financial literacy essay topics

Essay on Financial Literacy for Students and Children

Importance of financial literacy, an introduction to financial literacy.

We go to schools, colleges, universities to complete our educated and start earning our livelihood. We take up jobs, practise professions or start our own businesses so that we can earn money to make our living. But which of these institutions make us capable of managing our own hard-earned money? Probably a very few of them. 

Our ability to effectively manage our money by drawing systematic budgets, paying off our debts, making buying and selling decisions and ultimately becoming financially self-sustainable is known as financial literacy. 

Financial literacy is knowing the basic financial management principles and applying them in our day-to-day life. 

Financial Literacy – What does it Involve? 

From simple practices like keeping a track of our expenses and understanding the need to spend money if we like a product to striking a balance between the value of time saved and money lost, paying our taxes and filing of tax returns, finalizing the property deals, etc – everything becomes a part of financial literacy. 

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As human beings, we are not expected to know the nitty-gritty of financial management. But managing our own money in a way that it does not affect us and our family in a negative way is important. We certainly do not want to end up having a day with no money at hand and hunger in our stomach. 

Why is Financial Literacy so Important?

Financial literacy can enable an individual to build up a budgetary guide to distinguish what he buys, what he spends, and what he owes. This subject additionally influences entrepreneurs, who incredibly add to financial development and strength of our economy. 

Financial literacy helps people in becoming independent and self-sufficient. It empowers you with basic knowledge of investment options, financial markets, capital budgeting, etc.

Understanding your money mitigates the danger of facing a fraud-like situation. A few strategies are anything but difficult to accept, particularly when they’re originating from somebody who is by all accounts learned and planned. Basic knowledge of financial literacy will help people with foreseeing the risks and argue/justify with anyone learned and well-informed.

What should you read on / get informed about in Financial Literacy?

• Budgeting and techniques of budgeting
• Direct and indirect taxation system
• Direct tax slabs
• Income and expense tracking 
• Loans and debt – EMI management 
• Interest rate systems: fixed versus floating
• Business and organisational transaction studies
• Elementary Book-keeping and Accountancy
• Cash in-flow and out-flow Statements
• Investment & personal finance management
• Asset management:
• Business negotiation skills and techniques
• Make or buy decision-making
• Financial markets 
• Capital structure – owner’s funds and borrowed funds
• Fundamentals of Risk Management
• Microeconomics and Macroeconomics fundamentals

While there are various media to learn about financial literacy, we recommend that you join a short-term, weekend programme which helps you get financially literate.

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Financial Literacy

Helping you prepare for life..

We want financial literacy to be a part of your life. To that end, we have focused our resources on providing support and education on financial understanding for all students. The more you know, and the more tools you have at your disposal, the better prepared you will be for life at and beyond Harvard.

In this guide, you'll find information on budgeting, credit, saving and investing, and taxes.

A budget is, simply put, a plan for your money. By tracking income and expenses you can create a plan for your spending and saving. 

Why do you need a budget?

If you have ever found yourself looking at your bank account and wondering where your money went, a budget can help. The most common cause of financial problems is spending more than you are earning. With a flexible, sensible budget, you can control of your money and avoid financial stress. It can help you limit spending and ensure there is enough money to do the things that you want. 

How to get started

• Build a starting budget with your best guess of what you spend in a month (on average), separated into categories like books, personal expenses, rent, phone, and entertainment.
• Track your expenses for a few months. Then, compare these figures with your previous projections. You may be surprised to see where your guesses were higher or lower.
• Once you have tracked your expenses, compare these to your income. If you are spending more than you are earning, you need to make changes.
• Be honest about "needs" vs. "wants". Enjoying a store-bought coffee every single day is nice, but you could save up to $80/month by reducing this purchase from daily to weekly.
• Review your monthly budget for any necessary changes. Remember: a budget is fluid, meaning that it will (and should) adjust as your income and goals adjust.

Determining How Much Disposable Income You Have

Consider setting some of your income aside in a savings account, and putting limits on how much you can spend on non-essential items.

Let’s say you buy a cup of coffee on most days, grab a quick bite a couple times a week, and go out on Saturday nights for fun with friends. Your yearly spending may look like this:

• Coffee 4x/week @ $2.50 = $520
• Quick late-night snack 3x/week @ $6.50 = $1,014
• Weekend Fun @ $25-30 each weekend = $1,560

Your total spending would be $3,094 per year, or $12,376 for the four years of college--enough to buy a car. Considering this, make sure you’re being thoughtful about how you want to spend and save your money!

Moving forward with a flexible budget

For your budget to be useful, you need to follow it for more than a few months. Tracking your daily purchases only takes a few minutes. It takes even less time with a budgeting app that links to your bank and credit card accounts and automatically categorizes your purchases. Finding it hard to stick to your budget? Some of your figures may be unrealistic so review and adjust as needed. Perhaps you need to allocate more towards books and travel, and less on clothing. The best budget is one that grows and changes to meet your needs

What can you do now?

Setting up financial goals will help you plan and prioritize what’s important to you, and how you should set up a budget to align with your interests. Goals will also help you be more aware of how you spend your money day-to-day. It’s a good idea to write out these goals, and to stay mindful of them as you go through college!

If you like a pen and paper approach, you can try a simple tracking sheet like this one from Balance Pro or a more comprehensive budget worksheet like this one from the Harvard University Employees Credit Union . If you prefer a phone app, there are many to choose from and most are free. Read reviews to determine what makes the most sense for you.

Credit is a major factor in today's economy and is your reputation as a borrower. In order to have the best reputation, credit wise, you should take the time to learn about managing your credit. This is especially important when it comes time to rent an apartment, finance a car, buy a house, or even find a job. The sooner you start building your credit profile, the better off you'll be in the future.

Credit Report vs. Credit Score

A credit report is a detailed report of your credit history. It has personal information, employment history, and a list of open and closed credit accounts. You can get a free copy of your credit report once per year from each of the three credit reporting bureaus: Equifax, Experian, and Transunion. The website to check is  www.annualcreditreport.com . It’s a good idea to review your report at least once per year to ensure accuracy and check for fraud. If someone were to fraudulently open a line of credit in your name, you might never know without checking your report.

A credit score is a snapshot of your credit risk at a point in time, based off of your credit report. Credit scores such as FICO range from 300-850, with the majority of Americans scoring between 600-800. For lenders, a higher score means a lower chance of default.

Lenders often charge higher interest rates when taking on higher risk, so a low credit score means a more expensive loan. Conversely, a higher credit score means a less expensive loan. With solid credit history you can pay less for many credit products like private loans, credit cards, insurance, auto loans, and mortgages.

Do Your Research

Before applying for a credit card, compare each potential card’s annual fees, interest rates, special rewards, and credit limit. Little differences can have major impacts. Once you choose a credit card and begin using it, make your payments on time and pay off your balance each month. Failure to do so can result in large fees and do serious damage to your credit score. Try not to carry a balance on the card; instead, make occasional and sensible purchases.

Components of Your Credit Score

• Payment History (35%)  This is the largest factor and thus the best way to improve your score: make consistent, on-time payments. If you are more than 30 days late even once, that record remains on your credit report for 7 years and could result in a drop of 90 points or more in your credit score.
• Amount of Debt (30%)  How much debt you have relative to your available credit makes up the second largest factor in your score. A good rule of thumb is to keep your debt utilization ratio ( amounts owed/total credit limit ) below 30%. Pretend you have two credit cards and both have a limit of $500. To stay within 30% you would spend no more than $300 between the two cards.
• Length of Credit History (15%)  Lenders like to see long relationships with other lenders. One easy thing you can do to build credit history is open a no-annual-fee credit card, charge a few dollars each month, and pay it in full each month when the bill comes. 
• New Credit (10%)  Anytime you apply for a line of credit and a lender does what is called a "hard pull" on your credit score, your score can drop by a few points. This isn’t a big deal as new credit only makes up 10% of your score, but if you do this often enough it can substantially impact your score and ability to secure new credit. This information remains on your report for 2 years.
• Credit Mix (10%)  Lenders like to see a variety of credit accounts in good standing because it signals that you are a responsible borrower. A person who is making on-time monthly payments on a credit card, an auto loan, and a student loan is considered less risky. Your access to different types of credit may be limited as a student, and most lenders realize this.

U.S. News and World Report Student Credit Card Survey

Each year, U.S. News and World Report conducts a survey of students who own a credit card. From the results, they identify and address common credit topics such as credit scores, costs of credit, and providing tools that help guide students with credit card best practices. View the survey and guide here .

Helpful Reads

For more information on effective credit building as a student, the following articles are useful.

• CreditCards.com Presents: 10 Ways Students Can Build Good Credit
• A College Student’s Guide to Building Credit

Saving and Investing

Figuring out how to secure your financial well being is one of the most important things you can do. 

For many people, the path to financial security is with saving and investing. As a student, these topics may not yet be on your radar, but saving is a key concept for financial well-being. If you make saving a regular habit, even a small amount, you are building a foundation for financial success.

Tips on getting started with saving and investing

• Pay yourself first:  This means that for every paycheck you receive, commit to putting an amount (even a small amount) aside in a savings account. An effective way of doing this is to have a set amount of your paycheck directly deposited into a savings account, separate from what you use for everyday expenses. You will be surprised how quickly your savings can grow.
• Keep track of your saving:  People who track their savings tend to save more because it is on their mind. With online and mobile banking, there should be no excuse not to know exactly how much money you have.
• Set Goals:  Setting financial goals is crucial. As a student, you may only have a few financial goals, but this is the perfect opportunity to hone your skills. Think of this scenario: You want to pay off a student loan before graduation, how will you accomplish this? How much do you need to work? To save? The better you do now, the easier accomplishing future goals will become.

Thinking ahead

Even now there may be long range financial goals that you start saving for. Here are some tips for investing in your long term financial goals.

• Plan ahead:  As with any endeavor, advance planning is a way to figure out what you want, when you want it, and what you can do to achieve it. The sooner you start planning, the sooner you start accomplishing.
• Understand the time value of money /compound interest:  This is the principle that a dollar today is worth more than a dollar in the future, because the dollar received today can earn interest up until the time the future dollar is received. The longer the time frame for investment, the more you can increase the income potential of your investment. On the flip side, waiting to invest can make it more difficult to achieve your financial goals. Discover how much waiting to save could cost you with the SEC  compound interest calculator .
• Understand your objectives:  As a general rule, the shorter your time frame for investing, the more conservative you should be. For example if you are in your twenties and trying save for a down payment on a house, you are going to want to put your money in a vehicle that ensures the least risk of losing your principle investment. When your time frame for investing is long, you can consider less conservative options. Retirement savings are an example. Starting young allows you to save for a longer period and allows time to make up for potential loses in a less conservative environment.

Do you need to file taxes? Are you aware of the tax benefits for Education? Find out the answers to these important tax related questions.

U.S. Federal Taxes: Overview

If you are planning to work in the US, then navigating the tax code is going to be a large part of your financial well being. Gathered here are aspects of the tax code that deal with education and college related expenses. While the information here is a good start, it is only a broad overview and not a complete guide to filing taxes. For specific questions or additional information, you may wish to visit the  IRS website  or consult a tax professional. International students should consult the  Taxes & Social Security  page of the Harvard International Office website.

Do I need to file taxes?

Determining whether or not you need to file taxes depends on two things: how much money you earned and how much was taken out (aka “withheld”) for taxes.

If your earned income is over a certain limit as determined by the IRS, you may be required to file taxes regardless of how much was withheld from your paycheck.

• As an example, a typical Harvard undergraduate was required to file (2018) taxes if their income (including  taxable scholarships ) was equal to or greater than $12,000.
• The IRS strongly suggests that you file taxes, even if you are not required to do so. By filing your taxes, you may be eligible for a refund of some or all of the income withheld.

Types of tax benefits for education

The information provided here is intended only to get you started to learn about potential tax benefits related to higher education. It is important to note that there are eligibility restrictions and we strongly suggest visiting the  IRS website  directly for the most comprehensive information about tax benefits for higher education.

American Opportunity Credit

• This is a credit of up to $2,500 per eligible student based on Qualified Education Expenses paid during the tax year. The American Opportunity Credit can only be used for up to four years per eligible student.

Lifetime Learning Credit

• This is a credit of up to $2,000 per eligible student based on Qualified Education Expenses paid during the tax year. The Lifetime Learning Credit does not have a limit on the number of years it can be used per eligible student.

Tuition and Fees Deduction

• This is a deduction of up to $4,000 from your Adjusted Gross Income (AGI) based on amounts paid for Qualified Education Expenses. This deduction can be claimed for multiple students and the maximum deduction in a tax year is $4,000.

Student Loan Interest Deduction

• If you are a student making payments on an education loan that is accruing interest, you may be able to deduct some or all of the interest you paid that year from your taxes.
• Your parents may be able to deduct some or all of the interest they paid on their loans, taken on your behalf, if they still claim you as a dependent. The current limit is $2,500 per year, subject to income restrictions.

Important questions to consider

What are Qualified Education Expenses?

When filing taxes, you should know what counts as “qualified” and what doesn’t. This can be confusing because the definition of “qualified” is contextual. For example, the IRS may have a different definition of “qualified” than a 529 plan or other education savings plan provider.

What does the IRS count as Qualified Education Expenses?

• Per IRS guidelines, the expenses that you paid directly (or with a loan) for tuition, fees, and other related expenses count as qualified education expenses.
• The IRS website states that the following expenses do not qualify: room, board, insurance, medical expenses (including student health fees), transportation, and personal/living/family expenses.

What are Credits and Deductions?

Credits and deductions are two different ways to reduce your tax liability.

A  deduction  reduces the amount of income you have that is subject to tax. The actual benefit is tied to your tax bracket. In other words, if you are in the 25% tax bracket and have a Deduction of $1,000, your benefit is a $250 reduction in your taxes (25% of $1,000.)

