Financial Literacy: an Overview of Practice, Research, and Policy

Financial Literacy: An Overview of Practice, Research, and Policy

Sandra Braunstein and Carolyn Welch, of the Board's cial information. The timing and format of training, Division of Consumer and Community Affairs, pre- as well as human traits such as aversion to change, pared this article. play a role in whether programs will effect positive change that contributes to households' long-term In recent years, financial literacy has gained the atten- financial well-being. Accounting for all the variables tion of a wide range of major banking companies, associated with financial literacy training—when, government agencies, grass-roots consumer and com- how, and where it is delivered, who is trained, munity interest groups, and other organizations. Inter- and what information is presented—poses a great ested groups, including policymakers, are concerned challenge for program developers. Given the that consumers lack a working knowledge of finan- resources now devoted to financial literacy training, cial concepts and do not have the tools they need to this is an opportune time to evaluate the research, make decisions most advantageous to their economic identify best practices, and consider public policy well-being. Such financial literacy deficiencies can options that would further the goal of creating more affect an individual's or family's day-to-day money financially savvy consumers. management and ability to save for long-term goals such as buying a home, seeking higher education, or financing retirement. Ineffective money management CHANGES PROMPTING INCREASED ATTENTION can also result in behaviors that make consumers TO FINANCIAL LITERACY. vulnerable to severe financial crises. Numerous factors have led to a complex, specialized From a broader perspective, market operations and financial services marketplace that requires consum- competitive forces are compromised when consumers to be actively engaged if they are to manage their ers do not have the skills to manage their finances finances effectively. The forces of technology and effectively. Informed participants help create a more market innovation, driven by increased competition, competitive, more efficient market. As knowledge- have resulted in a sophisticated industry in which able consumers demand products that meet their consumers are offered a broad spectrum of services short- and long-term financial needs, providers com- by a wide array of providers. Compelling consumer pete to create products having the characteristics that issues, such as the very visible issue of predatory best respond to those demands. lending, high levels of consumer debt, and low sav- As concern about financial literacy has increased, ing rates, have also added to the sense of urgency so too have the number and variety of financial surrounding financial literacy. Other important demo- literacy training programs and program providers— graphic and market trends contributing to concerns some offering comprehensive information on sav- include increased diversity of the population, result- ings, credit, and similar topics for a broad audience ing in households that may face language, cultural, or and others tailored to a specific group, such as youth other barriers to establishing a banking relationship; or military personnel, or focused on a specific goal, expanded access to credit for younger populations; such as home ownership or savings. and increased employee responsibility for directing The findings of studies of the effectiveness their own investments in employer-sponsored retire- of financial literacy training have been mixed. ment and pension plans. Although some programs, particularly those having discrete objectives, have succeeded in improving certain aspects of consumers' personal financial Technological Changes management—such as maintaining a mortgage, and Market Innovation. increasing savings, or participating in employer- sponsored benefit plans—improved financial behav- Over the past decade, technological advances have ior does not necessarily follow from increased finan- transformed nearly every aspect of the marketing, delivery, and processing of financial products and However, consumers may have difficulty assessing services. The expansion of the Internet as a means the options, and a misguided choice can result in of communicating and delivering services has also higher costs due to monthly fees, overdrafts, or exces- enabled financial services providers to market finan- sive transactions. cial products and serve customers more efficiently. Market innovation has also prompted deregulation Communication and delivery innovations increase of the banking industry. As competition from non- the amount of information available to consumers banking institutions has increased over time, banks and allow them to shop for and choose from a wide have devised ways to offer products to customers array of products and services without geographic outside the bank-regulated structure. In response to limitation. To benefit from the innovations, however, these market realities, legislation was passed in 1999 consumers need a base level of financial knowledge, to eliminate the regulatory barriers that had prohib- so that they can identify and access pertinent informa- ited banks from engaging in the sale of securities tion as well as evaluate the credibility of the source and insurance, enabling bank-owned financial hold- of the information. ing companies to become one-stop financial services Technological advances have also increased the providers. This legislation (the Gramm-Leach-Bliley capacity for targeted marketing to consumers, with Act), recognizing the activities already occurring robust databases of consumer information making it within the marketplace, facilitated financial modern- possible to match household characteristics and pref- ization and promoted a more efficient financial ser- erences with product offerings. This application of vices industry. However, the expansion of financial technology can promote competition and improve products offered by banking organizations, for exam- customer service. However, its misuse can increase ple, securities and insurance, requires consumers to consumer vulnerability to unscrupulous lenders. become more aware of the distinction between these Questionable marketing and sales tactics may induce products and to recognize that they do not convey the consumers to acquire products that they do not need same consumer protections and rights as traditional or that are inappropriate for their circumstances. banking products. In addition to broadening the application of databases in marketing, technology has enabled the use of databases in loan underwriting. Using statistical mod- Rise in Questionable eling, sophisticated computer programs produce a Mortgage Lending Practices. numerically based risk profile of consumers to estab- lish a range of acceptable risk and to develop guide- An increase in anecdotal reports of unfair and lines for pricing credit. While credit-scoring tech- deceptive home equity lending practices in the late nology has increased loan production and decreased 1990s raised concerns about the scope and impact creditor costs, it has also diminished lender-customer of unscrupulous credit arrangements, commonly interaction. With the lack of personal involve- referred to as predatory lending. Investigations and ment, consumers, particularly those unfamiliar with public hearings by federal, state, and local govern- banking and credit systems, have limited means ment agencies to identify possibly unethical or preda- for obtaining insight on the elements in their finan- tory mortgage lending practices revealed that in many cial profile that affect decisionmaking and guidance cases the terms of such contracts are not technically on the course of action necessary to improve their illegal but rather are inappropriate for and disadvanta- creditworthiness. geous to consumers. An example is a loan structured Market innovation and competition within the with relatively small fixed payments in the early financial services industry can also be seen in the years but a large ''balloon'' payment at the end of the increase in the variety of products offered by deposi- loan term. Such a structure recognizes that a younger tory institutions. For example, basic deposit and borrower's future earning potential is generally credit products have multiplied and become highly greater than his or her current income and assumes specialized. In addition, there has been a proliferation that the borrower will be able to refinance at the end of nonbank providers of financial services, such as of the loan term. While the arrangement makes mort- payday lenders and check cashers. (The number of gage payments more affordable for some borrowers, check-cashing centers has doubled over the past five it can be devastating to those living on fixed incomes. years, according to Financial Service Centers of Efforts by government agencies to better under- America, Inc.) These developments have given con- stand predatory lending have generally found that the sumers more options and greater flexibility in creat- distortion or inappropriate use of credit provisions, ing financial arrangements that best suit their needs. coupled with the inherent complexity of mortgage lending, sometimes results in borrowers becoming payments on mortgage and consumer debt as a share entangled in a financially devastating credit quag- of disposable income—reaching near-record levels. mire. Borrowers who are unfamiliar with credit trans- Meanwhile, although the personal saving rate rose actions and unaware of the full implications of the on average in 2001, it registered below 1 percent loan terms may be vulnerable to unethical lenders' at year-end. In addition, a record number of non- sales strategies. Although regulatory protections and business bankruptcies, approximately 1.5 million, legal remedies are important, consumer education is were filed in 2001, an increase of more than 19 per- seen as an essential element for combating and pre- cent from 2000. Together, these data suggest that venting predatory lending. some consumers may be vulnerable to a financial crisis in the event of an economic shock such as the loss of employment or a protracted illness. Changes in Personal Finances.

