaffairs/national/CA_Conf_SusCommDev/pdf/clarkrobert.pdf
What works, and how do we know?
Money 2000Increased savings, decreased debtshttp://www.rce.rutgers.edu/money2000/research.asphttp://www.rce.rutgers.edu/money/pdfs/handlemoney.pdf
American Dream Demonstration (IDAs)
Financial education increases savings (maxes out at 8-10 hours)http://gwbweb.wustl.edu/csd/Publications/2002/ADDreport2002.pdf
Money SmartIncreased financial understandingNot associated with opening bank account
What works, and how do we know?
Employee Financial EducationIncreased 401k participation & improved other financial behaviorsKim, Kratzer, & Leech, Proceedings of AFCPE Conference, 2001.Garman, Kim, Kratzer, Brunson, & Joo, (1999). Financial Counseling and Planning,1999, 10(1), 79-88.
Financial Security in Later LifeImproved financial management practices (self-anchoring)Economic impacts averaged $870 (savings increased, debts reduced, etc.)
New evaluation initiatives
CFA evaluating multi-level impacts of Cleveland SavesCFA/AmEx/CRC evaluating the efficacy of credit counseling
Multiple delivery techniques -- in-person, phone, web
New evaluation initiatives
Philadelphia FRB – home ownership counseling programsFRB & DoD – longitudinal study on the effects of financial education on military A word of caution – most studies based on self-selection
What would effects be if people were randomly assigned to an educational program?
Subjective measures of making a difference
Satisfaction with life and lifestyleAttitudes -- feel confidentFeel prepared for events -- getting married, home buying, having kids, taking vacations, college education, home repairs, car buying, retirement
How do we triage financial education?
Finding out what education people needUniversity of Michigan’s Surveys of Consumers (Nov. & Dec. 2001)1,004 respondents interviewedAdditional questions
true/false financial knowledge quiz financial management practices financial product ownership learning experiences and preferences
How do we triage financial education?
Combined responses on financial management practices & product ownership to look at levels of financial behaviors related to:
Cash flow managementSavingInvestmentCredit
Knowledge quiz on financial management topics
The Good, the Bad, and the Ugly
Low Medium High
Cash Flow
Saving
Investment
Credit
Patterns of financial education needs
4 types of behaviors & 3 levels there are 64 possible patterns
Categorized the 64 patterns into 10 groups based on the type of financial education needed
What financial education do people need?
Savings None Basic (all 4 topics)
General (all 4 topics)
Cash flow, savings &
invest.
Credit, savings & investmentSavings &
investment
Investment
Cash flow &/or credit; savings, or
investment
Saving & investment
Continuum of financial education
Range from basic (even remedial) to advanced asset management (e.g. in retirement)“Hierarchy” of financial management
Cash flow management/bill paymentSavings/emergency fundInsuranceAssets (home ownership)Investments
Continuum of delivery techiques
Range from independent to intensiveIndependent – web, brochures, videosGroup – classes, seminars, coursesIndividual – 1 on 1 counseling
Caution: educating vs advising
What delivery techniques do people want?
The greater the need for basic financial education
the more likely the household preferred videoand the less likely the household preferred Internet & seminars
What delivery techniques do people want?
Households with fewer FE needs preferred:
Media (TV, radio, magazines, newspapers) Brochures Videos Internet Seminars
So what?
No “One size fits all” Topics for financial educationLevels of educational needs within each topic
Related to age/life cycle stage
Delivery techniques
So what?
No “one curriculum fits all”Match the learner with the resourcesDelivery via audience-specific techniques Show people how to apply the toolsConsider the role of personal experience in prior learning
So what?
No “one delivery technique for all”
“Learning-on-your-own” (media, brochures, Internet) – on demandVideos Informational brochuresGroup experiences1 on 1
Parting thoughts
There’s lots to doThere’s room for everyonePlan for evaulationUse the FDR approach
Do something – start somewhere, then fine tune