The Postrecession Financial Literacy of Americans Is Still Pitiful

An ongoing University of Arizona study offers the best chance for financial education by looking at how young adults develop financial habits, instead of lecturing them on budgeting and saving.

National Journal
Nancy Cook
May 7, 2014, 8:26 a.m.

The fin­an­cial know-how of most Amer­ic­ans stinks, roughly five years after the glob­al fin­an­cial re­ces­sion of­fi­cially ended.

The ma­jor­ity of people still can’t cor­rectly an­swer five ba­sic ques­tions about in­terest rates, mort­gages, bonds, in­fla­tion, and risk-tak­ing. The fin­an­cial crisis may have promp­ted dis­cus­sions about the need to pro­mote fin­an­cial lit­er­acy, but just 14 per­cent of 25,000 Amer­ic­ans sur­veyed knew the an­swer to all five ques­tions, ac­cord­ing to a 2012 re­port on fin­an­cial cap­ab­il­ity in the U.S., pub­lished by the Con­sumer Fin­an­cial Pro­tec­tion Bur­eau, the Treas­ury De­part­ment, and the FINRA In­vestor Edu­ca­tion Found­a­tion. 

Edu­cat­ors and aca­dem­ics say fin­an­cial-lit­er­acy edu­ca­tion re­mains a tricky en­deavor. “I have not dis­covered in my own work any gold stand­ard,” says Anand R. Mar­ri, an as­so­ci­ate pro­fess­or at Columbia Uni­versity Teach­ers Col­lege and the vice pres­id­ent and head of eco­nom­ic edu­ca­tion for the Fed­er­al Re­serve Bank of New York. “There is a lot of in­terest in it from non­profits, the fed­er­al gov­ern­ment, state gov­ern­ments, schools, and cor­por­a­tions. But I have not seen a pro­gram and said, ‘This is the best way to do it.’ “

Now, re­search­ers at the Uni­versity of Ari­zona are try­ing to change this by con­duct­ing a mul­ti­year study in­to the way young adults de­vel­op and gain fin­an­cial know­ledge. (The latest res­ults will come out this June and will fo­cus on the way twentyso­methings nav­ig­ate the tough job mar­ket and its ef­fect on their fin­ances.)

The hope is that the study’s long-term res­ults will help fin­an­cial edu­cat­ors learn more about what causes people to spend, save, take on debt, rely on pay­day loans, or buy homes they can­not af­ford. “If we look at how these be­ha­vi­ors are formed, we have a bet­ter chance of in­ter­cept­ing them,” says Joyce Serido, one of the study’s primary re­search­ers and an as­sist­ant pro­fess­or at the Uni­versity of Ari­zona.

Wide­spread fin­an­cial-lit­er­acy edu­ca­tion is not a new concept, first rising to prom­in­ence about 15 years ago. There are roughly 800 dif­fer­ent types of fin­an­cial-lit­er­acy cur­ricula cur­rently pub­lished in the U.S., says Mar­ri. In­sti­tu­tions from the Fed­er­al Re­serve to the Coun­cil for Eco­nom­ic Edu­ca­tion to fin­an­cial ser­vices com­pan­ies of­fer guides on the best ways to teach young people about money, fin­an­cial mar­kets, and good sav­ing habits.

The fed­er­al gov­ern­ment alone spent $68 mil­lion on 15 fin­an­cial-lit­er­acy pro­grams in 2010, ac­cord­ing to the Gov­ern­ment Ac­count­ab­il­ity Of­fice. And the Jump$tart Co­ali­tion, a D.C.-based non­profit that pro­motes fin­an­cial edu­ca­tion, has found that roughly 25 states now re­quire some type of fin­an­cial-lit­er­acy classes or sim­il­ar ex­pos­ure to gradu­ate from high school.

The only prob­lem with this myri­ad of op­tions? They tend to teach fin­an­cial lit­er­acy in a pretty di­dact­ic way by test­ing stu­dents on mul­tiple-choice ques­tions in­stead of ask­ing them to really think through their fin­an­cial val­ues. “Just think of any one-semester course you took in high school. Do you re­mem­ber it at all?” says Laura Lev­ine, pres­id­ent and CEO of Jump$tart.