Other factors prompting increased attention to finan- Changes in Demographics. cial literacy include the rise in consumer debt levels, the decline in already-low personal saving rates, and Data from the 2000 census confirm that the U.S. the increase in non-business bankruptcy filings. population has become considerably more diverse Although the rate of expansion of consumer credit in and that foreign-born households represent an impor- 2001 was well below that in 2000 (6.5 percent com- tant consumer market force. Many in these groups, pared with 10.25 percent), outstanding household as is common among underserved populations, may debt increased an estimated 8.75 percent in 2001, a be unfamiliar with U.S. financial practices and (or) rate about 1 percentage point faster than the average lack access to mainstream financial systems. Lan- growth over the preceding two years. Household guage, educational, and cultural barriers can discour- borrowing outstripped the growth of disposable per- age some populations from establishing a banking sonal income in that year, with the household debt- relationship to acquire financial services. Instead, service burden—an estimate of minimum scheduled they may use alternative providers to conduct basic transactions such as cashing checks, obtaining loans, or wiring funds. Although using alternative providers [note: 1]. In 1999 and 2000, a variety of efforts were undertaken by federal, state, and local agencies to gain insight into abusive lending may be convenient or comfortable, a report by the practices. The Federal Reserve hosted a series of public hearings to Fannie Mae Foundation asserts that they generally obtain comment on proposed revisions to the regulation implementing charge higher per-transaction fees (table 1). the Home Ownership Equity Protection Act, a statute enacted to stem Financial unscrupulous lending by increasing disclosure requirements and literacy programs promote participation in the bank- consumer protections for high-cost loans (www.federalreserve.gov/ ing system to enable consumers to gain access to a events/publichearings/default.htm). A joint task force of the Depart- ment of Housing and Urban Development and the Department of the Treasury released a report of findings and policy recommendations [note: 2]. Statistics on debt and savings are from ''Monetary Policy Report regarding predatory lending (www.huduser.org/publications/hsgfin/ to the Congress,'' Federal Reserve Bulletin, vol. 88 (March 2002), curbing.html). In both cases, financial education was recommended pp. 141-72. [end of note.] as a means of helping borrowers better understand the basics of [note: 3]. American Bankruptcy Institute, ''U.S. Bankruptcy Filings 1980- mortgage credit. [end of note.] 2001'' (www.abiworld.org/stats/1980annual.html). [end of note.]

Table 1. Estimated fees for financial services charged by nonbank providers, 2002

Rate per transaction Number of transactions Gross revenue Total fee revenue Service (percent) (millions) (billions of dollars) (billions of dollars)

Check cashing Payroll and government, 2-3 180 60 1.5 Personal, can exceed 15 Payday loans 15-17 per two weeks 55-69 10 -13.8 1.6-2.2 400 APR Pawnshops 1.5-25 per month 42 3.3 n.a. 30-300 APR

Rent-to-own 2 or 3 times retail 3 4.7 2.35 Auto title lenders 1.5-25 per month n.a. n.a. 30-300 APR . . . Total 280 78 5.45

