Assessing Financial Literacy Jeanne M. Hogarth


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Assessing Financial Literacy Jeanne M. Hogarth

  1. 1. Assessing Financial Literacy <ul><ul><li>Jeanne M. Hogarth </li></ul></ul><ul><ul><li>Federal Reserve Board </li></ul></ul><ul><li>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. </li></ul>
  2. 2. Goals <ul><li>What is financial education? </li></ul><ul><li>What are others doing in this arena? </li></ul><ul><li>What works, and how do we know? </li></ul><ul><li>How do we “triage” financial education -- matching people’s financial education needs with program resources? </li></ul>
  3. 3. Why is financial education important? <ul><li>Increased sophistication of financial products and services </li></ul><ul><li>Shifting responsibility away from institutions and towards individual </li></ul><ul><li>Demographic changes affecting the US marketplace </li></ul><ul><li>Long-term economic situation </li></ul>
  4. 4. Why is financial education important? <ul><li>Well-educated families make better financial decisions </li></ul><ul><ul><li>Increased economic well-being </li></ul></ul><ul><ul><li>Better able to contribute to thriving communities </li></ul></ul><ul><ul><li>Foster further community development </li></ul></ul><ul><li>Financial education is important to households & communities </li></ul>
  5. 5. What is financial education? <ul><li>Economic knowledge </li></ul><ul><ul><li>When the Fed raises interest rates, what happens to your credit card interest rate? To you savings account interest rate? </li></ul></ul><ul><li>Consumer knowledge </li></ul><ul><ul><li>If 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? </li></ul></ul>
  6. 6. What is financial education? <ul><li>Stock market knowledge </li></ul><ul><ul><li>Over a 25 year period, which instrument has performed better: stocks, bonds, treasury securities, or savings accounts? </li></ul></ul><ul><li>Money management knowledge </li></ul><ul><ul><li>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? </li></ul></ul>
  7. 7. Knowing vs Doing <ul><li>Help families attain “financial security” </li></ul><ul><ul><li>Ability to meet future needs while keeping pace with day-to-day obligations </li></ul></ul>
  8. 8. What financial education is going on out there? <ul><li>Vitt - 91 programs </li></ul><ul><li>Jacob – CES, credit counseling, employers, financial institutions </li></ul><ul><li>NEFE – 150 program resources </li></ul><ul><ul><li>New funding for 36 programs out of 810 applications </li></ul></ul><ul><li>FRB-San Francisco – 56 programs </li></ul><ul><li>Jump$tart – more than 100 partners </li></ul><ul><li>“ Everyone is doing it” </li></ul>
  9. 9. What’s new & emerging? <ul><li>Financial Literacy & Education Commission </li></ul><ul><ul><li> web site </li></ul></ul><ul><ul><li>1-888-my-money </li></ul></ul><ul><li>NEFE public awareness campaign </li></ul>
  10. 10. Who are target audiences? <ul><li>Youth </li></ul><ul><li>Military </li></ul><ul><li>Low-income families </li></ul><ul><li>First-time home buyers </li></ul><ul><li>Employees </li></ul><ul><li>Church members </li></ul><ul><li>Pre-retirees </li></ul><ul><li>Retirees </li></ul><ul><li>Women </li></ul><ul><li>Minority groups (Blacks, Hispanics, Native Americans) </li></ul>
  11. 11. What topics do programs cover? <ul><li>Cash-flow management </li></ul><ul><ul><li>Basic budgeting/financial management </li></ul></ul><ul><ul><li>Banking, check-book management </li></ul></ul><ul><li>Saving and investing </li></ul><ul><ul><li>Asset building </li></ul></ul><ul><li>Credit management </li></ul><ul><li>Home buying </li></ul><ul><li>Retirement planning </li></ul><ul><ul><li>For & in retirement </li></ul></ul>
  12. 12. What works, and how do we know? <ul><li>NEFE High School Financial Planning Program </li></ul><ul><ul><li>Increased knowledge, skills, and confidence </li></ul></ul><ul><ul><li>Improved behaviors </li></ul></ul><ul><ul><li>Measured before, after, & 3 months later </li></ul></ul><ul><li>Financial/consumer education in high school </li></ul><ul><ul><li>Financial education in high school associated with higher savings and net worth as an adult </li></ul></ul><ul><ul><li>Bernheim, Garrett, & Maki, Journal of Public Economics, June 2001, 435-465 </li></ul></ul>