Add to this a flood of in­form­a­tion and sales pitches com­ing out of the fin­an­cial-ser­vices in­dustry, and it’s no won­der that Amer­ic­ans feel con­fused. A Novem­ber 2013 study by the Con­sumer Fin­an­cial Pro­tec­tion Bur­eau showed that the fin­an­cial in­dustry spends about $17 bil­lion an­nu­ally to mar­ket its products, where­as the fed­er­al gov­ern­ment, non­profits, schools, and cor­por­a­tions com­bined spend about $670 mil­lion on fin­an­cial edu­ca­tion. That comes out to about $54 per per­son per year spent on fin­an­cial mar­ket­ing versus a little more than $2 per per­son spent on fin­an­cial edu­ca­tion. It’s hardly a fair battle.

The push among fin­an­cial edu­cat­ors these days is to in­stead fo­cus on the un­der­ly­ing be­ha­vi­ors that shape young people’s fin­an­cial de­cisions with the hope of even­tu­ally chan­ging them. It is part of the broad­er field of be­ha­vi­or­al eco­nom­ics, which pos­its that eco­nom­ists can only teach people to tweak their ac­tions when they un­der­stand the psy­cho­logy be­hind eco­nom­ic de­cisions.

That is the philo­soph­ic­al basis of the Uni­versity of Ari­zona study that began as a re­search idea in 2006 and pub­lished its first few waves of its find­ings in 2009, 2010, and 2011. Fun­ded by the Na­tion­al Found­a­tion for Fin­an­cial Edu­ca­tion, the Uni­versity of Ari­zona, and the Citi Found­a­tion, the re­search star­ted out fol­low­ing roughly 2,000 stu­dents at ages 17 or 18 as they entered col­lege and began to make their own in­de­pend­ent money de­cisions.

So far, the study has shown that par­ents hold enorm­ous sway over shap­ing kids’ fin­an­cial lives. The second wave in 2010 showed that the re­ces­sion ten­ded to hit middle-class young adults harder than really poor or really rich kids be­cause their fam­il­ies’ fin­an­cial lives were so upen­ded by un­em­ploy­ment, the plum­met­ing stock mar­ket, or weak hous­ing prices.

After gradu­at­ing from col­lege, many of the young adults sur­veyed in 2011 made much worse fin­an­cial de­cisions than they had in their late teens. “Kids were do­ing some dra­mat­ic things to get a handle on their fin­ances,” Serido says. “At this point, many of them had ac­crued huge amounts of debt from col­lege but did not have ca­reers or jobs lined up. Things were not rosy for the kids who gradu­ated in 2011.”

The next wave of re­search, sched­uled for pub­lic­a­tion in June, will re­vis­it the same young adults in their mid-twen­ties as they try to nav­ig­ate the still-weak labor mar­ket and con­tin­ue to lean on their par­ents for fin­an­cial sup­port. Serido hopes to fol­low this group through their mid-30s to map the way they de­vel­op their adult fin­an­cial lives, both mis­takes and suc­cesses.

Mar­ri of Teach­ers Col­lege calls the Uni­versity of Ari­zona study the best hope for re­think­ing and re­vamp­ing the mod­el of fin­an­cial-lit­er­acy edu­ca­tion. Oth­er prom­ising ideas in­clude great­er train­ing for middle and high school teach­ers, who may find them­selves teach­ing fin­an­cial lit­er­acy along­side Eng­lish, math, so­cial stud­ies, phys­ics, or driver’s edu­ca­tion. Fin­an­cial edu­ca­tion that uses case stud­ies in­stead of rote mem­or­iz­a­tion, also tent­at­ively seems to work well, say Mar­ri, Lev­ine, and Serido.

“We need to have more con­tinu­ous edu­ca­tion flow­ing to people,” says Ted Beck, the CEO of the Na­tion­al En­dow­ment for Fin­an­cial Edu­ca­tion, one of the fun­ders of the Uni­versity of Ari­zona study. “You need a found­a­tion of know­ledge and then on­go­ing reen­force­ment for it to work.”

That’s the hope of the Uni­versity of Ari­zona re­search­ers as they delve in­to the young adults’ fin­an­cial lives over a 20-year peri­od — that they will dis­cov­er what works over the long-term to make good fin­an­cial habits stick. “What is loud and clear for me is that we are not teach­ing kids to be mil­lion­aires,” says Serido. “Our goal is to help people un­der­stand that their fin­an­cial be­ha­vi­or has im­pact on their well-be­ing. That is the twist that is really im­port­ant for kids to hear.”

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