Abstract
This paper highlights the extent and effects of financial illiteracy among American households, reviews previous efforts to promote financial literacy, and discusses new directions for such initiatives. None of the four traditional approaches to financial literacy – employer-based, school-based, credit counseling, or community-based – has generated strong evidence that financial literacy efforts have had positive and substantial impacts. Nevertheless, the apparent success of financial planning efforts and of simplification initiatives suggests that there are both private actions and public policy strategies that can influence saving behavior. There is a key role for the private sector in enhancing financial literacy and the market is responding rapidly to try to fill the void. At the same time, there is an at least equally important role for the public sector, via a campaign that revolves around a comprehensive website, and through better coordination of existing policies toward saving. We conclude that improving financial literacy should be a first-order concern for policy-makers, and that gains could accrue not only to the affected individuals, but also to their family members and society at large.
Introduction
In a recent consumer study, 21 percent of individuals surveyed – including 38 percent of those with income below $25,000 – reported that winning the lottery was “the most practical strategy for accumulating several hundred thousand dollars” of wealth for their own retirement. In addition, 16 percent thought that winning the lottery was the best retirement strategy for all Americans, not just themselves (Consumer Federation of America and The Financial Planning Association, 2006). This is far from the only recent example of financial dysfunction among American households. From 401(k) portfolios overstuffed with company stock to cups of coffee that cost $35 because of overdraft fees, a growing number of compelling examples suggest that many people are simply financially illiterate. For purposes of this paper, we define financial literacy as the ability to make informed judgments and effective decisions regarding the use and management of money and wealth. Financially illiterate households make poor choices that affect not only the decision-makers themselves, but also their families and the public at large, making the improvement of financial literacy a first-order concern for public policy.
Although policy makers have long been concerned about the financial status of American households, secular shifts toward lower private saving, longer retirement periods, and “do-it-yourself” defined contribution plans have fueled these concerns in recent years. Likewise, declines in housing values, financial assets, and the overall economy have heightened both the urgency and the importance of these issues.
Analysis: This paper is rich in all thing’s financial literacy, whether it is factors that impact financial literacy, different strategies that can be used to increase financial literacy, or other financial concepts that work hand-in-hand to effect financial literacy in society, I find it to be extremely helpful. While criticizing the effects of previous financial education and literacy initiatives, or the new directions businesses are taking, it is clear that there are both private and public actions that can influence saving, and they will work best when enacted together. Potential “solutions” could be as simple as a public website and as complicated as passing new public policies, but there will not be a lasting impact without multiple forces working together. I question how a company like Huntington could best promote financial literacy to benefit public health along with their business. What could incentivize people to learn more about their finances, and how can Huntington make it easier for the customer?
Citation:
J. Mark Iwry, D. C. J., Gotbaum, J., & Aaron, H. J. (2016, July 28). Financial literacy: What works? how could it be more effective?. Brookings. https://www.brookings.edu/articles/financial-literacy-what-works-how-could-it-be-more-effective/
CashAmericaToday. (n.d.). Financial Literacy. The Importance of Financial Literacy . Retrieved August 27, 2023, from https://www.cashamericatoday.com/blog/the-importance-of-financial-literacy/. (Featured Image)