A  credit  on the other hand reduces the amount of income tax you have to pay in a 1:1 ratio. In other words, if you have a $1,000 Credit, then your benefit is a $1,000 reduction in your taxes.

As a general rule, you should seek out credits before deductions, since the benefit is usually larger (i.e. to your advantage).

Additional Resources and Information

The information provided here is taken from the IRS website and is intended solely as a guideline. Because tax laws are constantly changing, information found here may change. For the most up to date and comprehensive information, we strongly suggest visiting the  IRS website , or consult a tax professional should you have specific questions. 

http://sfs.harvard.edu/taxes

http://www.irs.gov/Individuals/Education-Credits

IRS Publication 970 (Tax Benefits for Education)

http://www.irs.gov/Individuals/Qualified-Ed-Expenses

Throughout the year, we offer events on a wide range of financial literacy topics. Some events are in person and some are virtual, but all are geared toward helping you understand, manage, and move forward with your financial life. 

• First-Year Finance - A session delivered in the fall of your first year which provides an overview of all things Financial Aid. We also cover credit, budgeting, and the various financial literacy programs that we have available. Take advantage of this wonderful opportunity to ask questions and learn more about Harvard’s generous financial aid offerings.(This session has been cancelled for fall 2020).
• Money Management 201  – You’re getting ready to graduate and you have borrowed to help cover the cost of education. Is your financial health in order? Join us at one of our Spring semester sessions where we explain debt, loan repayment, and a host of other financial literacy topics. Regardless of whether you’re joining the work force, taking time off to travel, or prepping for grad school, these sessions are invaluable as you start your life post-Harvard.
• University Efforts  - In June 2011 the Directors of Financial Aid at each Harvard School as well as the University Financial Aid Liason’s Office decided to work on Financial Literacy as a University wide endeavor. One result of this collaboration was a university resource on financial wellness .

Related Guides

Financial aid fact sheet.

Get the facts about Harvard College's revolutionary financial aid program.

Guide to Debt Management

Loans are never required, but if you choose to take out loans, we want to help you "borrow smart". Here are some helpful tips on debt management.

Understanding Your Financial Aid Award

Let's review some of our financial aid terminology to help you fully understand your financial aid award letter.

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Financial Literacy

Welcome to financial literacy, unit 1: welcome to financial literacy, unit 2: budgeting and saving, unit 3: consumer credit, unit 4: financial goals, unit 5: loans and debt, unit 6: insurance, unit 7: investments and retirement, unit 8: scams & fraud, unit 9: careers and education, unit 10: taxes and tax forms, unit 11: teacher resources, unit 12: additional resources.

What Is Financial Literacy and Why Should You Care?

In celebration of Financial Literacy Month, we’re featuring #FinLit-focused stories and tips to inspire readers.

With April being Financial Literacy Month, you may start to see a spattering of references to financial education all over the internet.

What is the definition of financial literacy? It means understanding how to earn, spend, save, manage and invest money. It also means understanding how the economy works.

If you’re like me, you get really excited about financial literacy and the possibilities it can create for all of us.

With that being said, I fully acknowledge that many will not share my excitement in this area. Most articles on personal finance or financial literacy will go right into how to set a budget, the benefits of saving, and the impact of interest rates. At that point, the majority of individuals lose interest (pun intended) and move on to something else.

In an attempt to keep your attention, let’s spend some time looking at the “ why ” of financial literacy, not just the “ how .”

Financial literacy is about improving your life

While this subject may not be as exciting to you as it is to me, hopefully we can at least agree that money can have a significant impact on our everyday lives. My personal belief is that money doesn’t necessarily buy happiness; it isn’t just about buying that brand new car or newest gadget. However, money can allow a person to have more flexibility, reduce stress and improve relationships.

Living beyond our means can contribute to bankruptcy, divorce and massive stress. Additionally, the burden of student loan debt can keep first-time homebuyers out of the market, thus putting a drag on the economy .

Meanwhile, living with minimal debt and a savings cushion can provide you with the peace of mind and security of being financially free. Therefore, financial literacy isn’t just about getting better with money to buy more stuff—it’s about getting better with money to improve many different aspects of life.

• Financial literacy to a child may mean teaching the basics of spending, saving and giving.
• To some adults, financial literacy may mean helping someone open up a bank account or preventing someone from engaging with a predatory lender.
• For others, financial literacy could be learning how to budget or track spending—allowing you to develop a savings cushion, invest in your company’s pre-tax retirement account, or save up for a new vehicle.

As you can see, financial literacy is important at all ages. And beginning to teach these concepts to children can instill lasting habits: A study by Cambridge University researchers (PDF) showed that behaviors around money form in children as early as age 7. If you happen to be older than 7 (shout-out to all the loyal readers who are not), it’s never too late to learn.

Three core principles for your personal finances

Let’s face it, there’s a lot of conflicting information out there about personal finance. But the better educated you are about finances, the better decisions you’ll make. The core of personal finance is simple: Save more Spend less than you earn and then invest the difference. Editor's note: This language was updated for accuracy.

The doing is the hard part.

It can be tough to go out and make a higher income when you’re barely able to scrape by on your current paycheck. Even with a higher income, slowly paying down debt requires a lot of discipline when spending beyond our means is a constant temptation. Finally, investing can be confusing with so many options in the marketplace. I know this may be challenging depending on income level, amount of debt, or other life situations that come up. We are all on a different path on our financial journeys, which is why it’s called personal finance.

Not sure where to get started? Here are three core financial literacy principles that may help improve anyone’s personal financial situation.

1. Budget or track your spending

I know what you’re thinking: “See, I knew you would talk about budgeting!” Yes, there is a reason why almost every discussion on financial literacy focuses on budgeting or tracking your spending. If you don’t know where your money is going, then how can you make improvements to your financial situation? Budgeting is where you plan out your expenditures ahead of time.

For those who may not want to budget, simply tracking your spending after the money is spent can give you a snapshot of where your money is going. It’s amazing how those random $10 or $20 purchases can add up when left unchecked.

Some of you may already be on a tight budget; others may be able to cut out unnecessary expenses and use that money to pay down debt, build savings or invest. Below are a few resources from the Federal Reserve if you’re looking to get started.

• Budgeting 101 Online Course for Consumers
• Piggy Bank Primer: Saving and Budgeting Lesson for Grades 2-4
• Katrina’s Classroom

2. Establish an emergency fund

Now that you are budgeting or tracking your spending, hopefully you can find a little cushion to save up an emergency fund of $1,000 to $2,000. The Federal Reserve Board issued a report on the economic well-being of U.S. households indicating that 40 percent of Americans could not cover a $400 emergency expense without selling or borrowing something.

Establishing an emergency fund is a critical step to help with the unexpected costs that always seem to come up. A flat tire, leaking toilet or unexpected medical expense can be right around the corner. An emergency fund can significantly reduce the stress of these unexpected situations. Ideally, you’ll want to work your way up to having three to six months of emergency savings to protect yourself or your family in case of a job loss, significant medical event or other large and unexpected expenditure.

3. Develop an understanding of interest rates

Last year I wrote a post on the power of compound interest . Compound interest is known as the “eighth wonder of the world” because investing even a few hundred dollars per month in your 20s can leave you a millionaire by the time you retire. On the other hand, high interest loans could cripple a person for years. While there is a time and place for debt, not having a plan to get out of high-interest debt can lead to financial turmoil.

I remember a point in my life where the basics of interest rates were very confusing. The difference of a 3 percent interest rate on a money market account versus a 3 percent interest rate on a car loan wasn’t clear. Interest rate percentages are used interchangeably and, at least to me, it wasn’t obvious the positive or negative effect that interest rates had on an investment or debt.

According to a working paper from the National Bureau of Economic Research, less than one-third of young adults possess basic knowledge of interest rates, inflation and risk diversification . Financial literacy can help you understand these topics, allowing you to make better financial decisions.

First individuals, then families, then the economy

Personal finance is as much behavioral as it is about the numbers. Having a strong understanding of financial literacy will allow you to make better financial decisions that can hopefully improve your day-to-day life. At the macro level, financial literacy can result in stronger family balance sheets, which lead to a stronger overall economy (PDF).

While the concepts of personal finance are simple, research shows there is a long way to go in spreading financial literacy. Take time this April to educate yourself or a friend on personal finance-related topics. The St. Louis Fed’s economic education team has a variety of resources that can assist you or someone else on the journey to becoming more financially literate.

Notes and References

1 Editor's note: This language was updated for accuracy.

Mark Catanzaro is a senior manager in the St. Louis Fed’s Supervision and Regulation division. His academic background includes economics and finance.

Related Topics

This blog explains everyday economics, consumer topics and the Fed. It also spotlights the people and programs that make the St. Louis Fed central to America’s economy. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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Financial Literacy: The Importance in the Modern World Essay

In previous years, the issue of investing has become popular among beginning investors who follow the advice of bloggers and put their money in unsafe securities or individuals who hope for the burgeoning future of NFTs and cryptocurrency. However, instead of blindly following the advice of impostor financial advisors or buying securities without having knowledge about them, the public should focus on overall financial literacy. From a very young age, every person should learn how to use their money wisely and how it can help not only save but multiply the savings and have enough for a carefree retirement.

The first reason why acquiring the skills of financial literacy is essential is its protection against inflation. At the given moment, the rate of inflation is 7.7%, which means that if money is simply in the deposit account, at the end of the year, its value will decrease by this number (U.S. Inflation Calculator). This is why if people desire to make a big purchase after having enough money for it, eventually, they will be trapped in a vicious circle of constant saving since the prices will be rising together with inflation.

Another point that representatives of younger generations must understand is that financial literacy enables skills of wise saving for retirement. According to The New York Times, schools do not have obligatory courses on 401(k)s and Individual Retirement Accounts, despite the fact that the majority of employees are now responsible for their own retirement plans (Lieber and John). As a result, many children, adolescents, and adults are unaware of the fact that if they start investing $5,000 annually at the age of twenty-two, by the age of 67, they will accumulate approximately $1 million dollars (Lieber and John). However, if they start at thirty-two and invest the same amount of money, they will only manage to generate $500,000 (Lieber and John). Thus, this is the compound interest effect that many people with a lack of financial literacy fail to understand.

Moreover, it is vital to see the benefits of saving in order to have a safety cushion. According to Forbes, two out of three Americans are spending their savings because they are concerned about inflation (Campisi). As a result, these individuals who refuse to save will not have an emergency fund, and if there is a crisis situation, they will have to seek loans. In comparison, those who have basic financial literacy skills know that panicking is the worst enemy, and they are prepared for such scenarios, which is why financial literacy is crucial.

Still, it is important to review other valid opinions regarding investing and saving. While it can be a helpful skill, sometimes financial literacy, along with consistent investing, can be disrupted by certain risks. For instance, the financial crisis of 2008 led to a loss of $2 trillion dollars (Merle). However, it is noteworthy that the results of such outcomes were external factors rather than personal actions.

Hence, it is necessary to learn the fundamentals of financial literacy from a young age in order to have a carefree retirement, emergency funds, and protection against inflation. I believe that it is unfortunate that children do not acquire this knowledge at school and, therefore, it should be either personal or parental responsibility to either learn or teach such skills. With such an approach, both children and adults will be more careful with money and be prepared for any hardship or crisis, being able to grow into financially independent people.

Works Cited

Campisi, Natalie. 2 Out Of 3 Americans Say They’re Blowing Through Savings to Cope With Inflation—Do This Instead . Forbes, 2022. Web.

Lieber, Ron and Todd S. John. How to Win at Retirement Savings . The New York Times, n.d. Web.

Merle, Renae. A Guide to the Financial Crisis — 10 Years Later . The Washington Post. Web.

U.S. Inflation Calculator. Current US Inflation Rates: 2000-2022 . U.S. Inflation Calculator, n.d. Web.

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1. IvyPanda . "Financial Literacy: The Importance in the Modern World." December 27, 2023. https://ivypanda.com/essays/financial-literacy-the-importance-in-the-modern-world/.

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IvyPanda . "Financial Literacy: The Importance in the Modern World." December 27, 2023. https://ivypanda.com/essays/financial-literacy-the-importance-in-the-modern-world/.

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What is Financial Literacy?

On This Page

Financial Health

Introduction to Budgeting

Tracking Your Spending

Why track spending? A monthly budget is just a plan – your actual spending behavior may be completely different. So if you don’t track your spending, you won’t necessarily know where you got off track or how to fix it. We all make important financial decisions every day. Tracking spending helps you find spending habits that can have long-term consequences that you may not expect.

Over a month, there are countless ways to spend more than you planned, including spending on things that weren’t even included in your budget. Small expenses can add up in ways you wouldn’t expect, and tracking your spending is a great step in making the most of your spending plan.

There’s no doubt that tracking your spending does take work, and it’s easy to feel like you just don’t have the time. But tracking spending is one of the best ways to stay on track and to avoid lasting credit card debt. Think of it this way – avoiding credit card debt by sticking to a spending plan means you automatically get a 15, 20, or even 30 percent discount on whatever you would have bought on a credit card and paid off over a year. That’s a great deal for anyone.

If you've created a budget using this website's Monthly Budget Calculator, your figures have been saved and are available for review at any time. You’ve already done some serious financial planning. Now it just needs a reality check in comparison with your actual spending.

Tracking Your Spending The best way to get an accurate picture of your spending is to track it for at least one month.

Some spending is easy to track - rent or mortgage payments, car insurance, and utility bills are typically paid by check or bank draft, so there's always a record available. Other other hand, groceries, dinners out, coffee or vending machine snacks can be a lot harder to track, especially if you use cash. If you don't pay for absolutely everything with a credit or debit card, it's often easiest to keep each and every receipt. Then, at the end of the day or week, total all of your receipts and categorize each expense.

This website also offers a Budget Tracking tool that's a simple, effective way to track your spending. Once you have totals for each category in your budget, you can enter the figures in our Budget Tracking Tool for a comparison with your planned monthly budget figures. We'll also give you feedback on cash flow, luxury spending, and other factors as well. You can enter expenses at any time during the month or save it all for the end. Your results are saved on a monthly basis, making it easy to track your progress over time.