  13. 13. What works, and how do we know? <ul><li>Credit counseling </li></ul><ul><ul><li>Improved credit scores, better credit management, lower delinquency </li></ul></ul><ul><ul><li> </li></ul></ul><ul><li>Homeownership counseling </li></ul><ul><ul><li>Lowered 90-day delinquency rates </li></ul></ul><ul><ul><li> </li></ul></ul>
  14. 14. What works, and how do we know? <ul><li>Retirement planning </li></ul><ul><ul><li>Save More Tomorrow </li></ul></ul><ul><ul><ul><li>Increased participation in 401k, increased rates of contribution, high retention after 3 years </li></ul></ul></ul><ul><ul><ul><li> </li></ul></ul></ul><ul><ul><li>Members of TIAA-CREF </li></ul></ul><ul><ul><ul><li>Revised retirement savings goals, plan to modify saving & investment </li></ul></ul></ul><ul><ul><ul><li> </li></ul></ul></ul>
  15. 15. What works, and how do we know? <ul><li>Money 2000 </li></ul><ul><ul><li>Increased savings, decreased debts </li></ul></ul><ul><ul><li> </li></ul></ul><ul><ul><li> </li></ul></ul><ul><li>American Dream Demonstration (IDAs) </li></ul><ul><ul><li>Financial education increases savings (maxes out at 8-10 hours) </li></ul></ul><ul><ul><li> </li></ul></ul><ul><li>Money Smart </li></ul><ul><ul><li>Increased financial understanding </li></ul></ul><ul><ul><li>Not associated with opening bank account </li></ul></ul>
  16. 16. What works, and how do we know? <ul><li>Employee Financial Education </li></ul><ul><ul><li>Increased 401k participation & improved other financial behaviors </li></ul></ul><ul><ul><li>Kim, Kratzer, & Leech, Proceedings of AFCPE Conference, 2001. </li></ul></ul><ul><ul><li>Garman, Kim, Kratzer, Brunson, & Joo, (1999). Financial Counseling and Planning,1999, 10(1 ), 79-88. </li></ul></ul><ul><li>Financial Security in Later Life </li></ul><ul><ul><li>Improved financial management practices (self-anchoring) </li></ul></ul><ul><ul><li>Economic impacts averaged $870 (savings increased, debts reduced, etc.) </li></ul></ul>
  17. 17. New evaluation initiatives <ul><li>CFA evaluating multi-level impacts of Cleveland Saves </li></ul><ul><li>CFA/AmEx/CRC evaluating the efficacy of credit counseling </li></ul><ul><ul><li>Multiple delivery techniques -- in-person, phone, web </li></ul></ul>
  18. 18. New evaluation initiatives <ul><li>Philadelphia FRB – home ownership counseling programs </li></ul><ul><li>FRB & DoD – longitudinal study on the effects of financial education on military </li></ul><ul><li>A word of caution – most studies based on self-selection </li></ul><ul><ul><li>What would effects be if people were randomly assigned to an educational program? </li></ul></ul>
  19. 19. Subjective measures of making a difference <ul><li>Satisfaction with life and lifestyle </li></ul><ul><li>Attitudes -- feel confident </li></ul><ul><li>Feel prepared for events -- getting married, home buying, having kids, taking vacations, college education, home repairs, car buying, retirement </li></ul>
  20. 20. How do we triage financial education? <ul><li>Finding out what education people need </li></ul><ul><li>University of Michigan’s Surveys of Consumers (Nov. & Dec. 2001) </li></ul><ul><li>1,004 respondents interviewed </li></ul><ul><li>Additional questions </li></ul><ul><ul><li>true/false financial knowledge quiz </li></ul></ul><ul><ul><li>financial management practices </li></ul></ul><ul><ul><li>financial product ownership </li></ul></ul><ul><ul><li>learning experiences and preferences </li></ul></ul>
  21. 21. How do we triage financial education? <ul><li>Combined responses on financial management practices & product ownership to look at levels of financial behaviors related to: </li></ul><ul><ul><li>Cash flow management </li></ul></ul><ul><ul><li>Saving </li></ul></ul><ul><ul><li>Investment </li></ul></ul><ul><ul><li>Credit </li></ul></ul><ul><li>Knowledge quiz on financial management topics </li></ul>
  22. 22. The Good, the Bad, and the Ugly Low Medium High Cash Flow Saving Investment Credit
  23. 23. Patterns of financial education needs <ul><li>4 types of behaviors & 3 levels there are 64 possible patterns </li></ul><ul><li>Categorized the 64 patterns into 10 groups based on the type of financial education needed </li></ul>
  24. 24. What financial education do people need?