APR = Annual percentage rate. SOURCE. James H. Carr and Jenny Schuetz, ''Financial Services in Distressed n.a. = Not available. Communities: Framing the Issue, Finding Solutions'' (Fannie Mae Foundation, . . . = Not applicable. August 2001). full complement of services, with the possible result an investment strategy that ensures their retirement of significant savings in transaction fees. An addi- security—first by recognizing the advantage of con- tional benefit of engagement with the banking system tributing to employer-sponsored savings plans and is suggested by research indicating that 51 percent then by understanding their future needs, goals, and of households that have a banking relationship save appetite for risk. regularly, compared with 14 percent of households that do not. PROVIDERS AND FOCUS OF FINANCIAL LITERACY TRAINING. Increase in Consumer Responsibilities. Efforts to improve the quality and increase the Consumer responsibilities for credit and investment amount of the financial information provided to con- management have increased in recent years. For sumers have been in place for many years. In a broad example, greater competition and more-flexible sense, the disclosure of key terms and costs of lend- underwriting standards have increased younger pop- ing and deposit transactions dictated by federal con- ulations' access to credit. It is not uncommon for sumer protection laws constitute a financial education college students, even those lacking a job or other tool, as they are intended to enable consumers to source of income, to obtain a credit card. In a 2001 compare the same type of information across prod- study by the U.S. General Accounting Office, more ucts. Although the utility of disclosure documents than 33 percent of surveyed students indicated that has been debated, disclosures are generally viewed as they had a credit card before they entered college, an important mechanism for communicating impor- and another 46 percent had acquired a card in their tant information to consumers. freshman year of college. Evidence that younger What is new is the proliferation of programs. A populations are having difficulty managing debt is study commissioned by Fannie Mae found that two- revealed in statistics showing a 51 percent increase in thirds of the ninety financial literacy programs that bankruptcy filings by debtors under the age of it examined were begun in the 1990s and that three- twenty-five between 1991 and 1999. fourths of those were initiated in the late 1990s or Consumers' responsibilities for their retirement 2000. investments have also grown. Employers are increas- The providers of financial literacy programs are ingly offering defined-contribution plans, for which a diverse group that includes employers, the mili- the employee directs the investment, rather than tary, state cooperative extension services, community defined-benefit plans, for which the employer makes colleges, faith-based groups, and community-based the investment decisions on behalf of its employees. organizations. Commercial banks are also important In 1980, 70 percent of pension plans were structured providers of financial literacy education. All but two as defined-contribution plans; by 1997, the pro- of the forty-eight retail banks responding to a portion had risen to 92 percent. Moreover, sur- recent survey by the Consumer Bankers Association veys indicate that as many as 30 percent of eligible reported contributing to financial literacy efforts in employees do not participate in employer retirement some way. Many banks consider their engagement plans. Financial training can help employees devise in this area a way to expand their customer base and promote goodwill, and such activities are often given [note: favorable consideration in examination4]. James H. Cars rfo anr d compliJenny Schuetz- , ''Financial Services in Dis- tressed Communities: Framing the Issue, Finding Solutions'' (Fannie ance with the Community Reinvestment Act. Mae Foundation, August 2001) (www.fanniemaefoundation.org/ programs/papers.shtml). [end of note.] The content and audience of financial literacy [note: programs also vary considerably. Som5]e. Constancprogramse R., Dunham, ''The Role of Banks and Nonbanks in Serving Low- and Moderate Income Communities,'' in Jackson L. such as the Federal Deposit Insurance Corporation's Blanton, Alicia Williams, and Sherrie L. W. Rhine, eds., Chang- ing Financial Markets and Community Development: Proceedings ''Money Smart'' curriculum, offer comprehensive of a Federal Reserve System Community Affairs Research Confer- ence (April 2001), pp. 31-58 (www.chicagofed.org/cedric/2001/ [note: 10]. Lois A. Vitt, Carol Anderson, Jamie Kent, Deanna M. Lyter, sessionone.cfm). [end of note.] Jurg K. Siegenthaler, and Jeremy Ward, Personal Finance and [note: 6]. U.S. General Accountinthe Rushg Office to Competence:, ''Consume r FinancialFinance : CollegLiteracye Education in the U.S. Students and Credit Cards,'' Report GAO-01-773 (GAO, June 2001). [end of note.](stud y commissioned and supported by the Fannie Mae Foundation [note: and conducted by the Institute for Socio-Financia7]. Ibid. l Studies, [endMid - of note.] [note: dleburg, Va., 2000) (www.fanniemaefoundation.org/programs/pdf8]. U.S. Departmen/ t of Labor, ''The National Summit on Retirement Savings: Agenda Background Materials'' (prepared by C. Conte), rep_finliteracy.pdf). [end of note.] 1998. [end of note.] [note: 11]. Consumer Bankers Association, ''Financial Literacy Programs: [note: A Survey of the Banking Industry'' 9](Jul. Mary k2001 Dolliver) (www.cbanet.org, ''Just Blame /I t on Ignorance, if Not on Improvi- dence,'' Adweek, vol. 42 (March 2001). [end of note.] issues/financial_literacy/Financial_Literacy_Survey_2002.htm). [end of note.] The American Bankers Association Education Foundatio[beginningn offers bankerof s a varietbox:]y of informatioThn e Federal Reserve System's Role in Economic and Financial Literacy. resources to promote the importance of savings and credit management and sponsors a Personal Econom- Recognizing the importance of educated and informed ics Program in which banks work with educators to consumers to the operation of efficient markets, the Fed- teach people of all ages about banking services and eral Reserve has been an active provider of economic financial management. Banks and other deposi- literacy materials to help students and the public better tory institutions also collaborate with community understand the U.S. economy and the role of the Federal development organizations as a means of increasing Reserve. Each of the twelve Federal Reserve Banks sup- ports this objective through a wide variety of education their reach. For example, some financial institu- partnerships, publications, learning tools, and student tions support the National Community Reinvest- challenge contests. ment Coalition's financial literacy initiative designed As the importance of financial literacy has increased to help bring low- and moderate-income communi- in recent years, the Federal Reserve has also become ties, minority groups, and individuals into the finan- engaged in a broad spectrum of initiatives to further that cial mainstream. One component of the program goal. In partnership with government agencies, commu- helps banks and local community groups develop nity groups, and other organizations, the Federal Reserve mutually beneficial strategies for promoting financial has supported programs to provide training seminars for literacy. community educators and increase awareness of abusive Employers are also common providers of financial practices in lending and other financial services. Some Reserve Banks