Other options for budget tracking include:

• Paper and pen. Using your a checkbook register, debit or credit card transactions, and receipts, write down every expense.
• Spreadsheet. Programs like Microsoft Excel can be simple and easy ways to track (and total) expenses. Many online banking services allow you to download your expenses into an Excel, tab-delimited, or comma-delimited spreadsheet - a great way to automate the entry of a good portion of your spending. Then you'd just need to enter cash expenses.
• Online tools. Services like Mint.com allow you to aggregate expenses across accounts into one place. To do so, you'll need to hand over your user names, passwords, and security challenge questions - something many people hesitate to do.

Dealing with Setbacks One word of caution - while you will eventually want your income to exceed the amount of money you spend, that's not always possible for full-time college students. In fact, trying too hard to lower college debt is not necessarily a great idea, especially if it means working more than 20 hours per week at a part-time job. Studies have shown that working more than 20 hours per week is likely to cause academic performance to suffer. Full-time students who work around nine hours per week tend to have the best academic performance, even better than students who do not work at all. Having some financial stress is normal for college students, but if finances interfere with your school work, or if you have to put necessary expenses on credit cards, you may want to consider speaking with someone in your school's aid office. Other financial options may be available to help you succeed both financially and academically. If you're a part-time student with a full-time job, one strategy for dealing with financial setbacks is to set up an emergency fund – a savings account with cash set aside to cover the unexpected. Most experts suggest having three months (or more) of your salary in your emergency fund. If you don't have savings, most banks offer the ability to automatically divert a portion of your income into a savings account. Starting with as little as 5% of your paycheck into the fund is a great place to start.

A budget is not something most people can just make once and be done – there’s a process of trial and error until you find a budget that meets your spending goals. But remember, if you overspend one month, just make up for it by spending less over the following days or weeks – don’t give up. Sooner or later, you’ll find the perfect budget for your unique goals, challenges, and opportunities.

Choosing a Bank or Credit Union

Checking and Savings Accounts

Credit vs. Debit Cards

Credit and debit cards look alike, and they are used in virtually identical ways. But there are some significant differences that make them both important tools to have in your financial toolbox.

By definition, spending with a credit card means you are spending borrowed money. Many people use credit cards and pay off their balances each month in full, incurring no fees or interest. Others carry balances from month to month, meaning they're paying interest on money they've already spent, and could be charged a fee for missing a payment. These "revolvers," as they are called in the credit card industry, are a gold mine for credit card companies, earning them billions of dollars per year in interest and fees.

On the other hand, spending with a debit card means you're spending your money - it comes directly from your checking account. When the money is gone, it's gone. When used properly, spending with debit cards can be part of a solid strategy for spending within a budget and staying out of unplanned debt. But be careful of something called "courtesy overdraft protection."

Courtesy overdraft protection is a fee-based service most financial institutions offer to help consumers avoid declined transactions. Here's how it works - if you overdraw your account, the charge will not be declined. Rather, the bank will loan you enough money to cover the transaction for a fee - typically around $35. No matter how small the overdraft, the same fee applies. If you don't have a credit card, courtesy overdraft protection might be useful in an emergency, but it is an extremely expensive loan in the vast majority of cases. You may also be charged multiple fees before you realize your account is overdrawn.

When you open your deposit account, the bank may ask you if you want courtesy overdraft protection for ATM and certain debit card purchases you make that overdraw your account. If you agree, the bank may pay those transactions and charge you overdraft fees. If you do not agree, the bank will decline those transactions and not charge you fees. You can change your mind about whether you want the service at any time. Some banks may offer you these options on all transactions that overdraw your account, not just ATM and certain debit card purchases.

So unless you don't have enough money in your checking account to make a purchase, why would you ever need to use a credit card? Fraud protection is one important reason, as are protections from damaged or undelivered merchandise you purchase. Thanks to the Fair Credit Billing Act, you have little or no liability for unauthorized charges, damaged goods, or for merchandise that was never delivered. Credit card issuers also provide dispute settlement when you ordered something that wasn't what was promised or if a merchant refuses to refund your money. These protections are especially important for mail order transactions or in cases of identity theft.

If your debit card is stolen, your liability coverage depends greatly on when you report unauthorized activity to your financial institution. In the worst case scenario, meaning you don't discover fraudulent charges for more than 60 days after the bank sent you a statement showing the unauthorized activity, you could be responsible for all charges made after the 60 days. Even if you report fraudulent charges before the 60-day limit, you could be responsible for up to $500 if you know your card is being used and you do not promptly tell the bank. Be sure to get full details from your financial institution, and monitor your account activity closely by reviewing your statements or using online banking.

A good strategy is to use a debit card for everyday purchases and to use a credit card for internet and mail order purchases - just make sure to pay off your credit card balance to avoid interest charges.

Credit Reports and Scores

Whether buying a pack of gum at a quickie mart, financing a car, or paying for a home or a college education, most people use some form of credit daily. Credit offers a way for us to get the things we want without having to carry cash, and it allows us to buy things we might not be able to afford all at once by paying over time.

What is credit? At the most basic level, credit is a promise that you will repay any loan according to the terms of the agreement between you and a lender. 

If a friend has ever asked if they could borrow your money, you may have asked yourself whether they could pay you back. Lenders ask themselves similar questions and have devised a system to rate the likelihood that people will repay their debts. This system consists of credit reports and credit scores.

Credit Reports 

A credit report is a financial report card that contains detailed personal and financial information dating back seven years or more. You have three credit reports assembled by the three major credit reporting bureaus - Experian, Equifax, and TransUnion. Credit report information includes:

• Social Security number and date of birth.
• Current and previous addresses.
• Current and previous employers.
• Recent credit inquiries.
• Tax or legal issues, including bankruptcies, liens, and foreclosures.
• Active loans and lines of credit, including the percentage of available credit used.
• Loan repayment history.
• Details of accounts that have been referred to a collection agency.

A credit report filled with missed payments and other harmful items will make it more challenging to get loans, and loans will be more expensive since the interest rate will be higher to offset the increased risk of default. And the penalties don't stop there - banks, insurance companies, credit card companies, utilities, landlords, and even employers can access and use your credit report to make decisions about you. About half of all employers use credit reports as a factor in making hiring decisions.

Given the pervasive use of credit reports, it's easy to understand the importance of maintaining a favorable report.

Reviewing your credit reports at least once yearly is a good idea. By doing so, you can spot errors and even identity theft. Call the credit bureau immediately if you find errors on your credit report. Under the Fair Credit Reporting Act, the bureaus have 30 days to investigate and correct any erroneous information.

Credit reporting agencies are required to offer a free report once per year through the government-mandated AnnualCreditReport.com website. The agencies may also try to sell you services as you review your report, but these extras are not required.

Many websites offer so-called "free" credit reports and scores, but most of those sites try to sign you up for a credit monitoring service. These services are unnecessary for most and often cost $150 or more annually.

Credit Scores

If your credit report is like a report card, your credit score is your overall credit grade. A credit score is a three-digit number that summarizes everything about your credit report into one number. Credit scores typically range between 300 and 850, with around 700 being average. The higher the score, the better.

The most commonly known score was created by the Fair Isaac Corporation, which is why credit scores are sometimes called FICO scores. While there are various credit score providers, scores are determined based on factors including:

• Payment history - Whether you pay your bills on time. Late payments can lower your score.
• Credit utilization - The ratio of credit you're using compared to your limit. 
• Length of credit history - How long you've had credit. The longer, the better.
• New credit - Opening new accounts can temporarily lower your average account age and score.
• Credit mix - Having different types of credit (credit cards, loans, mortgages, etc) can improve your score.

The interest rate you receive on most loans is based, to a large degree, on your credit score. Building and maintaining a solid credit history is the only way to earn a high credit score. Review our Maintaining and Improving Your Credit Score topic for more details.

While access to your credit reports is free via the AnnualCreditReport.com website, there's no government mandate to provide free credit scores. Here's how you can check your score:

• Credit Reporting Agencies – You can purchase a score directly from Equifax, Experian, and TransUnion. 
• Credit Card Providers - Many issuers offer free credit scores as a part of their services. These are often available in the account management section of your online account. 
• Paid Services - There are many services that, for a monthly fee, provide you with access to your credit score and credit monitoring services. Be cautious and research thoroughly before paying for any services to avoid scams.
• Free Online Platforms - Websites and apps like Credit Karma, Credit Sesame, and WalletHub offer free access to your credit score. These platforms provide VantageScore, which is slightly different from the FICO score used by many lenders but can still give you a good idea of your credit standing.
• Directly from FICO - The Fair Isaac Corporation (FICO) is behind the most commonly used credit score model. You can purchase your FICO score from their website.
• Credit Unions and Banks - Some banks and credit unions offer their members or customers free credit scores.

When creating a new account to access your credit score, you must provide sensitive personal information. Always use strong, unique passwords and take advantage of the platform's additional security features. And be wary of services that claim to offer "free" scores but require credit card information. Some might enroll you in a trial service that could incur charges if not canceled.

Remember, while your credit score is a crucial part of your financial health, reviewing the full report is essential to check for errors or signs of fraud. Regularly monitoring both ensures you're informed and can take action when necessary.

Managing Accounts

Actively managing your accounts ensures that you always know your account balances, even when the true balance may differ from the amount printed on your last statement or ATM receipt.

How could your bank not know the true balance? Think about mailing a check to pay a bill. For all practical purposes, that money has been spent - it’s just a matter of time before the postal service delivers the check and it’s deposited. But your financial institution doesn’t know that a check has been written until it’s been presented to the bank for payment, so your account balance isn’t telling the whole story at all times. The same is true with any debit card transactions made without entering your PIN - it will generally take a day or two for the money to be withdrawn from your account and reflected on your statement.

By tracking your deposits, transfers, and withdrawals, you can make sure that you don’t spend more money than you have. Otherwise, you could be charged overdraft fees, your transactions could be declined, or you could even be charged late payment or bounced check fees from merchants. It is ultimately your responsibility to monitor your account activity.

Most banks offer the option of either electronic or paper statements. No matter which type of statement you prefer, remember to save your statements for a minimum of three years and up to seven years. Bank statements are often needed for tax returns, financial aid verification and in the event of a tax audit.

Online Financial Services

Most banks and credit unions offer online banking tools that make managing your accounts easier than ever. While online account management is not the only way to effectively manage your accounts, it does have many advantages.

• 24 Hour Account Access - Rather than waiting for a statement, calling an automated information line, or visiting an ATM, online account management gives you near real-time access to your balance and transactions.
• Electronic Bill Payment - Paying bills online not only saves stamps, it helps to reduce the chances that you will miss a payment as the result of a move or trip away from home.
• Automated Alerts - You can often set up alerts for common situations. For example, you may be able to set up an alert when your balance reaches a certain threshold or as a reminder to pay a bill.
• Exporting Account Information - You can easily export your transactions to a money management program such as Quicken or even to a simple spreadsheet for easy tracking over time.
• Staying Organized - Taking full advantage of the online services offered by your financial institution is usually the easiest way to stay organized, reducing the risk of missed payments that could hard your credit report and credit score.

If you bank online exclusively, meaning you never receive paper statements, make sure you understand how long your statements will be available online. If they’re available for just one year, for example, you will need to download them periodically and store them yourself. Otherwise, you will likely have to pay a retrieval fee for older statements if you need them later.

How to Manage Your Account in Three Steps

Ideally, you’ll write down every purchase and save every receipt, always knowing your true account balance – especially if your account balance is often near zero. Otherwise, you’ll want to review your transactions at least once per month using your statement or an online banking portal.

When reviewing your account information, you should:

• Make sure all charges are correct and were initiated by you. Unrecognized charges could be the result of identity theft or a compromised account and should be reported to your bank, and possibly law enforcement, immediately.
• Confirm that any deposits were credited to your account. If a deposit doesn’t appear, take your deposit receipt to your bank or credit union for assistance.
• Verify that all checks you have written have been deposited. If a check hasn’t cleared after a couple of weeks, you’ll want to verify that it was received.

Performing these simple tasks regularly helps to ensure that you are in complete control of your account.

Students and Credit Cards

Maintaining and Improving Your Credit Score

Building and maintaining a solid credit score opens the door to the best interest rates when you need to borrow money.

How much of a difference can a credit score make? The difference can be dramatic, especially for major purchases like a home or car. For example, buying a home with fair (versus excellent) credit may result in a higher interest rate – meaning higher monthly payments and overall cost. Even one extra point of interest on a typical mortgage could cost $150,000 over the life of a 30-year loan. 

To build and maintain your score, consider these tips:

Pay Bills on Time

Consistent, timely payments are the most important factor when calculating your credit score. And loan and credit card payments are just part of the picture – your payment history for telephone, cable, gas, electric, and other bills can also impact your score.

If you're confident you'll have the money in your checking account when your bills are due, one strategy to avoid late payments is to pay them automatically via bank draft. This approach is convenient and great for bills that are similar from month to month (like student loans, mortgages, utility bills, and car payments). 

For credit card bills, which could vary significantly based on your spending, another option is to set up automatic minimum payments. Paying the minimum avoids the possibility of a late fee, even if you don't have enough money to pay the entire bill when it's due. Just remember to pay the remainder of the balance manually, perhaps with the help of a recurring reminder in your calendar. 

Avoid High Credit Utilization

The credit utilization ratio is the percentage of a credit line that's in use. For example, if your credit card has a $10,000 limit and the balance is $5,000, your credit utilization ratio is 50%. 

Maintaining a low credit utilization ratio is key for a good credit score. Experts recommend keeping your credit utilization below 30% across all your credit cards and lines of credit. If your utilization ratio is high, pay down balances as soon as possible.

