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