use their web sites as information clear- education, and many sponsor informational and train- inghouses, aggregating and categorizing the variety of ing sessions that employees can attend during the resources that can be accessed on the Internet. Others workday. For example, the Federal Reserve Board have published manuals to help consumers understand has in recent years periodically hosted sessions focus- fundamental financial management concepts and have ing on homebuyer orientation, budgeting and credit developed electronic tools for designing personal budgets management, and savings for retirement and chil- and savings plans. To contribute to the body of research dren's education. The Department of Defense, which on the topic, the Federal Reserve has conducted numer- determined that financial wellness contributes to ous studies related to consumer finances. In addition, the quality of life and affects military readiness, incorpo- 2003 Federal Reserve Community Affairs Research Con- rated comprehensive financial education in its basic ference will serve as an opportunity to bring new think- training programs for certain personnel. ing to the subject of measuring the effect of financial literacy training and determining the level of need for such education. [end of box.] FINDINGS OF EMPIRICAL STUDIES OF FINANCIAL LITERACY PROGRAMS. information intended to familiarize households with the fundamentals of saving and credit. Other pro- While financial literacy training programs have grams are intended to facilitate the attainment clearly proliferated, research measuring the effective- of a specific goal, such as home ownership, savings ness of the training has not kept pace. Those studies accumulation, or debt reduction. Some programs that have been conducted use a variety of criteria for are intended for a broad audience. Others are determining success, ranging from the incidence of designed for a particular group, such as high school default on home mortgages to changes in confidence students or military personnel. For the banks sur- levels among training participants. The body of veyed by the Consumer Bankers Association, pro- objective research generally concludes that financial spective homeowners were the most common focus. literacy training yields some benefits. Student testing Another major target audience was training for youth: and surveys of confidence in financial matters, how- Three-fourths of the responding banks reported that ever, produce less-definitive results. they support financial literacy programs in public In analyzing the efficacy of financial literacy pro- schools, through direct investment and participation grams, the primary challenge is defining and quan- in training initiatives. tifying ''success.'' The broad objective of all programs is to present information that will improve [note: 12]. For a description of the FDIC program, see ''Money Smart: An Adult Education Program'' (www.fdic.gov/consumers/consumer/ moneysmart/index.html). [end of note.] [note: 14]. American Bankers Association Education Foundation, [note: ''Our National Programs'' (www.aba.com/Consumer+Connection13]. Consumer Banker/ s Association, ''Financial Literacy Programs: A Survey of the Banking Industry.'' [end of note.] CNC_aboutef.htm). [end of note.] consumers' ability to make decisions that are bene- 1993 through 1998 under its affordable mortgage ficial to their financial well-being. One measure of loan program, Affordable Gold. Some borrowers success is the achievement of a specific outcome had received prepurchase counseling, and others had resulting from the training, with programs that are not; those who had received counseling had received tied to a defined goal providing the best opportunities it from a variety of sources, including government for measuring success. Initiatives that have a signifi- agencies, mortgage insurers, and nonprofit groups. cant goal-oriented educational component include The objective of the study was to determine whether programs for first-time homebuyers, savings initia- prepurchase home ownership counseling affected tives, and workplace retirement-planning efforts. ninety-day delinquency rates and whether effectiveness varied with training format (individual counseling, group classes, home study, or telephone Homebuyer Counseling Programs. counseling). Borrowers receiving counseling had, on average, a 19 percent lower ninety-day delinquency Home ownership, a primary mechanism for house- rate than borrowers with ''equivalent observable hold asset accumulation, is the cornerstone of gov- characteristics'' not receiving counseling. Those who ernment housing policy objectives and community received individual counseling had a 34 percent lower development strategies. Considerable resources have delinquency rate than those who received no coun- been devoted to supporting consumers in purchas- seling, and those who received classroom and home ing a home. Prepurchase counseling has long been study training had 26 percent and 21 percent lower a way of preparing and qualifying prospective delinquency rates respectively. Telephone counseling homeowners—particularly those who have low did not lower delinquency rates. The reduction in income, inadequate savings, or impaired credit delinquency rates was found to be attributable to the histories—for the financial responsibility of a mort- type of counseling format, regardless of the organiza- gage. Many affordable-housing programs include tion providing the counseling. a financial literacy component, with such training generally addressing debt management, budgeting, and saving. Savings Initiatives. Within the community development arena, homebuyer counseling has been a fundamental strategy Financial literacy training is integral to many initia- for increasing home ownership among disadvantaged tives designed to increase the rate of saving among households in distressed communities. As a catalyst middle- and lower-income households. America for neighborhood stabilization, community organiza- Saves—a program in which communities conduct tions provide financial literacy training to develop local savings campaigns—was begun by the Con- ''bankable'' borrowers who can qualify for a mort- sumer Federation of America in May 2001. The gage and appropriately manage their debt. Neighbor- program includes efforts to enroll residents as savers hood Housing Services, a subsidiary of the Neigh- and the provision of no-fee savings accounts, moti- borhood Reinvestment Corporation (NRC), was one vational workshops, and one-on-one consultation. of the first community-based affordable-housing The pilot program in Cleveland, Ohio, has more than programs to institute this practice. NRC and its 100 organizational participants, has enrolled 1,500 umbrella network, NeighborWorks, provided home- ''Cleveland Savers,'' and has involved more than buyer training, both before and after purchase, to 2,000 individuals in motivational workshops. An more than 71,000 individuals in fiscal year 2001. areawide survey suggests that through these efforts, Maintenance of a mortgage loan in accordance some 10,000 Cleveland-area residents have been per- with the contract is a desired outcome of many home- suaded to save more effectively. Since the launch of buyer counseling programs, and timely payments are the pilot program, America Saves campaigns have a measure of their success. Using payment perfor- been initiated in Kansas City and are being organized mance as a measure of success, Freddie Mac, one of in other cities, including Indianapolis and Charlotte. the largest purchasers of mortgage loans, conducted a study of nearly 40,000 mortgages originated from