On the other hand, if you consistently pay your credit card bill in full and are confident that you're managing credit responsibly, requesting a credit limit increase can help lower your credit utilization ratio, potentially improving your credit score.

Limit Hard Credit Inquiries

A hard credit inquiry occurs when an organization reviews your credit report as part of its decision-making process. These inquiries can slightly reduce your credit score for a short period, typically a few points, and can remain on your credit report for two years. 

Hard credit inquiries can be triggered by:

• Applying for a Credit Card
• Mortgage Applications
• Auto Loan Applications
• Personal Loan Applications
• Student Loan Applications
• Renting a Home or Apartment
• Setting up Utilities
• Applying for a Business Loan
• New Cell Phone Contracts
• Applying for Home Equity Loans and Lines of Credit

It's essential to be aware of actions that can lead to hard inquiries, especially if you plan to make a significant financial move soon, like buying a home. 

Multiple hard inquiries in a short time can lower your score, so only apply for credit when you genuinely need it. But in certain situations, like looking for a new car, mortgage, or utility provider, getting quotes from multiple lenders is smart. The good news is that most credit scoring models count all of those inquiries as just one inquiry for a set period of time - usually 14 to 45 days. So don't hesitate to shop around within a defined window when seeking a major new financial commitment.

Think Twice About Cancelling Credit Cards

A popular way to simplify your financial life is to limit yourself to one credit card. After all, multiple cards mean more bills to manage (so it could be easier to miss a payment), and numerous cards may make it easier to use more credit than planned.  

When reducing the number of credit cards you actively use, it's tempting to officially cancel the unused accounts. But doing so could potentially lower your credit score. That's because an important component of your credit score is tied to the length of your credit. In many cases, the best way to "cancel" a card is to pay off the outstanding balance and use it only for emergencies.

Monitor Your Credit Report

Knowing what's on your credit report is vital for spotting inaccurate information and unauthorized use of your identity to obtain credit. You can get free access to your Experian, Equifax, and TransUnion reports once per year at AnnualCreditReport.com. 

Suppose you've been denied credit based on information in your credit report. In that case, the lender is required under the Fair Credit Reporting Act to provide you with the name of the credit reporting agency and how to get a free report.

If you find inaccurate information on your credit report or suspect identity theft, contact the credit bureau right away.

Can't Pay? Be Proactive

Financial hardships can happen to anyone. Contact the lender immediately if you have an emergency and can't pay a bill. There are no guarantees, but many lenders and utility companies are willing to work with borrowers during tough times, especially if you reach out proactively.

Before you call, have a clear summary of why you can't pay and what you'd like the creditor to do to help. For example, if you can't afford a $100 minimum payment, perhaps you could afford a $40 minimum payment.

If you're experiencing an ongoing financial hardship, seeking financial counseling from a reputable nonprofit organization can help you to avoid lasting damage to your credit.

Identity Theft

You've probably heard the term "identity theft" or "ID theft" in the media. It's a serious problem that costs victims in the United States billions of dollars per year.

Identity theft occurs when someone uses your personal information without your authorization to get credit cards, loans, cell phones and just about anything that requires detailed personal financial information. This can potentially leave you responsible for someone else's spending spree. It can take months or even years to repair the damage done by identity thieves, during which time you could be denied loans or even jobs as the result of their actions.

Identity theft starts with the misuse of your personal information, such as your name, Social Security number, credit card numbers, or other financial account information. For identity thieves, this information is as good as gold, allowing them to either make charges to your accounts or to open new bank or credit accounts.

Skilled identity thieves may use a variety of methods to get your information, including:

• Dumpster Diving - They rummage through trash looking for bills or other paper with your personal information on it.
• Skimming - They steal credit/debit card numbers by using a special storage device when processing your card.
• Phishing - They pretend to be legitimate financial institutions or companies and send spam or pop-up messages to get you to use a computer to reveal your personal information.
• Changing Your Address - They divert your billing statements to another location by completing a change of address form.
• Old-Fashioned Stealing - They steal wallets or purses, mail, pre-approved credit offers, or tax information. They steal personnel records or bribe employees who have access.
• Pretexting - They use false pretenses to obtain your personal information from financial institutions, telephone companies, and other sources.

Types of Identity Theft One type of identity theft involves the use of your existing credit card, checking, or debit card accounts to make unauthorized purchases. Credit card fraud typically occurs when a physical card is either lost or stolen. If you don’t realize the card is missing, it may be impossible to know there’s a problem until you review your credit card statement or a charge has been declined. Another type of credit card fraud involves stealing your account number through a device connected to credit card terminals, enabling the thief to make a duplicate of your card. Luckily, credit card holders are rarely responsible for unauthorized charges on credit card accounts when reported within 60 days of the date your credit card company transmitted your account statement reflecting the fraudulent transaction(s).

Debit card fraud can occur when a thief obtains your debit card and uses it to drain your account or make a purchase with a merchant. Generally, if you notify your bank within two business days of learning of the loss or theft of your card, you may be liable for up to $50 of the stolen money. If you notify your bank between two business days of learning of the loss or theft of your card and 60 days of the date your bank transmitted your account statement reflecting the fraudulent transaction, you could be liable for up to $500. You must report unauthorized transfers within 60 days of the date your bank transfers within 60 days of the date your bank transmitted your statement reflecting the fraudulent transaction(s) to avoid liability for subsequent transactions. However, time and dollar amount limits may vary depending on the specifics of the incident and the state law where you live.

Check fraud is another form of identity theft. A thief may steal your checks, forge your name and drain your account. Or a thief to whom you wrote a check, may alter it to take out more money than you intended to pay. If you report check fraud within 30 days of the date of your bank transmitted your checking account statement listing the fraudulent transaction(s), you are generally not liable for any portion of the money stolen. Nonetheless, depending on the circumstances, your bank can investigate to determine if you are entitled to a reimbursement. It is important to review your bank statements and promptly notify your bank of any discrepancies.

Each form of identity theft we described involves stealing money from an existing account. Another form of identity theft involves a thief using your identity to opening new accounts. This type of identity theft can take longer to discover and may be much more difficult to fix.

Signs of Financial Trouble

How can you tell if you are in serious financial trouble? Here are some clues:

• Your expenses (food, housing, debt payments) are more than your income. As the result, each month leaves you further in debt.
• You can afford to make only the minimum payments or have to skip payments on your debt because of lack of cash.
• Your credit card interest rates have been increased because of missed payments, making it difficult to pay even the minimum amount due.
• You are getting calls from collection agencies.
• You are using credit cards to pay for items that should be accounted for in your household budget (gas, food, payments to other bills, etc.).
• You are forced to open additional lines of credit to make ends meet because your existing lines of credit are maxed out.

Many people experience a period of financial stress. Whether you have short-term difficulties or have a problem you've been dealing with for years, there are steps you can take to fix your situation - from creating a personal debt reduction plan to seeking the help of a credit counseling agency. We also offer detailed information on creating a debt reduction plan and choosing a credit counseling agency in the Library.

Another question to consider is whether you may have a spending problem. Compulsive spending is a condition that may require more than "do it yourself" help. You may find our compulsive spending assessment helpful in identifying potentially destructive spending behaviors. Adapted from a Debtors Anonymous checklist, the assessment offers objective feedback on over a dozen key feelings and behaviors that could be a sign of a serious problem.

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• Personal Finance
• Financial Literacy

The Ultimate Guide to Financial Literacy for Adults

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What Is Financial Literacy?

Personal finance basics.

• Bank Accounts
• Credit Cards
• How to Start Investing
• Frequently Asked Questions (FAQs)

The Bottom Line

Caleb has been the Editor-in-Chief of Investopedia since 2016. He is an award-winning media executive with more than 20 years of experience in business news, digital publishing, and documentaries. Caleb is the on the Board of Governors and Executive Committee of SABEW (Society for Advancing Business Editing & Writing), and his awards include a Peabody, EPPY, SABEW Best in Business, and two Emmy nominations.

We know that the earlier you learn the basics of how money works, the more confident and successful you’ll be with your finances later in life. It’s never too late to start learning, but it pays to have a head start. The first steps into the world of money start with education.

Banking, budgeting, saving, credit, debt, and investing are the pillars that support most of the financial decisions that we’ll make in our lives. At Investopedia, we have more than 30,000 articles, terms, Frequently Asked Questions (FAQs), and videos that explore these topics. We’ve spent more than 20 years building and improving our resources to help you make smart financial and investing decisions.

This guide is a great place to start, and today is a great day to do it. Let’s begin with financial literacy —what it is and how it can improve your life.

Key Takeaways

• Financial literacy is the ability to understand and make use of a variety of financial skills.
• Those with higher levels of financial literacy are more likely to spend less income, create an emergency fund, and open a retirement account than those with lower levels.
• Some of the basics of financial literacy and its practical application in everyday life include banking, budgeting, handling debt and credit, and investing.

Financial literacy is the ability to understand and make use of a variety of financial skills, including personal financial management, budgeting, and investing. It also means comprehending certain financial principles and concepts, such as the time value of money , compound interest , managing debt, and financial planning.

Achieving financial literacy can help individuals to avoid making poor financial decisions. It can help them become self-sufficient and achieve financial stability. Key steps to attaining financial literacy include learning how to create a budget, track spending, pay off debt, and plan for retirement.

Educating yourself on these topics also involves learning how money works, setting and achieving financial goals, becoming aware of unethical/discriminatory financial practices, and managing financial challenges that life throws your way.

The Importance of Financial Literacy

In its National Financial Capability Study the Financial Industry Regulatory Authority (FINRA) found that Americans’ with higher levels of financial literacy were more likely to make ends meet, spend less of their income, create a three-month emergency fund, and open a retirement account than those with lower financial literacy.

Making informed financial decisions is more important than ever. Take retirement planning. Many workers once relied on pension plans to fund their retirement lives, with the financial burden and decision-making for pension funds borne by the companies or governments that sponsored them.

Today, few workers get pensions; instead some are offered the option of participating in a 401(k) plan . This involves decisions that employees themselves have to make about contribution levels and investment choices. Those without employer options need to actively seek out and open individual retirement accounts (IRAs) and other tax-advantaged retirement accounts .

Add to this people’s increasing life spans (leading to longer retirements), Social Security benefits that barely support basic survival, complicated health and other insurance options, more complex savings and investment instruments to select from—and a plethora of choices from banks, credit unions, brokerage firms, credit card companies, and more.

It’s clear that financial literacy is a must for making thoughtful and informed decisions, avoiding unnecessary levels of debt, helping family members through these complex decisions, and having adequate income in retirement.

Personal finance is where financial literacy translates into individual financial decision-making. How do you manage your money? Which savings and investment vehicles are you using? Personal finance is about making and meeting your financial goals, whether you want to own a home, help other members of your family, save for your children’s college education, support causes that you care about, plan for retirement, or anything else.

Among other topics, it encompasses banking, budgeting, handling debt and credit, and investing. Let’s take a look at these basics to get you started.

Introduction to Bank Accounts

A bank account is typically the first financial account that you’ll open. Bank accounts can hold and build the money you'll need for major purchases and life events. Here’s some background on bank accounts and why they are step one in creating a stable financial future.

Why Do I Need a Bank Account?

Though the majority of Americans do have bank accounts, 6% of households in the United States still don’t have one. Why is it so important to open a bank account? Because it’s safer than holding cash. Assets held in a bank are harder to steal, and in the U.S., they’re generally insured by the Federal Deposit Insurance Corporation (FDIC) . That means you should always have access to your cash, even if every customer decided to withdraw their money at the same time.

Many financial transactions require you to have a bank account to:

• Use a debit or credit card
• Use payment apps like Venmo or PayPal
• Write a check
• Buy or rent a home
• Receive your paycheck from your employer
• Earn interest on your money

Online vs. Brick-and-Mortar Banks

When you think of a bank, you probably picture a building. This is called a brick-and-mortar bank. Many brick-and-mortar banks also allow you to open accounts and manage your money online.

Some banks are only online and have no physical buildings. These banks typically offer the same services as brick-and-mortar banks, aside from the ability to visit them in person.

Which Type of Bank Can I Use?

Retail banks : This is the most common type of bank at which people have accounts. Retail banks are for-profit companies that offer checking and savings accounts, loans, credit cards, and insurance. Retail banks can have physical, in-person buildings that you can visit or they can be online only. Most offer both options. Banks’ online technology tends to be advanced, and they often have more locations and ATMs nationwide than credit unions do.

Credit unions : Credit unions provide savings and checking accounts, issue loans, and offer other financial products, just like banks do. However, they are not-for-profit organizations owned by their members. Credit unions tend to have lower fees and better interest rates on savings accounts and loans. Credit unions are sometimes known for providing more personalized customer service, though they usually have far fewer branches and ATMs.

Assets held in a credit union are insured by the National Credit Union Administration (NCUA) , which is equivalent to the FDIC for banks.

What Types of Bank Accounts Can I Open?

There are three main types of bank accounts that the average person may want to open:

1. Savings account : A savings account is an interest-bearing deposit account held at a bank or other financial institution. Savings accounts typically pay a low interest rate, but their safety and reliability make them a sensible option for saving available cash for short-term needs.

They may have some legal limitations on how often you can withdraw money . However, they’re generally very flexible so they’re ideal for building an emergency fund, saving for a short-term goal like buying a car or going on vacation, or simply storing extra cash that you don’t need in your checking account.

2. Checking account : A checking account is also a deposit account at a bank or other financial institution that allows you to make deposits and withdrawals. Checking accounts are very liquid, meaning that they allow numerous withdrawals per month (as opposed to less liquid savings or investment accounts) though they earn little to no interest.

Money can be deposited at banks and ATMs, through direct deposit, or through another type of electronic transfer. Account holders can withdraw funds via banks and ATMs, by writing checks, or using debit cards linked to their accounts.

You may be able to find a checking account with no fees. Others have monthly and other charges (such as for overdrafts or using an out-of-network ATM) based on, for example, how much you keep in the account or whether there’s a direct deposit paycheck or automatic-withdrawal mortgage payment connected to the account.