  25. 25. Continuum of financial education <ul><li>Range from basic (even remedial) to advanced asset management (e.g. in retirement) </li></ul><ul><li>“ Hierarchy” of financial management </li></ul><ul><ul><li>Cash flow management/bill payment </li></ul></ul><ul><ul><li>Savings/emergency fund </li></ul></ul><ul><ul><li>Insurance </li></ul></ul><ul><ul><li>Assets (home ownership) </li></ul></ul><ul><ul><li>Investments </li></ul></ul>
  26. 26. Continuum of delivery techiques <ul><li>Range from independent to intensive </li></ul><ul><li>Independent – web, brochures, videos </li></ul><ul><li>Group – classes, seminars, courses </li></ul><ul><li>Individual – 1 on 1 counseling </li></ul><ul><ul><li>Caution: educating vs advising </li></ul></ul>
  27. 27. What delivery techniques do people want? <ul><li>The greater the need for basic financial education </li></ul><ul><ul><li>the more likely the household preferred video </li></ul></ul><ul><ul><li>and the less likely the household preferred Internet & seminars </li></ul></ul>
  28. 28. What delivery techniques do people want? <ul><li>Households with fewer FE needs preferred: </li></ul><ul><ul><li>Media (TV, radio, magazines, newspapers) </li></ul></ul><ul><ul><li>Brochures </li></ul></ul><ul><ul><li>Videos </li></ul></ul><ul><ul><li>Internet </li></ul></ul><ul><ul><li>Seminars </li></ul></ul>
  29. 29. So what? <ul><li>No “One size fits all” </li></ul><ul><ul><li>Topics for financial education </li></ul></ul><ul><ul><li>Levels of educational needs within each topic </li></ul></ul><ul><ul><ul><li>Related to age/life cycle stage </li></ul></ul></ul><ul><ul><li>Delivery techniques </li></ul></ul>
  30. 30. So what? <ul><li>No “one curriculum fits all” </li></ul><ul><ul><li>Match the learner with the resources </li></ul></ul><ul><ul><li>Delivery via audience-specific techniques </li></ul></ul><ul><ul><li>Show people how to apply the tools </li></ul></ul><ul><ul><li>Consider the role of personal experience in prior learning </li></ul></ul>
  31. 31. So what? <ul><li>No “one delivery technique for all” </li></ul><ul><ul><li>“Learning-on-your-own” (media, brochures, Internet) – on demand </li></ul></ul><ul><ul><li>Videos </li></ul></ul><ul><ul><li>Informational brochures </li></ul></ul><ul><ul><li>Group experiences </li></ul></ul><ul><ul><li>1 on 1 </li></ul></ul>
  32. 32. Parting thoughts <ul><li>There’s lots to do </li></ul><ul><li>There’s room for everyone </li></ul><ul><li>Plan for evaulation </li></ul><ul><li>Use the FDR approach </li></ul><ul><ul><li>Do something – start somewhere, then fine tune </li></ul></ul>