[not: 16]. Abdighani Hirad and Peter M. Zorn, ''A Little Bit of Knowl- edge Is a Good Thing: Empirical Evidence of the Effectiveness of [note: Pre-purchase Homeownership Counseling'' (Freddi15]e Mac. Th,e MaNeighborhooy 2001). [endd ofReinvestmen note.] t Corporation was created by Congress in 1978 to revitalize older, underserved areas through [note: 17]. America Saves, ''One-Quarter of U.S. Households Are Wealth community-based approaches to support redevelopment and afford- Poor,'' press release, May 13, 2002 (www.americasaves.org/ able housing. [end of note.] back_page/savinginamerica_first.cfm). [end of note.] Money 2000, a program sponsored by the U.S. Workplace Programs. Department of Agriculture through its Cooperative Extension Service (a division of the agency's Coop- As employers have shifted from offering employer- erative State Research, Education, and Extension driven defined-benefit retirement plans to employee- Services program) was initiated to provide informa- directed defined-contribution plans, many individuals tion and tools to consumers seeking to improve their have of necessity assumed greater responsibility for savings and spending patterns. Program participants planning for their financial needs in retirement. Many reporting progress toward their financial goals employers have instituted training seminars to help increased their savings, on average, approximately employees assess their needs and evaluate their $1,600 within a twelve-month period and decreased options for the future. their credit balances an average of more than A study by Fannie Mae found that employers $1,200. most often initiated financial education for reasons Other, more focused efforts support asset devel- associated with their 401(k) programs—to increase opment among lower-income households through participation and contribution levels, to comply with the use of monetary incentives. Matched-savings pro- related regulations, and to avoid potential liability for grams known as individual development accounts losses. The study profiled programs on long-term (IDAs) were designed to address the concern that financial and retirement planning at Weyerhaeuser many lower-income earners do not have access Company and United Parcel Service (UPS). The to employer-sponsored savings programs, such as Weyerhaeuser program was begun in 1984, and the 401(k) plans. Participants open savings accounts and UPS program in 2000; both are strongly supported specify a savings objective. Their contributions are by management and are offered at regular intervals. matched by sponsoring organizations such as non- The programs consist of one- or two-day workshops profit organizations, corporations, government agen- tailored to particular age groups. Employees receive cies, and foundations. Matching funds are forfeited extensive resource materials, including workbooks if the funds are withdrawn for any reason other than that incorporate explanations of the companies' bene- to purchase a home, start a small business, or fund fits in the context of broader financial planning strate- higher education. gies. The Weyerhaeuser program takes a holistic To determine the effectiveness of IDAs, the Cor- approach, covering nonfinancial topics such as health poration for Enterprise Development initiated a pilot and quality of life in the workshops. The UPS pro- project involving fourteen IDA programs throughout gram augments written resource materials with a the country, the American Dream Demonstration web-based service to help employees develop a per- (ADD). Participants in the programs received an sonal financial action plan and computer software to average of ten and one-half hours of financial train- provide information on such topics as budgeting, ing. An evaluation of ADD programs, participants, managing debt, saving, insurance, and wills. and savings patterns from September 1997 through Employee response to workplace financial educa- June 2000 found generally favorable outcomes. tion programs and the results of studies of the influ- Although IDAs have many features that can influence ence of such training on employee financial behavior success rates, such as voluntary enrollment and have generally been favorable. One study found matching funds, financial training appears to have that employees who attended training workshops played an important role: Average monthly net depos- subsequently increased their participation in 401(k) its increased with each additional hour of training up plans. Another study drew a similar conclusion, to twelve hours (training beyond that amount had with more than half of those participating in counsel- little effect). ing sessions and workshops changing at least one financial behavior. In a study evaluating the effec- [Note: 18]. Money 2000 recently became Money 2020 and is being incor- porated into the America Saves program (www.money2000.org/). [end of note.] [note: 19]. The Corporatio[note:n for Enterprise Development is a nonprofit 20]. Lois A. Vitt and others, Personal Finance and the Rush to organization that promotes asset-building and economic opportunity Competence. [end of note.] strategies primarily in low-income and distressed communities. The [note: 21]. Jinhee Kim, Constance Y. Kratzer, and Irene E. Leech, evaluation of the ADD programs is reported in Mark Schreiner, ''Impacts of Workplace Financial Education on Retirement Plans,'' in Michael Sherraden, Margaret Clancy, Lissa Johnson, Jami Curley, Jeanne M. Hogarth, ed., Proceedings of the 2001 Annual Conference Michal Grinstein-Weiss, Min Zahn, and Sondra Beverly, ''Savings of the Association for Financial Counseling and Planning Education, and Asset Accumulation in Individual Development Accounts: Down- p. 28. [end of note.] payments on the American Dream Policy Demonstration, A National [note: 22]. Jinhee Kim, ''The Effectiveness of Individual Financial Coun- Demonstration of Individual Development Accounts'' (Washington seling Advice,'' in Jeanne M. Hogarth, ed., Proceedings of the 2001 University in St. Louis, February 2001) (http://gwbweb.wustl.edu/csd/ Annual Conference of the Association for Financial Counseling and Publications/ADDreport2001/index.htm). [end of note.] Planning Education, pp. 62-69. [end of note.] tiveness of financial education offered by a chemi- when participating students reached adulthood. cal production company, 75 percent of employees A more recent study, based on data from the 1999 reported deriving a sense of benefit from workplace- Freddie Mac Consumer Credit Survey, concluded sponsored training; they believed that they had made that specific and detailed knowledge of financial better financial decisions after attending the work- affairs had little effect on behaviors and outcomes, shop and were overall more confident in making and that confidence and a broad understanding were investment decisions. Other researchers conducted more important predictors of successful financial out- a telephone survey of a national sample of indi- comes. The study also found that consumers appear viduals aged thirty to forty-eight to examine the to benefit from practical and applied learning: The effects of employer-based financial education on major source of learning for all groups was a difficult savings, both in general and for retirement. Retire- financial experience. The researchers concluded that ment accumulation, by nearly all measures, was teaching financial literacy in the abstract appears to found to be significantly higher for respondents be ineffective and that providing consumers with whose employers offered financial education. In ready access to information on an ongoing basis may addition, rates of participation in 401(k) plans for better help households having minor financial diffi- both respondents and spouses were higher in the culties avoid exacerbating their situation through presence of employer-sponsored financial educa- unproductive behaviors. tion. The study found a significant relationship Other surveys have sought to measure the short- between financial education and the rate of total term effects of financial training targeted at second- saving; however, there was essentially no relation- ary school students. One such survey was a 1997-98 ship between financial education and total wealth evaluation by the National Endowment for Financial accumulation. Education (NEFE) of its High School Financial Plan- Studies of workplace-sponsored financial training ning Program. The survey compared students' have also focused on benefits to employers. The responses to questions about their financial behav- study at the chemical production company, for exam- iors, financial knowledge, and confidence levels