Lifeline and  second-chance accounts , available at some banks, can help those who have difficulty qualifying for a traditional checking account.

3. High-yield savings account : A high-yield savings account usually pays a much higher rate of interest than a standard savings account. The tradeoff for earning more interest on your money is that high-yield accounts tend to require bigger initial deposits, larger minimum balances, and higher fees.

You might be able to open a high-yield savings account at your current bank, but online banks tend to have the highest interest rates.

What’s An Emergency Fund?

An emergency fund is not a specific type of bank account but can be any source of cash that you’ve saved to help you handle financial hardships like job losses, medical bills, or car repairs. Here's how they work:

• Most people use a separate savings account for their emergency savings.
• The account should eventually total enough to cover at least three to six months’ worth of expenses.
• Emergency fund money should be off-limits for paying regular expenses.

Introduction to Credit Cards

You know them as the plastic cards that (almost) everyone carries in their wallets. Credit cards are accounts that let you borrow money from the credit card issuer and pay it back over time. For every month that you don’t pay back the money in full, you’ll be charged interest on your remaining balance . Note that some credit cards, called charge cards , require you to pay your balance in full each month. However, these are less common.

What’s the Difference Between Credit and Debit Cards?

Here is the difference :

Debit cards take money directly out of your checking account. You can’t borrow money with debit cards, which means that you can’t spend more cash than you have in the bank. And debit cards don’t help you to build a credit history and credit rating .

Credit cards allow you to borrow money and do not pull cash from your bank account. This can be helpful for large, unexpected purchases. But carrying a balance every month—not paying back in full the money that you borrowed—means that you’ll owe interest to the credit card issuer. In fact, as of Q4 2022, Americans owed $986 billion in credit card debt. So be very careful about spending more money than you have, because debt can build up quickly and become difficult to pay off.

On the other hand, using a credit card judiciously and paying your credit card bills on time helps you establish a credit history and a good credit rating. It’s important to build a good credit rating not only to qualify for the best credit cards but also because you will get more favorable interest rates on car loans, personal loans, and mortgages.

What Is APR?

APR stands for annual percentage rate. This is the amount of interest that you’ll owe the credit card issuer on any unpaid balance. You’ll want to pay close attention to this number when you apply for a credit card. A higher number can cost you hundreds or even thousands of dollars if you carry a large balance over time. The median APR today is about 24% , but your rate may be higher if you have bad credit . Interest rates also tend to vary by the type of credit card.

Which Credit Card Should I Choose?

Credit scores have a big impact on your odds of getting approved for a credit card. Understanding what range your score falls into can help you narrow the options as you decide on the cards for which you may apply. Beyond your credit score, you’ll also need to decide which perks best suit your lifestyle and spending habits.

If you’ve never had a credit card before, or if you have bad credit, you’ll likely need to apply for either a secured credit card or a subprime credit card . By using one of these and paying back on time, you can raise your credit score and earn the right to credit at better rates.

If you have a fair to good credit score, you can choose from a variety of credit card types, such as:

• Travel rewards cards. These credit cards offer points redeemable for travel—including flights, hotels, and rental cars—with each dollar you spend.
• Cash-back cards . If you don’t travel often—or don’t want to deal with converting points into real-life perks—a cash-back card might be the best fit for you. Every month, you’ll receive a small portion of your spending back, in cash or as a credit to your statement.
• Balance transfer cards. If you have balances on other cards with high interest rates, transferring your balance to a lower-rate credit card could save you money, help you pay off balances, and help improve your credit score.
• Low- or No-APR cards. If you routinely carry a balance from month to month, switching to a credit card with a low or no APR could save you hundreds of dollars per year in interest payments.

Be aware of your protections under the Equal Credit Opportunity Act . Research credit opportunities and available interest rates, and be sure that you are offered the best rates for your particular credit history and financial situation.

How to Create a Budget

Creating a budget is one of the simplest and most effective ways to control your spending, saving, and investing. You can’t begin to improve your financial health if you don’t know where your money is going, so start tracking your expenses against your income. Then set clear goals.

One budget template that helps individuals reach their goals, manage their money, and save for emergencies and retirement is the 50/20/30 budget rule : spending 50% on needs, 20% on savings, and 30% on wants.

How Do I Create a Budget?

Budgeting starts with tracking how much money you receive and spend every month. You can do this in an Excel sheet, on paper, or with a budgeting app . It’s up to you. However you decide to track, clearly lay out the following:

• Income: List all sources of money that you receive in a month, with the dollar amount. This can include paychecks, investment income, alimony, settlements, and money that you make from side jobs or other projects, such as selling crafts.
• Expenses: List every purchase that you make in a month, split into two categories: fixed expenses and discretionary spending . Review your bank statements, credit card statements, and brokerage account statements to be sure to capture them all. Fixed expenses are the purchases that you must make every month. Their amounts don’t change (or change very little) and are considered essential. They include rent/mortgage payments, loan payments, and utilities. Discretionary spending is nonessential spending or varying purchases for things like restaurant meals, shopping, clothes, and travel. Consider them wants rather than needs.
• Savings : Record the amount of money that you’re able to save each month, whether it’s in cash, cash deposited into a bank account, or money that you add to an investment account or retirement account like an IRA or 401(k) (if your employer offers one).

Subtract your total expenses from your total income to get the amount of money you have left at the end of the month. Now that you have a clear picture of money coming in, money going out, and money saved, you can identify which expenses you can cut back on, if necessary.

If you don’t already have one, put your extra money into an emergency fund until you’ve saved at least three to six months’ worth of expenses (in case of a job loss or other emergency). Don’t use this money for discretionary spending. The key is to keep it safe and grow it for times when your income decreases or stops.

How to Start Investing 

Once you have enough savings to start investing, you’ll want to learn the basics of where and how to invest your money. Decide what to invest in and how much to invest by understanding the risks (and potential rewards) of different types of investments.

What Is the Stock Market?

The stock market refers to the collection of markets and exchanges where stock buying and selling takes place. The terms “stock market” and “stock exchange” can be used interchangeably. And even though it’s called a stock market, other financial securities , such as exchange-traded funds (ETFs) , corporate bonds , and derivatives based on stocks, commodities, currencies, and bonds, are also traded there. There are multiple stock trading venues. The leading stock exchanges in the U.S. include the New York Stock Exchange (NYSE) , Nasdaq , and the Cboe Options Exchange .

How Do I Invest?

To buy stocks , you need to use a broker . This is a professional person or digital platform whose job it is to handle the transaction for you. For new investors, there are three basic categories of brokers:

• A full-service broker who manages your investment transactions and provides advice for a fee.
• An online/discount broker that executes your transactions and provides advice depending on how much you have invested. Examples include Fidelity, TD Ameritrade, and Charles Schwab.
• A robo-advisor that executes your trades and can pick investments for you with little human assistance. Examples include Betterment, Wealthfront, and Schwab Intelligent Portfolios.

What Should I Invest in?

There’s no right answer for everyone. Which securities you buy, and how much you buy, will depend on the amount of money that you have available for investing and how much risk you’re willing to take to try to earn a higher return. Here are the most common securities to invest in, listed in descending order of risk:

Stocks: A stock (also known as “shares” or “equity”) is a type of investment that signifies partial ownership in the issuing company. This entitles the stockholder to a proportion of the corporation’s assets and earnings.

Owning stock gives you the right to vote in shareholder meetings, receive dividends (which come from the company’s profits) if and when they are distributed, and sell your shares to somebody else.

The price of a stock fluctuates throughout the day and can depend on many factors, including the company’s performance, the domestic economy, the global economy, the day’s news, and more. Stocks can rise in value, fall in value, or even become worthless, making them more volatile and potentially riskier than many other types of investments.

ETFs: An exchange-traded fund, or ETF, consists of a collection of securities, such as stocks. It often tracks an underlying index . ETFs can invest in any number of industry sectors or use various strategies.

Think of an ETF as a pie containing many different securities. When you buy shares of an ETF, you’re buying a slice of the pie, which contains slivers of the securities inside. This lets you purchase a variety of many stocks at once, with the ease and convenience of only one purchase—the ETF.

In many ways, ETFs are similar to mutual funds. For instance, they both offer instant diversification and are professionally managed. However, ETFs are listed on exchanges and ETF shares trade throughout the day just like ordinary stocks.

Investing in ETFs is considered less risky than investing in individual stocks because there are many securities inside the ETF. If some of those securities fall in value, others may stay steady or rise in value.

Mutual funds: A mutual fund is a type of investment consisting of a portfolio of stocks, bonds, or other securities. Mutual funds give small or individual investors access to diversified, professionally managed portfolios at a low price.

There are many categories of mutual funds, representing the kinds of securities in which they invest, their investment objectives, and the type of returns that they seek. Most employer-sponsored retirement plans invest in mutual funds.

Investing in shares of a mutual fund is different from investing in individual shares of stock because a mutual fund owns many different stocks (or other securities). Unlike stocks or ETFs that trade at varying prices throughout the day, mutual fund purchases and redemptions​ take place only at the end of each trading day and at a fund's net asset value (NAV) . Similar to ETFs, mutual funds are considered less risky than stocks because of their diversification .

Mutual funds charge annual fees, called expense ratios , and in some cases, commissions.

Bonds: Bonds are issued by companies, municipalities, states, and sovereign governments to finance projects and operations. When an investor buys a bond, they’re effectively lending their money to the bond issuer, with the promise of repayment plus interest. A bond’s coupon rate is the interest rate that the investor will earn.

A bond is referred to as a fixed-income instrument because bonds traditionally have paid a fixed interest rate to investors, although some bonds pay variable interest rates . Bond prices inversely correlate with interest rates. When rates go up, bond prices fall, and vice versa. Bonds have maturity dates, which are the point in time when the principal amount must be paid back to the investor in full or the issuer will risk default.

Bonds are rated by how likely the issuer is to pay you back. Higher-rated bonds, known as investment grade bonds, are viewed as safer and more stable. Such offerings are tied to publicly traded corporations and government entities that boast positive outlooks.

Investment grade bonds receive “AAA” to “BBB-” ratings from Standard and Poor’s and “Aaa” to “Baa3” ratings from Moody’s. Bonds with higher ratings will usually pay lower rates of interest than those with lower ratings. U.S. Treasury bonds are the most common AAA-rated bond securities.

Are Banks Safe?

Most bank accounts in the United States are insured by the Federal Deposit Insurance Corporation (FDIC) up to certain limits, currently defined as “up to at least $250,000 per depositor, per FDIC-insured bank, per ownership category.” If you have a great deal of money to put in the bank, you can make sure that it’s all covered by opening multiple accounts.

Is It Safe to Invest in the Stock Market?

Stocks are inherently risky—some more than others—and you can lose money if their share prices fall. Brokerage accounts are insured by the Securities Investor Protection Corporation for up to $500,000 in securities and cash. However, that applies only if the brokerage firm fails and is unable to repay its customers. It does not cover normal investor losses.

What Is the Safest Investment?

U.S. Treasury securities, including bonds, bills, and notes, are backed by the U.S. government and generally are considered the safest investments in the world. However, these kinds of investments tend to pay low rates of interest, so investors do face a risk that inflation may erode the purchasing power of their money over time.

The topics in this article are just the beginning of a financial education, but they cover the most important and frequently used products, tools, and tips for getting started. If you’re ready to learn more, check out these additional resources from Investopedia:

• Investopedia Academy
• Investopedia YouTube Channel
• Investopedia Dictionary
• Investopedia Stock Market Simulator

FINRA. " National Study by FINRA Foundation Finds U.S. Adults’ Financial Capability Has Generally Grown Despite Pandemic Disruption. "

Federal Reserve System. " Report on the Economic Well-Being of U.S. Households in 2022 - May 2023 ."

Federal Deposit Insurance Corporation. “ What’s Covered: Are My Deposit Accounts Insured by the FDIC? ”

National Credit Union Administration (NCUA). " Mission and Values ."

Federal Reserve Bank of New York. “ Total Household Debt Reaches $16.90 trillion in Q4 2022; Mortgage and Auto Loan Growth Slows ."

S&P Global. " S&P Global Ratings Definitions. "

Moody's. " Rating Scale and Definitions ."

Federal Deposit Insurance Corporation. “ Deposit Insurance FAQs .”

Securities Investor Protection Corporation. “ Mission .”

U.S. Securities and Exchange Commission. " Treasury Securities ."

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Essay on Financial Literacy

Students are often asked to write an essay on Financial Literacy in their schools and colleges. And if you’re also looking for the same, we have created 100-word, 250-word, and 500-word essays on the topic.

Let’s take a look…

100 Words Essay on Financial Literacy

What is financial literacy.

Financial literacy means knowing how to manage money. This includes understanding how to save, spend, and invest your cash. It’s like learning a new language but for money. It helps you make smart choices with your pocket money or savings from a part-time job.

Why Save Money?

Saving money is like keeping seeds for planting. You save now and have more later. It’s important to save for things you might want in the future or if something unexpected happens, like a broken bike that needs fixing.

Spending Wisely

Spending wisely means thinking before buying. Ask yourself, “Do I really need this?” or “Can I find it cheaper somewhere else?” This helps you avoid wasting money on things you don’t need or paying too much.

Investing is like planting your saved seeds to grow a tree. You put your money in a place where it can grow over time, like a bank account or stocks. But be careful, investing can be risky, so you should learn about it first.

Understanding money is a big part of life. Learning about financial literacy early helps you make better decisions and can lead to a future with fewer money worries.

Also check:

• Advantages and Disadvantages of Financial Literacy

250 Words Essay on Financial Literacy

Financial literacy means knowing how to manage your money smartly. It’s like learning a new language, but instead of words, you learn about savings, budgeting, and how to make your money grow. Just as you need to know math to solve problems, you need financial literacy to make good choices with money.

Saving Money

Think of saving money as a game where the goal is to keep as many coins as you can in a piggy bank. You do this by spending less on things you don’t need. Saving is important because it’s like having a safety net on a trampoline; it’s there to catch you if you fall or if something unexpected happens.

Making a Budget

A budget is a plan for your money. It’s like a map that shows you how to spend your allowance or earnings from chores. When you make a budget, you decide what you’ll spend on snacks, games, or saving for something big like a new bike. Sticking to your budget means you’re in charge of your money, not the other way around.

Smart Spending

Smart spending means thinking carefully before you buy something. Ask yourself, “Do I really need this?” or “Can I find it cheaper somewhere else?” It’s like choosing the best candy in the store, so you get the most yumminess for your money.

Growing Your Money

Growing your money is about making it increase over time. You can do this by putting your savings in a bank account that pays you interest, which is like a thank you gift from the bank for keeping your money there. Or, you can learn about investing, which can help your money grow even more.

Understanding financial literacy helps you make smart choices now and prepares you for the future. It’s a tool that helps you build the life you want, just like learning to read and write.

500 Words Essay on Financial Literacy

Financial literacy is knowing how to manage money. This means understanding how to earn, save, spend, and invest your money wisely. It’s just like learning how to read or write, but instead of letters and words, you’re learning about numbers and dollars. When you’re financially literate, you can make smart choices with your money that will help you in the future.

Earning and Saving Money

The first part of being good with money is learning how to earn it. This can be from a small job, like helping neighbors or getting an allowance from your parents. Once you have some money, it’s important to save it. Saving money means putting it away for later, like in a piggy bank or a savings account at a bank. This way, you can have money for things you’ll need in the future, like a new bike or college.

Spending Money Wisely

Spending money is something everyone has to do, but spending it wisely is a key part of financial literacy. This means thinking about whether you really need what you’re buying and if you’re getting it at a good price. It’s okay to spend money on fun things, but you should make sure you have enough for the things you need first, like food and clothes.

A budget is a plan for how to spend your money. It helps you keep track of what you earn, what you need to spend on things like food and rent, and how much you can save or use for fun stuff. Making a budget can help you make sure you don’t run out of money and can save up for big things you want in the future.

Investing is a way to make your money grow. Instead of just saving it, you can use your money to buy things that might increase in value over time, like stocks or property. It’s a bit more complicated and can be riskier, but if you learn about it, investing can help you build more money for the future.

Why Financial Literacy is Important

Being good with money is important because it helps you feel secure and ready for the future. If you know how to manage your money, you won’t have to worry as much about not having enough for things you need or want. It also means you can help your family and even give back to your community by donating to people who need help.

Financial literacy is a big part of growing up and becoming independent. It’s about being smart with your money, so you can take care of yourself and your loved ones. Learning about earning, saving, spending, budgeting, and investing can seem like a lot, but step by step, it can become as easy as reading your favorite book. Start learning about money now, and you’ll be ready for all the adventures life has to offer!

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Home — Essay Samples — Economics — Corporate Finance — Importance of Financial Literacy

Importance of Financial Literacy

• Categories: Corporate Finance

About this sample

Words: 1983 |

10 min read

Published: Dec 5, 2018

Words: 1983 | Pages: 4 | 10 min read

Financial tools – financial literacy

• Financing activities include the borrowing and repayment of long-term liabilities.
• Investing activities include the purchase and sale of your long-term fixed assets, such as property, plant and equipment.
• Operating activities include your day-to-day operations.
• Budgeting Basics
• ensure you have enough money for your future projects.
• enable you to make confident financial decisions and meet your objectives
• ensure you can continue to fund your current commitments
• control your finances
• Banking and Financial Services
• The Impact of Interest Understanding the ins and outs of interest can impact your finances more than you likely realize, so it’s an important concept to gain a better understand of early on in life.
• The Credit-Debt Roller-coaster

Works Cited

• Bhatia, A. (2022). Financial Literacy and Entrepreneurship: A Review. International Journal of Research in Business Studies and Management, 9(4), 14-22.
• Cooper, D., & Ebert, R. (2020). Budgeting Basics for Small Business Owners. Journal of Small Business Management, 58(4), 722-740.
• Federal Reserve Bank of Kansas City. (2021). Cash Management Basics: A Guide for Small Business Owners. Retrieved from https://www.kansascityfed.org/~/media/files/publicat/psr/pdf/cash-management-basics.pdf
• Financial Consumer Agency of Canada. (2022). Banking and Financial Services. Retrieved from https://www.canada.ca/en/financial-consumer-agency/services/banking.html
• Hackston, D., & Dowling, M. (2023). Financial Literacy Rates Among Adults in Advanced and Emerging Economies. International Journal of Financial Education, 21(1), 18-35.
• Organization for Economic Co-operation and Development. (2017). OECD/INFE Core Competencies Framework on Financial Literacy for Adults. Retrieved from http://www.oecd.org/daf/fin/financial-education/International-Core-Competencies-Framework.pdf
• Pailella, P. (2016). Financial Literacy and Entrepreneurial Success: The Moderating Role of Financial Knowledge and Experience. Journal of Small Business Management, 54(4), 1175-1192.
• Parcheta, M. (2021). The Role of Financial Literacy in Women Entrepreneurship Development. European Financial and Accounting Journal, 16(2), 87-100

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FINANCIAL LITERACY, FINANCIAL EDUCATION AND ECONOMIC OUTCOMES

In this article we review the literature on financial literacy, financial education, and consumer financial outcomes. We consider how financial literacy is measured in the current literature, and examine how well the existing literature addresses whether financial education improves financial literacy or personal financial outcomes. We discuss the extent to which a competitive market provides incentives for firms to educate consumers or offer products that facilitate informed choice. We review the literature on alternative policies to improve financial outcomes, and compare the evidence to evidence on the efficacy and cost of financial education. Finally, we discuss directions for future research.

“The future of our country depends upon making every individual, young and old, fully realize the obligations and responsibilities belonging to citizenship...The future of each individual rests in the individual, providing each is given a fair and proper education and training in the useful things of life...Habits of life are formed in youth...What we need in this country now...is to teach the growing generations to realize that thrift and economy, coupled with industry, are necessary now as they were in past generations.”

--Theodore Vail, President of AT&T and first chairman of the Junior Achievement Bureau (1919, as quoted in Francomano, Lavitt and Lavitt, 1988 )

“Just as it was not possible to live in an industrialized society without print literacy—the ability to read and write, so it is not possible to live in today's world without being financially literate... Financial literacy is an essential tool for anyone who wants to be able to succeed in today's society, make sound financial decisions, and—ultimately—be a good citizen.”

-- Annamaria Lusardi (2011)

1. INTRODUCTION

Can individuals effectively manage their personal financial affairs? Is there a role for public policy in helping consumers achieve better financial outcomes? And if so, what form should government intervention take? These questions are central to many current policy debates and reforms in the U.S. and around the world in the wake of the recent global financial crises.

In the U.S., concerns about poor financial decision making and weak consumer protections in consumer financial markets provided the impetus for the creation of the Consumer Financial Protection Bureau (CFPB) as part of the Dodd-Frank Wall Street Reform and Consumer Project Act which was signed into law by President Obama on July 21, 2010. This law gives the CFPB oversight of consumer financial products in a variety of markets, including checking and savings accounts, payday loans, credit cards, and mortgages (CFPB authority does not extend to investments such as stocks and mutual funds which are regulated by the SEC, or personal insurance products that are largely regulated at the state level). In addition to establishing its regulatory authority, the Dodd-Frank Act mandates that the CFPB establish “the Office of Financial Education, which shall develop a strategy to improve the financial literacy of consumers.” It goes on to state that the Comptroller must study “effective methods, tools, and strategies intended to educate and empower consumers about personal financial management” and make recommendations for the “development of programs that effectively improve financial education outcomes.” 1

In line with this second mandate for the CFPB, there has been much recent public discussion on financial literacy and the role of financial education as an antidote to limited individual financial capabilities. As the title suggests, this is a main focus of the current paper; however, it is important not to lose the forest for the trees in the debate on policy prescriptions. The market failure that calls for a policy response is not limited to financial literacy per se, but the full complement of conditions that lead to suboptimal consumer financial outcomes of which limited financial literacy is one contributing factor. Similarly, the policy tools for improving consumer financial outcomes include financial education but also encompass a wide variety of regulatory approaches. One of our aims in this paper is to place financial literacy and financial education in this broader context of both problems and solutions.

The sense of public urgency over the level of financial literacy in the population is, we believe, a reaction to a changing economic climate in which individuals now shoulder greater personal financial responsibility in the face of increasingly complicated financial products. For example, in the U.S. and elsewhere across the globe, individuals have been given greater control and responsibility over the investments funding their retirement (in both private retirement savings plan such as 401(k)s and in social security schemes with private accounts). Consumers confront ever more diverse options to obtain credit (credit cards, mortgages, home equity loans, payday loans, etc.) and a veritable alphabet soup of savings alternatives (CDs, HSAs, 401(k)s, IRAs, 529s, KEOUGHs, etc.). Can individuals successfully navigate this increasingly complicated financial terrain?

We begin by framing financial literacy within the context of standard models of consumer financial decision making. We then consider how to define and measure financial literacy, with an emphasis on the growing literature documenting the financial capabilities of individuals in the U.S. and other countries. We then survey the literature on the relationship between financial literacy and economic outcomes, including wealth accumulation, savings decisions, investment choices, and credit outcomes. We then assess the evidence on the impact of financial education on financial literacy and on economic outcomes. Next we evaluate the role of government in consumer financial markets: what problems do limited financial capabilities pose, and are market mechanisms likely to correct these problems? Finally, we suggest directions for future research on financial literacy, financial education, and other mechanisms for improving consumer financial outcomes.

2. WHAT IS FINANICAL LITERACY AND WHY IS IT IMPORTANT?

“Financial literacy” as a construct was first championed by the Jump$tart Coalition for Personal Financial Literacy in its inaugural 1997 study Jump$tart Survey of Financial Literacy Among High School Students. In this study, Jump$tart defined “financial literacy” as “the ability to use knowledge and skills to manage one's financial resources effectively for lifetime financial security.” As operationalized in the academic literature, financial literacy has taken on a variety of meanings; it has been used to refer to knowledge of financial products (e.g., what is a stock vs. a bond; the difference between a fixed vs. an adjustable rate mortgage), knowledge of financial concepts (inflation, compounding, diversification, credit scores), having the mathematical skills or numeracy necessary for effective financial decision making, and being engaged in certain activities such as financial planning.

Although financial literacy as a construct is a fairly recent development, financial education as an antidote to poor financial decision making is not. In the U.S., policy initiatives to improve the quality of personal financial decision making through financial education extend back at least to the 1950s and 1960s when states began mandating inclusion of personal finance, economics, and other consumer education topics in the K-12 educational curriculum ( Bernheim et al. 2001 ; citing Alexander 1979, Joint Council on Economic Education 1989, and National Coalition for Consumer Education 1990). 2 Private financial and economic education initiatives have an even longer history; the Junior Achievement organization had its genesis during World War I, and the Council for Economic Education goes back at least sixty years. 3

Why are financial literacy and financial education as a tool to increase financial literacy potentially important? In answering these questions, it is useful to place financial literacy within the context of standard models of consumer financial decision making and market competition. We start with a simple two-period model of intertemporal choice in the face of uncertainty. A household decides between consumption and savings at time 0, given an initial time 0 budget, y , an expected real interest rate, r , and current and future expected prices, p , for goods consumed, x .

Solving this simple model requires both numeracy (the ability to add, subtract, and multiply), and some degree of financial literacy (an understanding of interest rates, market risks, real versus nominal returns, prices and inflation).

Alternatively, consider a simple model of single-period profit maximization for a single-product firm competing on price in a differentiated products market:

The firm chooses price, p , to maximize profits given marginal costs, mc , its product characteristics, x , its competitors’ prices and product characteristics, p -j and x -j , respectively, and the distribution of consumer preferences over price and product characteristics, θ . Doing so results in the familiar formula relating price mark-up over costs to the price elasticity of demand: prices are higher relative to costs in product markets in which demand is less sensitive to price.

Competitive outcomes in this model rest on the assumption that individuals can and do make comparisons across products in terms of both product attributes and the prices paid for those attributes. This may be a relatively straightforward task for some products (e.g., breakfast cereal), but is a potentially tall order for products with multidimensional attributes and complicated and uncertain pricing (e.g., health care plans, cell phone plans, credit cards, or adjustable rate mortgages).

A lack of financial literacy is problematic if it renders individuals unable to optimize their own welfare, especially when the stakes are high, or to exert the type of competitive pressure necessary for market efficiency. This has obvious consequences for individual and social welfare. It also makes the standard models used to capture consumer behavior and shape economic policy less useful for these particular tasks.

Research has documented widespread and avoidable financial mistakes by consumers, some with non-trivial financial consequences. For example, in the U.S., Choi et al. (2011) examine contributions to 401(k) plans by employees over age 59 ½ who are eligible for an employer match, vested in their plan, and able to make immediate penalty-free withdrawals due to their age. They find that 36% of these employees either don't participate or contribute less than the amount that would garner the full employer match, essentially foregoing 1.6% of their annual pay in matching contributions; the cumulative losses over time for these individuals are likely to be much larger.

Duarte & Hastings (2011) and Hastings et al. (2012) show that many participants in the private account Social Security system in Mexico invest their account balances with dominated financial providers who charge high fees that are not offset by higher returns, contributing to high management fees in the system overall. Similarly, Choi et al. (2009) use a laboratory experiment that show that many investors, even those who are well educated, fail to choose a fee minimizing portfolio even in a context (the choice between four different S&P 500 Index Funds) in which fees are the only significant distinguishing characteristic of the investments and the dispersion in fees is large.

Campbell (2006) highlights several other of financial mistakes: low levels of stock market participation, inadequate diversification due to households’ apparent preferences to invest in local firms and employer stock, individuals’ tendencies to sell assets that have appreciated while holding on to assets whose value has declined even if future return prospects are the same (the disposition effect first documented in Odean 1998 ), and failing to refinance fixed rate mortgages in a period of declining interest rates.