in ple, found that financial wellness was positively cor- managing financial matters before and after par- related with worker productivity (as measured by ticipating in the program. Nearly 30 percent of the supervisors' performance ratings) and worker health students reported that they started saving after partici- (as a function of absentee records). pating in the training, and 15 percent indicated that they began saving more. In addition, 37 percent of the students stated that they had better skills for RESULTS OF SURVEYS tracking spending, 47 percent believed that they were OF GENERAL FINANCIAL TRAINING PROGRAMS. more knowledgeable about the cost of credit, and 38 percent indicated that they were both better While studies generally find a positive correlation informed about investments and more confident about between financial training and the achievement of managing money after participating in the program. specific goals, the results of surveys measuring the While the NEFE survey results indicate that gen- acquisition of more general, more comprehensive eral financial literacy training can be useful for stu- financial literacy are less clear cut. A 1995 telephone dents, at least for a short period after the training, survey of a nationally representative sample of individuals aged thirty to forty-nine to measure the long- term effects of financial curricula in high schools [note: 26]. B. Douglas Bernheim, Daniel M. Garrett, and Dean Maki, across the country found that state-mandated finan- ''Education and Saving: The Long-Term Effects of High School cial education resulted in both increased exposure to Financial Curriculum Mandates,'' NBER working paper w6085 (National Bureau of Economic Research, July 1997). [end of note.] such information and improved asset accumulation [note: 27]. The study was based on data for more than 12,000 individuals across the country aged twenty to forty with household incomes of less than $75,000. Study results are discussed in Donald Bradley, Abdi Hirad, Vanessa Gail Perry, and Peter Zorn, ''Is Experience the [note:Best Teacher? The Relationship between Financial Knowledge, Finan23]. -E. Thomas Garman, Jinhee Kim, Constance Y. Kratzer, Bruce H. Brunson, and So-hyun Joo, ''Workplace Financial Education cial Behavior, and Financial Outcomes,'' paper submitted to the Improves Personal Financial Wellness,'' Financial Counseling and Rodney L. White Center for Financial Research, University of Penn- Planning Journal, vol. 10 (issue 1, 1999), pp. 79-99. [end of note.] sylvania, Workshop on Household Financial Decision Making, March [note:2001 . [end of note.] 24]. B. Douglas Bernheim and Daniel M. Garrett, ''The Effects of Financial Education in the Workplace: Evidence from a Survey of [note: 28]. Laurie Boyce and Sharon M. Danes, ''Evaluation of the NEFE Households,'' Journal ofPublic Economics (forthcoming). [end of note.] High School Financial Planning Program, 1997-1998'' (report of a [note:study sponsored by the National Endowment for Financial Education25]. )E . Thomas Garman and others, ''Workplace Financial Educa- tion Improves Personal Financial Wellness.'' [end of note.] (www.nefe.org/pages/educational.html). [end of note.] scores on a test administered to high school seniors its that the risk—either real or perceived—associated by the Jump$tart Coalition, a nonprofit financial with experimenting with something new will cause education advocacy group, present a less clear view an individual to remain in a situation that is not of the relationship between training, knowledge, and optimal. The study's authors also note several confidence. Over a period when attention to public economically self destructive aspects of behavior, school training in personal finance was increasing, such as overconfidence (investing in the absence of average scores on a multiple-choice test of seniors' complete information), overreaction (exaggerated knowledge of the basics of personal finance were response to new information), selflessness (giving to declining—from 57 percent in 1999 to 52 percent in charity despite one's financial situation), and loss 2000 to 50 percent in 2002. In fact, students in the aversion (delayed entry into or exit from a financial 2002 study who had received an entire semester of situation inconsistent with one's financial best inter- training scored a bit worse on the test than those who est). Recognition of these behavioral traits can help had not, and students in states having a statewide financial literacy trainers understand households' pri- training requirement scored worse than those in states orities and create financial training programs that having no requirement. Notably, in the 2002 survey, take these traits into consideration. students who had participated in an interactive stock With respect to savings, the NBER authors suggest market game as part of their training scored better on that consumers' lack of self-discipline necessitates the survey (52 percent) than did students overall and strategies and policies that force savings, such as better than those who had received other types of automatic enrollment in 401(k) investment plans training. Despite the low average score, 65 percent and tax benefits to motivate contributions to indi- of the students tested in 2002 indicated that they felt vidual retirement accounts. Other mechanisms con- ''somewhat sure'' or ''very sure'' of their ability to sumers commonly use that can be characterized handle their finances. as forced savings are the overwithholding of income taxes to ensure a refund and the accumulation of home equity through mortgage payments and prop- INFLUENCE OF BEHAVIOR TRAITS erty appreciation. AND LEARNING PREFERENCES. In one study of a savings program that capitalizes on the propensity of households to engage in passive Although research shows that the acquisition of addi- savings, researchers examined the Save More Tomor- tional information can result in improved behavior row (SMT) program, through which employees in financial matters, studies also make clear that commit, in advance, a portion of their future salary increased information does not automatically result increases toward their (employee-directed) defined- in such improvement. While the overarching objec- contribution retirement plan. Program participants tive of financial literacy training is to impart knowl- are offered ongoing counseling by an investment edge that will, ultimately, improve financial behav- adviser. Although the study was not based on random iors, the assumption that the presence of more assignment, as participants self-selected into the pro- information will lead to improved behavior is faulty. gram, the findings are compelling: Savings rates of The conundrum of why, in the presence of reliable participants tripled in twenty-eight months; 78 per- and credible information, households do not always cent of eligible employees elected to participate; and act in their best financial interest—as the efficient- the vast majority of participants remained in the markets model contends they should—is explored by program through two or three pay increases (98 per- the discipline of behavioral economics. Research in cent and 80 percent respectively). behavioral economics can contribute to the develop- The manner in which information is presented can ment of policies and programs that motivate positive also influence the effectiveness of financial literacy change. programs. A recent Federal Reserve study based on the In examining the disconnect between the efficient- November and December 2001 Surveys of Consumers markets model and the ''nonrational'' behaviors in which consumers engage, a study funded by the [note: 30]. Sendhil Mullainathan and Richard H. Thaler, ''Behavioral Eco- National Bureau of Economic Research (NBER) pos- nomics,'' NBER working paper w7948 (National Bureau of Economic Research, October 2000). [end of note.] [note: 31]. Richard H. Thaler and Shlomo Benartzi, ''Save More Tomor- row: Using Behavioral Economics to Increase Employee Saving'' [note:(workin g paper prepared at the University of California at Los Ange29]. -The results of the 2002 Personal Financial Literacy Survey are available at www.jumpstart.org/download.cfm. Also see ''From les, August 2001). (For information on the Save More Tomorrow Bad to Worse: Financial Literacy Drops Further among 12th Grad- program, see http://gsbwww.uchicago.edu/news/capideas/summer02/ ers,'' Jump$tart press release, April 23, 2002. [end of note.] savemoretomorrow.html). [end of note.] Table 2. Proportion of consumers who have various financial products and engage in various financial behaviors, by consumer money management style Percent

Money management style: Money management style: Money management style: Product or behavior Inactive/Engaged Inactive/Unengaged Active/Unengaged Money managementstyle:Al lconsumer s Money management style:Active/Engaged

Financial product:Deposi t products: Checking account 89 74 100 92 100 80 61 Financial93 product: Depositproducts:Saving 85 s account 94 30 14 Financial38 product: Deposit20 products:Certificat52 e of deposit Financial product: Investment products: Any investment account 52 17 84 31 93 46 15 Financial69 product:28 Investment84 products: Mutual fund 24 7 Financial43 product:11 Investment43 products: Public stock 6 1 Financial7 product:4 Investment12 products: Bonds Financial product: Retirement products: Company pension plan or 401(k) plan 45 19 72 27 74 43 16 Financial70 product:21 Retirement76 products: IRA or Keogh Financial product: Credit products: Credit card 79 57 97 79 97 72 53 Financial87 product:70 Credit91 products: Mortgage Financial product: Credit products: Refinanced mortgage or loan for home improvements 35 16 51 23 57

97 92 Financial100 100 10product:0 At least one financial product Financial product: Memo: Average number of financial products owned 7 4 9 5 10

Financial behavior:Cash-flo w management: Pay all bills on time 88 75 90 96 98 65 41 Financial51 behavior:83 Cash-flow89 management: Have a recordkeeping system 67 49 Financial64 behavior:82 Cash-flow82 management: Balance checkbook monthly 59 41 Financial32 behavior:86 Cash-flow76 management: Track expenses 46 34 Financial14 behavior:71 Cash-flow59 management: Use a spending plan or budget Financial behavior: Savings: Have an emergency fund 63 30 60 81 93 49 20 Financial40 64 behavior: 78 Savings: Save or invest money out of each paycheck Financial behavior: Savings: Save for long-term goals such as education, car, home, or vacation 39 14 16 59 65 36 20 Financial10 57 behavior: 54 Savings: Plan and set goals for financial future Financial behavior: Investment: Have money in more than one type of investment 53 16 74 46 93 40 14 Financial33 4behavior:7 68 Investment: Calculated net worth in past two years Financial behavior: Investment: Participate in employer's 401(k) retirement plan 37 11 47 33 68 Financial behavior: Investment: Put money into other retirement plan, such as an IRA 22 4 16 22 47 Financial behavior: Credit: Review credit report 58 40 47 74 74 49 21 Financial53 54 behavior: 76 Credit: Pay credit card balances in full each month 35 21 Financial34 44 behavior: 47 Credit: Compare offers before applying for a credit card Financial behavior: Other: Do own taxes 40 31 31 47 51 20 5 Financial9 23 behavior: 40 Other: Read about personal money management

100 100 Financial100 100 10behavior:0 At least one financial behavior engaged in 9 5 Financial7 12 behavior:13 Memo: Average number of behaviors

NOTE. See text for explanation of consumer money management style. SOURCE. Jeanne M. Hogarth, Marianne A. Hilgert, and Jane Schuchardt, Statistical tests show that for each item, the differences among the groups are ''Money Managers—The Good, the Bad, and the Lost,'' paper presented at the significant at the 99 percent level of confidence. Association for Financial Counseling and Planning Education Conference, Scottsdale, Arizona, November 2002. looked at the perceived effectiveness of different households, and perceptions about effective informa- means of information delivery and numerous other tion sources. It also provided insight into household aspects of money management. The study identi- cash-flow management, saving and investment, and fied money management styles and factors associ- retirement planning. ated with those styles, information resources used by Survey respondents were classified in terms of the number of financial products they used or owned [note: 32]. The Survey of Consumers is a monthly telephone survey of a sample of U.S. households conducted by the University of Michigan (from a list of thirteen) and the number of financial Survey Research Center. Information on the Federal Reserve study is behaviors they exhibited (from a list of eighteen). from Jeanne M. Hogarth, Marianne A. Hilgert, and Jane Schuchardt, Respondents who ranked above the median in both ''Money Managers—The Good, the Bad, and the Lost,'' paper pre- number of products (labeled ''engaged'' consumers) sented at the Association for Financial Counseling and Planning Education Conference, Scottsdale, Arizona, November 2002. [end of note.] and number of behaviors (labeled ''active'' consum- Table 3. Proportion of consumers who obtained financial information from various sources, by consumer money management style Percent

Money management style: Money management style: Money management style: Item Inactive/Engaged Inactive/Unengaged Active/Unengaged Money managementstyle:Al lconsumer s Money management style:Active/Engaged

Learned ''a lot''or a ''fair amount'' aboutfinancial topics from: Personal financial experiences *** 68 51 66 72 86 42Learned ''a lot''or a ''fair35 amount'' about financial40 topics from: Friends an46d family *** 49 36Learned ''a lot''or a 2''fair8 amount'' about financial34 topics from: TV38, radio, magazines, 45 newspapers*** 21Learned ''a lot''or a ''fair amount''16 about financial topics21 from:Employe r 20 26 ** 19Learned ''a lot''or a ''fair15 amount'' about financial12 topics from: Hig2h0 schoo l or college 26 course*** 17Learned ''a lot''or a ''fair11 amount'' about financial12 topics from: Course 1outsid8 e school 25 *** 11Learned ''a lot''or a ''fair amount''5 about financial topics12 from: Internet*** 12 19

Most important way learned about personal finances: 1 Personal financial experiences 48 47 42 49 51 21Most important way 2learned4 about personal25 finances: Friends an19d family * 17 11Most important way8 learned about personal13 finances: TV11, radio, magazines, 1newspaper4 s * 5Most important way learned3 about personal 4finances: Training 6 5 courses/seminars 5Most important way learned3 about personal finances:5 Employer 6 5 4Most important way 7 learned about personal5 finances: High4 schoo l or college cours4 e 5Most important way learned0 about personal4 finances: Internet 4 1 2Most important way8 learned about personal1 finances: N1o answer 1

Effective ways to learn about personal finances: TV, radio, magazines, newspapers** 71 66 74 71 76 66Effective ways to learn about65 personal finances:Informationa 65 l 64 70 brochures 64Effective ways to 65learn about personal63 finances: Video6 0presentatio n at 67 home 56Effective ways to learn about43 personal finances:Internet/compute 56 r progra61m *** 67 53Effective ways to learn about49 personal finances:Informationa 52 l seminars 5i0n community 58 53Effective ways to 5learn3 about personal5 3 finances: Formal 5course6 s at a school 52