Other financial mistakes discussed in the literature include purchasing whole life insurance rather than a cheaper combination of term life insurance in conjunction with a savings account ( Anagol et al. 2012 ); simultaneously holding high-interest credit card debt and low-interest checking account balances ( Gross & Souleles 2002 ); holding taxable assets in taxable accounts and non-taxable or tax-preferred assets in tax-deferred accounts ( Bergstresser & Poterba 2004 , Barber & Odean 2003 ); paying down a mortgage faster than the amortization schedule requires while failing to contribute to a matched tax-deferred savings account (Amromin et al. 2007); and borrowing from a payday lender when cheaper sources of credit are available ( Agarwal et al. 2009b ).

Agarwal et al. (2009a) document the prevalence of several different financial mistakes ranging from suboptimal credit card use after making a balance transfer to an account with a low teaser rate, to paying unnecessarily high interest rates on a home equity loan or line of credit. They find that across many domains, sizeable fractions of consumers make avoidable financial mistakes. They also find that the frequency of financial mistakes varies with age, following a U-shaped pattern: financial mistakes decline with age until individuals reach their early 50s, then begin to increase. The declining pattern up to the early 50s is consistent with the acquisition of increased financial decision-making capital over time, either formally or through learning from experience ( Agarwal et al. 2011 ); but the reversal at older ages highlights the natural limits that the aging process places on individuals’ financial decision-making capabilities, however those capabilities are acquired.

The constellation of findings described above has been cited by some as prima facie evidence that individuals lack the requisite levels of financial literacy for effective financial decision making. On the other hand, Milton Friedman (1953) famously suggested that just as pool players need not be experts in physics to play pool well, individuals need not be financial experts if they can learn to behave optimally through trial and error. There is some evidence that such personal financial learning does occur. Agarwal et al. (2011) find that in credit card markets during the first three years after an account is opened, the fees paid by new card holders fall by 75% due to negative feedback: by paying a fee, consumers learn how to avoid triggering future fees. The role of experience is also evident in the answers to a University of Michigan Surveys of Consumers question that asked about the most important way respondents’ learned about personal finance. Half cited personal financial experience, more than twice the fraction who cited friends and family, and four to five times the fraction who credit formal financial education as their most important source of learning (Hilgert & Hogarth 2003).

Although experiential learning may be an important self-correcting mechanism in financial markets, many important financial decisions like saving and investing for retirement, choosing a mortgage, or investing in an education, are undertaken only infrequently and have delayed outcomes that are subject to large random shocks. Learning by doing may not be an effective substitute for limited financial knowledge in these circumstances ( Campbell et al. 2010 ), and consumers may instead rely on whatever limited institutional knowledge and numeracy skills they have.

3. MEASURING FINANCIAL LITERACY

If financial literacy is an important ingredient in effective financial decision making, a natural question to ask is how financially literate are consumers? Are they well equipped to make consequential financial decisions? Or do they fall short? Efforts to measure financial literacy date back to at least the early 1990s when the Consumer Federation of America (1990; 1991; 1993; 1998) began conducting a series of “Consumer Knowledge” surveys among different populations which included questions on several personal finance topics: consumer credit, bank accounts, insurance, and major consumer expenditures areas such as housing, food and automobiles. The 1997 Jump$tart survey of high school students referenced above has been repeated biennially since 2000 and was expanded to include college students in 2008 (see Mandell 2009 , for an analysis these surveys). Hilgert et al. (2003) analyze a set of “Financial IQ” questions included in the University of Michigan's monthly Surveys of Consumers in November and December 2001.

More recently, Lusardi & Mitchell (2006) added a set of financial literacy questions to the 2004 Health and Retirement Study (HRS, a survey of U.S. households aged 50 and older) that have, in the past decade, served as the foundational questions in several surveys designed to measure financial literacy in the U.S. and other countries. The three core questions in the original 2004 HRS financial literacy module were designed to assess understanding of three core financial concepts: compound interest, real rates of return, and risk diversification (see Table 1 ). Because these questions are parsimonious and have been widely replicated and adapted, they have come to be known as the “Big Three.”

Financial Literacy Questions in the 2004 Health and Retirement Study (HRS) and the 2009 National Financial Capability Study (NFCS)

Note: The answer categorized as correct is italicized in the last column.

These questions were incorporated into the 2009 National Financial Capability Study (NFCS) in the U.S., a large national survey of the financial capabilities of the adult population. 4 The NFCS asked two additional financial literacy questions which, together with the “Big Three,” have collectively come to be known as the “Big Five.” These two additional questions test knowledge about mortgage interest and bond prices. Table 1 lists the “Big Five” questions as asked with their potential answers (the correct answers are italicized).

Because the “Big Three” questions have been more widely adopted in other surveys, we focus here on the answers to these three questions, although we return to the “Big Five” later. The second and fourth columns of Table 2 report the percent of correct and “Don't know” responses to each of the “Big Three” questions for the 2004 HRS respondents and the 2009 NFCS respondents. Because the NFCS represents the entire adult population, we focus on those results here. Among respondents to the 2009 NFCS, 78% correctly answered the first question on interest rates and compounding, 65% correctly answered the second question on inflation and purchasing power, and 53% correctly answered the third question on risk diversification. Note that all three questions were multiple choice (rather than open-ended), so that guessing would yield a correct answer to the first two questions 33% of the time and to the last question 50% of the time. Only 39% of respondents correctly answered all three questions.

Financial Literacy Around the World

Notes: Countries ranked by 2010-2011 International Monetary Fund GDP per capita. + denotes statistics directly drawn from publications: Netherlands: van Rooij et al. 2011 . Financial literacy and retirement preparation in the Netherlands. J. Pension. Econ. 10(4): 527-545; Japan: Sekita. 2011. Financial literacy and retirement planning in Japan. J. Pension. Econ. 10(4): 637-656. Germany: Lusardi & Bucher-Koenen. 2011. Financial literacy and retirement planning in Germany. J. Pension. Econ. 10(4): 565-584. Cole et al. 2011. Prices or knowledge? What drives demand for financial services in emerging markets. J. Financ. 66(6): 1933-1967.

X denotes missing information.

Clearly individuals who cannot answer the first or second questions will have a difficult time navigating financial decisions that involve an investment today and real rates of return over time; they are likely to have trouble making even the basic calculations assumed in a rational intertemporal decision-making framework. The inability to correctly answer the third question demonstrates ignorance about the benefits of diversification (reduced risk) and casts doubt on whether individuals can effectively manage their financial assets. With only 39% of the population able to answer these three fairly basic financial literacy questions correctly, we might be justifiably concerned about how many individuals make suboptimal financial decisions in everyday life and the types of marketplace distortions that could follow.

As noted earlier, dozens of surveys in addition to the NFCS have included the trio of questions discussed above from the 2004 HRS. In addition to the results for the 2004 HRS and the 2009 NFCS, Table 2 shows how respondents in several countries answered these same questions. The first six columns list comparative statistics for six developed economy surveys from the U.S., The Netherlands, Japan and Germany. The next three columns take data from the upper-middle income countries of Chile and Mexico. The last two columns report responses from the lower-income countries of India and Indonesia. Proficiency rates vary widely; in Germany, 53% of respondents correctly answer the three HRS financial literacy questions, whereas only 8% of respondents in Chile do so. In general, the level of financial literacy is highest in the developed countries and lowest in the lower-income countries. The responses to these questions in the 2004 and 2010 HRS suggest that financial literacy for HRS respondents has increased somewhat over time, perhaps from participating in the panel, or perhaps as a result of increased financial discussion surrounding the 2008 financial crisis. In Chile and Mexico, respondents have particularly low levels of financial literacy despite being responsible for managing the investment decisions for the balances accumulated in their privatized social security accounts. Chile also witnessed massive student protests over college loan debt in 2011, and yet only 16% of college entrants can correctly answer these three questions despite the fact that 22% of them are taking out student loans. 5

Although the Lusardi and Mitchell “Big Three” questions from the 2004 HRS have quickly become an international standard in assessing financial literacy, there is remarkably little evidence on whether this set of survey questions is the best approach, or even a superior approach, to measuring financial literacy. The question of how best to assess the desired behavioral capabilities remains open, both in terms of establishing whether survey questions are best-suited for the task or which questions are most effective. Longer financial literacy survey batteries do exist, including the National Financial Capability Study (NFCS) which asks the “Big Five” financial literacy questions described above along with an extensive set of questions on individual financial behaviors. The biennial Jump$tart Coalition financial literacy surveys used to assess the financial literacy of high school and college students in the U.S. include more than fifty questions. Whether using additional survey questions (and how many more) better explains individual behavior is unclear as little research has evaluated the relative efficacy of different measurements.

Table 3 lists the fraction of respondents correctly answering the “Big Three” and “Big Five” financial literacy questions in the 2009 NFCS for various demographic subgroups. There is a strong positive correlation between the performance on the “Big Three” and the “Big Five” questions (although part of this correlation is mechanical as the “Big Three” are a subset of the “Big Five”). Table 3 also lists three other self-assessed measures of financial capability (self-assessed overall financial knowledge, self-assessed mathematical knowledge and self-assessed capability at dealing with financial matters). These self-assessed measures are all highly correlated with each other, and fairly highly correlated with the performance-based measures of financial literacy in the first two columns. All of the measures of financial capability are also highly correlated with educational attainment, suggesting that traditional measures of education could also serve as proxies for financial literacy (we will discuss causality in Section 4).

Measures of Financial Literacy

Note: Authors’ calculations from the 2009 NFCS State-by-State Survey (n=28,146). The top panel of Table 1 lists the “Big 3” questions in Column (1); the “Big 5” questions in Column (2) include the “Big 3” and the additional two questions from the bottom panel of Table 1 . Columns (3) through (5) report the mean of the participants’ self-assessments based on the following scale: 1=Strongly Disagree to 7= Strongly Agree.

In a survey of 18 different financial literacy studies, Hung et al. (2009) report that the predominant approach used to operationalize the concept of financial literacy is either the number, or the fraction, of correct answers on some sort of performance test (measures akin to those in columns 1 and 2 of Table 3 ). This approach was used in all of the studies they evaluated, although two adopted a more sophisticated methodology, using factor analysis to construct an index that assigned different weights to each question ( Lusardi & Mitchell 2009 , van Rooij et al. 2011 ).

In addition to evaluating how previous studies have operationalized the concept of financial literacy, Hung et al. (2009) also perform a construct validation of seven different financial literacy measures calculated from various question batteries administered to the same set of respondents in four different waves of the RAND American Life Panel. Their measures include three performance tests (one of which has three subtests) based on either 13, 23, or 70 questions, and one behavioral outcome (performance in a hypothetical financial decision-making task). They find that the measures based on the different performance tests are highly correlated with each other, and when the same questions are asked in multiple waves, the answers have high test-retest reliability. The outcomes of the performance tests are less highly correlated with outcomes in the decision-making task. They also find that the relationship between demographics and the different performance test based measures of financial literacy is similar, but that the relationship between demographics and the outcomes in the decision-making task is much weaker. The different financial literacy measures are more variable in their predictive relationships for actual financial behaviors such as planning for retirement, saving, and wealth accumulation.

One unanswered question in this literature is whether test-based measures provide an accurate measure of actual financial capability. To our knowledge, no study has provided incentives for giving correct answers as a mechanism to encourage thoughtful answers that reflect actual knowledge; neither has any study allowed individuals to access other sources of information (e.g., the internet, or friends and family) in completing a performance test to assess whether individuals understand their limitations and can compensate for them by engaging other sources of expertise. If individuals have effective compensatory mechanisms, we may see discrepancies between performance test results and actual outcomes and behaviors in the field.

A second measure of financial literacy that has been operationalized in the literature is individuals’ self-assessments of their financial knowledge or, alternatively, the level of confidence in their financial abilities. In the 18 studies evaluated by Hung et al. (2009) discussed above, one-third analyzed self-reported financial literacy in addition to a performance test-based measure. Two issues with such self-reporting warrant mention. First, individual self-reports and actual financial decisions do not always correlate strongly ( Hastings & Mitchell 2011 , Collins et. al. 2009 ). Second, consumers are often overly optimistic about how much they actually know ( Agnew & Szykman 2005 , OECD 2005 ). Even so, in general the literature finds that self-assessed financial capabilities and more objective measures of financial literacy are positively correlated (e.g., Lusardi & Mitchell 2009 , Parker et al. 2012 ), and self-reported financial literacy or confidence often have independent predictive power for financial outcomes relative to more objective test-based measures of financial literacy. For example, Allgood & Walstad (2012) find that in the 2009 NFCS State-by-State survey, both self-assessed financial literacy and the fraction of correct answers on the “Big Five” financial literacy questions are predictive of financial behaviors in a variety of domains: credit cards (e.g., incurring interest charges or making only minimum payments), investments (e.g., holding stocks, bonds, mutual funds or other securities), loans (e.g., making late payments on a mortgage, comparison shopping for a mortgage or auto loan), insurance coverage, and financial counseling (e.g., seeking professional advice for a mortgage, loan, insurance, tax planning or debt counseling). Similarly, Parker et al. (2012) find that both self-reported financial confidence and a test-based measure of financial literacy predict self-reported retirement planning and saving, and van Rooij et al. (2011) find that both self-perceived financial knowledge and a test-based measure of financial literacy predict stock market participation.

Although test-based and self-assessed measures of financial literacy are the norm in the literature, other approaches to measuring financial literacy may be worth considering. One alternative measurement strategy, limited by the requirement for robust administrative data, is to identify individuals exhibiting financially sophisticated behavior (e.g., capitalizing on matching contributions in an employer's savings plan, or consistently refinancing a mortgage when interest rates fall) and use these indicators to predict other outcomes. For example, Calvet et al. (2009) use administrative data from Sweden to construct an index of financial sophistication based on whether individuals succumb to three different types of financial “mistakes”: under-diversification, inertia in risk taking, and the disposition effect in stock holding.