NOTE. See text for explanation of consumer money management style. 1 = Percentages may not sum to 100 percent because of rounding. Statistical tests show that the differences among groups are significant at SOURCE. Jeanne M. Hogarth, Marianne A. Hilgert, and Jane Schuchardt, the following levels of confidence: * =9 0 percent level; ** =9 5 percent level; ''Money Managers—The Good, the Bad, and the Lost.'' *** =9 9 percent level. ers) owned, on average, ten of the thirteen financial media, information brochures, and video presenta- products and exhibited thirteen of the eighteen finan- tions at home. The Internet, seminars, and classroom cial behaviors, while the average respondent below courses ranked somewhat lower, with active respon- the medians (inactive/unengaged consumers) owned dents generally more likely than inactive respondents only four of the products and exhibited only five of to consider these effective ways to learn about finan- the behaviors (table 2). cial management. Those sources generally consid- To measure level of financial knowledge, the sur- ered most effective can be classified as individually vey asked a series of true-false questions concerning focused and available ''on demand''—that is, con- savings, credit, and other general financial manage- sumers appear to want information at a time of their ment matters. Overall, respondents answered 67 per- choosing, not on someone else's schedule. Those cent of the questions correctly; active/engaged con- who did tend to see a group environment as an sumers answered 76 percent correctly, and inactive/ effective venue for learning were more likely to be unengaged consumers answered 59 percent correctly. active, engaged consumers. Test score, income, and level of education were Data of this sort promise to be helpful in the design the only variables found to have a statistically sig- of financial education programs and the develop- nificant relationship to money management style: ment of strategies for reaching various target groups Respondents with higher test scores, greater income, most effectively. For example, by cross-referencing and a higher level of education were more likely socioeconomic data collected in the survey (not to be active/engaged and less likely to be inactive/ reported here) with the data on effective sources of unengaged than other respondents—a finding sup- information, the design and delivery of programs can porting the value of financial literacy education. be tailored to be more responsive to the preferences Most commonly cited as the most important source of learners. of information about personal finances was personal experience; smaller proportions of respondents cited POLICY IMPLICATIONS friends and family and mass media (TV, radio, mag- AND PROGRAM CHALLENGES. azines, and newspapers) as their most important source (table 3). Most commonly cited as effective Overall, evidence concerning the benefits of financial ways to learn about personal finances were mass training is consistent with conventional wisdom— education can result in more-informed consumers • Where should financial literacy education be pro- who make better financial decisions. When it comes vided to reach the broadest audience? to specifics, however, many challenges remain in • How can financial literacy education be effec- identifying the most effective and most efficient tively delivered, both at specific points in time and means of providing relevant information to educate over time, to assist households in adjusting their consumers at appropriate points in their financial life financial plan to suit their circumstances? cycle. Demonstration of program effectiveness is • How can the effectiveness and impact of finan- critical to maintaining the current level of interest in cial literacy programs be measured? and resources devoted to financial literacy education. Certainly, the matter has received the attention of The task, which may appear simple when reduced policymakers, with members of the Federal Reserve to a series of bullet items, becomes complex when Board addressing the topic on numerous occasions these variables are considered simultaneously or and Congress holding two days of hearings on the the multiple implications of just one variable are subject in February 2002. In addition, the Depart- evaluated fully. For example, in considering where to ment of the Treasury has established an Office of introduce financial management topics to youth, the Financial Education dedicated to providing resources public school system may seem a logical place. How- and contributing to policy on financial literacy. And ever, issues of funding and teaching priorities compli- the No Child Left Behind Act of 2001 commits cate the use of this venue. Even when states mandate federal funding for innovative assistance programs personal finance education, the question remains at the local level, including '' activities to promote of how to incorporate training into existing student consumer, economic and personal finance education, curricula, as specific requirements related to aca- such as disseminating information on and encour- demic performance and the desire to offer worthwhile aging use of the best practices for teaching the basic but competing electives, such as foreign languages principles of economics and promoting the concept and music, may leave little room for a separate of achieving financial literacy. . . .'' course. Similarly, while research identifies the work- The challenges for policymakers and educators in place as an effective venue for extending financial designing and delivering financial literacy education literacy to adults, the existence of workplace pro- to meet the needs of all groups within the population grams is dependent on management philosophy and are many. The elements that must be considered can corporate culture, and as a result, programs may not be defined broadly in a set of questions: be available to large segments of the population. The challenge of providing financial training to • Who is the targeted audience and what are the adults is particularly vexing in light of the wide group's information needs? variety of information needs arising from differences • What does the audience need to know to under- in prior experience, language and cultural back- stand personal financial circumstances, identify future ground, current financial situation, and time availabil- goals, and implement behaviors consistent with ity, given work and family commitments. The wide attainment of those goals? variation in needs also poses challenges in the devel- • When is the appropriate time to expose individu- opment and delivery of relevant information. Most als to both general and specific information about classroom-style programs take a ''one size fits all'' financial issues and options? approach, in a well-intended effort to provide as much information as possible in a limited amount of [note:time . Such training may not be enough for som33]. eSee , for example, ''Financial Literacy,'' testimony by Chairman Alan Greenspan before the U.S. Senate Committee on Banking, Hous- participants and too much for others. Many education ing, and Urban Affairs, February 5, 2002; ''Reflections on Financial providers use the Internet to offer resources and refer- Literacy,'' speech by Vice Chairman Roger W. Ferguson, Jr., before the National Council on Economic Education, May 13, 2002; and rals, allowing consumers to choose, among a range of ''Financial Literacy,'' speech by Governor Edward M. Gramlich at the topics, the information that best suits their needs. But Financial Literacy Teacher Training Workshop, University of Illinois this approach has limited utility for consumers who at Chicago, May 2, 2002. Also see ''Hearings on the State of Financial Literacy and Educa- cannot access a computer, have limited language or tion in America,'' U.S. Senate Committee on Banking, Housing, and reading skills, or need a more personalized training Urban Affairs, February 5-6, 2002 (www.senate.gov/%7Ebanking/ experience. 02_02hrg/020502/index.htm and www.senate.gov/%7Ebanking/ 02_02hrg/020602/index.htm). [end of note.] In an ideal world, financial educators would ana- [note:lyze each individual's needs and provide customize34].d U.S . Department of the Treasury, ''Treasury Department Announces Office of Financial Education—New Deputy Assistant Secretary for Financial Education in Place,'' press release, May 7, training based on that assessment. But such one-on- 2002 (www.treas.gov/press/releases/po3079.htm). [end of note.] one interaction is time- and resource-intensive. Thus, educators are seeking other ways to analyze con- assessment of the individual's motivation and confi- sumer needs more effectively and deliver pertinent dence, could assist in providing relevant financial information more efficiently. One approach might information at the appropriate time. parallel in some ways the use of a credit-scoring The development of consistent standards for model in loan underwriting, which has enabled lend- measuring results, too, could increase the success ers to quickly and effectively construct an individual of financial literacy programs. Practitioners who can risk profile. A similar approach might be taken in demonstrate the effectiveness of their programs can determining a consumer's financial literacy profile, contribute significantly to the identification of ''best with a database on an individual's or group's finan- practices'' and the setting of policies that may lead to cial status, behavior, and learning preferences used to consumers who are better equipped to survive and, identify an individual's information and educational more important, thrive in our vibrant, diverse, com- needs. Knowledge of those needs, coupled with an plex financial marketplace.