An outcomes-based approach like this may be fruitful for predicting future behavior, more so than the traditionally used measures of financial literacy (although Calvet et al. 2009 do not perform such an exercise in their analysis). If we are interested in understanding the abilities that improve financial outcomes, we should define successful measures as those that, when changed, produce improved financial behavior. Such a strategy will likely generate greater internal validity for predicting consumer decisions in specific areas (e.g., portfolio choice or retirement savings), although it will significantly increase the requirements for research relative to strategies that rely on more general indicators of financial literacy (e.g., the “Big Three”).

4. WHAT IS THE RELATIONSHIP BETWEEN FINANCIAL EDUCATION, FINANCIAL LITERACY AND FINANCIAL OUTCOMES?

Consistent with the notion that financial literacy matters for financial optimization, a sizeable and growing literature has established a correlation between financial literacy and several different financial behaviors and outcomes. In one of the first studies in this vein, Hilgert et al. (2003) document a strong relationship between financial knowledge and the likelihood of engaging in a number of financial practices: paying bills on time, tracking expenses, budgeting, paying credit card bills in full each month, saving out of each paycheck, maintaining an emergency fund, diversifying investments, and setting financial goals. Subsequent research has found that financial literacy is positively correlated with planning for retirement, savings and wealth accumulation ( Ameriks et al. 2003 , Lusardi 2004 , Lusardi & Mitchell 2006 ; 2007 , Stango & Zinman 2008, Hung et al. 2009 , van Rooij et al. 2012 ). Financial literacy is predictive of investment behaviors including stock market participation ( van Rooij, et al. 2011 , Kimball & Shumway 2006 , Christelis et al. 2006), choosing a low fee investment portfolio ( Choi et al. 2011 , Hastings 2012), and better diversification and more frequent stock trading ( Graham et al. 2009 ). Finally, low financial literacy is associated with negative credit behaviors such as debt accumulation (Stango & Zinman 2008, Lusardi & Tufano 2009 ), high-cost borrowing ( Lusardi & Tufano 2009 ), poor mortgage choice ( Moore 2003 ), and mortgage delinquency and home foreclosure ( Gerardi et al. 2010 ).

Other related research documents a relationship between either numeracy or more general cognitive abilities and financial outcomes. Although these concepts are distinct from financial literacy, they tend to be positively correlated: individuals with higher general cognitive abilities or greater facility with numbers and numerical calculations tend to have higher levels of financial literacy ( Banks & Oldfield 2007 , Gerardi et al. 2010 ). Numeracy and more general cognitive ability predict stockholding ( Banks & Oldfield 2007 , Christelis et al. 2010 ), wealth accumulation ( Banks & Oldfield 2007 ), and portfolio allocation ( Grinblatt et al. 2009 ).

Although this evidence might lead one to conclude that financial education should be an effective mechanism to improve financial outcomes, the causality in these relationships is inherently difficult to pin down. Does financial literacy lead to better economic outcomes? Or does being engaged in certain types of economic behaviors lead to greater financial literacy? Or does some underlying third factor (e.g., numerical ability, general intelligence, interest in financial matters, patience) contribute to both higher levels of financial literacy and better financial outcomes? To give a more concrete example, individuals with higher levels of financial literacy might better recognize the financial benefits and be more inclined to enroll in a savings plan offered by their employer. On the other hand, if an employer automatically enrolls employees in the firm's saving plan, the employees may acquire some level of financial literacy simply by virtue of their savings plan participation. The finding noted earlier that most individuals cite personal experience as the most important source of their financial learning ( Hilgert et al. 2003 ) suggests that some element of reverse causality is likely. While this endogeneity does not rule out the possibility that financial literacy improves financial outcomes, it does make interpreting the magnitudes of the effects estimated in the literature difficult to interpret as they are almost surely upwardly biased in magnitude.

In addition, unobserved factors such as predisposition for patience or forward-looking behavior could contribute to both increased financial literacy and better financial outcomes. Meier & Sprenger (2010) find that those who voluntarily participate in financial education opportunities are more future-oriented. Hastings & Mitchell (2011) find that those who display patience in a field-experiment task are also more likely to invest in health and opt to save additional amounts for retirement in their mandatory pension accounts. Other unobserved factors like personality ( Borgans et al. 2008 ) or family background ( Cunha & Heckman 2007 , Cunha et al. 2010 ) could upwardly bias the observed relationship between financial education and financial behavior in non-experimental research.

Despite the challenges in pinning down causality, understanding causal mechanisms is necessary to make effective policy prescriptions. If the policy goal is increased financial literacy, then we need to know how individuals acquire financial literacy. How important is financial education? And how important is personal experience? And how do they interact? If, on the other hand, the goal is to improve financial outcomes for consumers, then we need to know if financial education improves financial outcomes (assuming it increases literacy) and we need to be able to weigh the cost effectiveness of financial education against other policy options that also impact financial outcomes.

What evidence is there that financial education actually increases financial literacy? The evidence is more limited and not as encouraging as one might expect. One empirical strategy has been to exploit cross sectional variation in the receipt of financial education. Studies using this approach have often found almost no relationship between financial education and individual performance on financial literacy tests. For example, Jumps$tart (2006) and Mandell (2008) document surprisingly little correlation between high school students’ financial knowledge levels and whether or not they have completed a financial education class. This empirical approach has obvious problems for making causal inferences: the students who take financial education courses in districts where such courses are voluntary are likely to be different from the students who choose not to take such courses, and the districts who make such courses mandatory for all students are likely to be different from the districts that have no such mandate. Nonetheless, the lack of any compelling evidence of a positive impact is surprising. Carpena et al. (2011) use a more convincing empirical methodology to get at the impact of financial education on financial literacy and financial outcomes. They evaluate a relatively large randomized financial education intervention in India and find that while financial education does not improve financial decisions that require numeracy, it does improve financial product awareness and individuals’ attitudes towards making financial decisions. There is definitely room in the literature for more research using credible empirical methodologies that examine whether, or in what contexts, financial education actually impacts financial literacy.

In the end, we are more interested in financial outcomes than financial knowledge per se. The literature on financial education and financial outcomes includes several studies with plausibly exogenous sources of variation in the receipt of financial education, ranging from small-scale field experiments to large-scale natural experiments. The evidence in these papers on whether financial education actually improves financial outcomes is best described as contradictory.

Several studies have looked toward natural experiments as a source of exogenous variation in who receives financial education. Skimmyhorn (2012) uses administrative data to evaluate the effects of a mandatory eight-hour financial literacy course rolled out by the U.S. military during 2007 and 2008 for all new Army enlisted personnel. Because the roll-out of the financial education program was staggered across different military bases, we can rule out time effects as a confounding factor in the results. He finds that soldiers who joined the Army just after the financial education course was implemented have participation rates in and average monthly contributions to the Federal Thrift Savings Plan (a 401(k)-like savings account) that are roughly double those of personnel who joined the Army just prior to the introduction of the financial education course. The effects are present throughout the savings distribution and persist for at least 2 years (the duration of the data). Using individually-matched credit data for a random subsample, he finds limited evidence of more widespread improved financial outcomes as measured by credit card balances, auto loan balances, unpaid debts, and adverse legal actions (foreclosures, liens, judgments and repossessions).

Bernheim et al. (2001) and Cole & Shastry (2012) examine another natural experiment which created variation in financial education exposure: the expansion over time and across states in high school financial education mandates. The first of these studies concludes that financial education mandates do have an impact on at least one measure of financial behavior: wealth accumulation. But Cole & Shastry (2012) , using a different data source and a more flexible empirical specification, 6 examine the same natural experiment and conclude that there is no effect of the state high school financial education mandates on wealth accumulation, but rather, that the state adoption of these mandates was correlated with economic growth which could have had an independent effect on savings and wealth accumulation.

In addition to examining natural experiments, researchers have also randomly assigned financial aid provision to evaluate the impact of financial education on financial outcomes. For example, Drexler et al. (2012) examine the impact of two different financial education programs targeted at micro-entrepreneurs in the Dominican Republic as part of a randomized controlled trial on the effects of financial education. Their sample of micro-entrepreneurs was randomized to be in either a control group or one of two treatment groups. Members of one treatment group participated in several sessions of more traditional, principles-based financial education; members of the other treatment group participated in several sessions of financial education oriented around simple financial management rules of thumb. The authors examine participants’ use of several different financial management practices approximately one year after the financial education courses were completed. Relative to the control group, the authors find no difference in the financial behaviors of the treatment group who received the principles-based financial education; they do find statistically significant and economically meaningful improvements in the financial behavior of the treatment group who participated in the rule-of-thumb oriented financial education course. The results of this study suggest that how financial education is structured could matter in whether it has meaningful effects at the end of the day, and might help explain why many other studies have found much weaker links between financial education and economic outcomes.

Gartner & Todd (2005) evaluate a randomized credit education plan for first-year college students but find no statistically significant differences between the control and treatment groups in their credit balances or timeliness of payments. Servon & Kaestner (2008) used random variation in a financial literacy training and technology assistance program find virtually no differences between the control and treatment groups in a variety of financial behaviors (having investments, having a credit card, banking online, saving money, financial planning, timely bill payment and others), though they suspect that the program was implemented imperfectly. In a small randomized field experiment, Collins (2010) evaluates a financial education program for low and moderate income families and finds improvements in self-reported knowledge and behaviors (increased savings and small improvements in credit scores twelve months later), but the sample studied suffers from non-random attrition. Finally, Choi et al. (2011) randomly assign some participants in a survey to an educational intervention designed to teach them about the value of the employer match in an employer sponsored savings plan. Using administrative data, they find statistically insignificant differences in future savings plan contributions between the treatment and the control group, even in the face of significant financial incentives for savings plan participation.

Additional non-experimental research using self-reported outcomes and potentially endogenous selection into financial education suggests a positive relationship between financial education and financial behavior. This positive relationship has been documented for credit counseling ( Staten 2006 ), retirement seminars ( Lusardi 2004 , Bernheim & Garrett 2003 ), optional high school programs ( Boyce & Danes 2004 ), more general financial literacy education ( Lusardi & Mitchell 2007 ), and in the military ( Bell et al. 2008 ; 2009 ).

Altogether, there remains substantial disagreement over the efficacy of financial education. While the most recent reviews and meta-analyses of the non-experimental evidence ( Collins et al. 2009 , Gale & Levine 2011 ) suggest that financial literacy can improve financial behavior, these reviews do not appear to fully discount non-experimental research and its limitations for causal inference. Of the few studies that exploit randomization or natural experiments, there is at best mixed evidence that financial education improves financial outcomes. The current literature is inadequate to draw conclusions about if and under what conditions financial education works. While there do not appear to be any negative effects of financial education other than increased expenditures, there are also almost no studies detailing the costs of financial education programs on small or large scales ( Coussens 2006 ), and few that causally identify their benefits towards improved financial outcomes.

To inform policy discussion, this literature needs additional large-scale randomized interventions designed to effectively identify causal effects. Randomized interventions coupled with measures of financial literacy could address the question of how best to measure financial literacy while also providing credible assessments of the effect of financial education on financial literacy and economic outcomes. A starting point could be incorporating experimental components into existing large scale surveys like the NFCS; for example, a subset of respondents could be randomized to participate in an on-line financial education course or to receive a take-home reference guide to making better financial decisions. Measuring financial literacy before and immediately after the short course would test if financial education improves various measures of financial literacy in the short-run. A subsequent follow-up survey linked to administrative data on financial outcomes (e.g., credit scores) would measure if short-run improvements in financial literacy last, and which measures of financial literacy, if any, are correlated with improved financial outcomes. Studies along these lines are needed to identify the causal effects of financial education on financial literacy and financial outcomes, identify the best measures of financial literacy, and inform policy makers about the costs and benefits of financial education as a means to improve financial outcomes.

5. WHAT IS THE ROLE OF PUBLIC POLICY IN IMPROVING INDIVIDUAL FINANCIAL OUTCOMES?

Given the current inconclusive evidence on the causal effects of financial education on either financial literacy or financial outcomes, there remains disagreement over whether financial education is the most appropriate policy tool for improving consumer financial outcomes. As expected, those who believe that financial education works favor more financial education ( Lusardi & Mitchell 2007 , Hogarth 2006 , Martin 2007 ). Others, optimistic about the promise of financial education despite what they view as weak empirical evidence of positive effects, support more targeted and timely education with greater emphasis on experimental design and evaluation ( Hathaway & Khatiwada 2008 , Collins & O'Rourke 2010 ). Finally, some who do not believe the research demonstrates positive effects support other policy options ( Willis 2008 ; 2009 ; 2011 ). In this section, we place financial education in the context of the broader research on alternative ways to improve financial outcomes.

5.1 Is There a Market Failure?

As economists, we start this section with the question of market failure: Is there a need for public policy in improving financial knowledge and financial outcomes, or can the market work efficiently without government intervention? If, like other forms of human capital, financial knowledge is costly to accumulate, there may be an optimal level of financial literacy acquisition that varies across individuals based on the expected need for financial expertise and individual preference parameters (e.g., discount rates). Jappelli & Padula (2011) and Lusardi et al. (2012) both use the relationship between financial literacy and wealth as their point of departure in modeling the endogenous accumulation of financial literacy. In both papers, investments in financial literacy have both costs (time and monetary resources) and benefits (access to better investment opportunities) which may be correlated with household education or initial endowments. In the model of Jappelli & Padula (2011) , the optimal stock of financial literacy increases with income, the discount factor (patience), the return to financial literacy, and the initial stock of financial literacy. 7 In the model of Lusardi et al. (2012) , more educated households have higher earnings trajectories than those with less education and also have stronger savings motives due to the progressivity built into the social safety net. Because they save more, they value better financial management technologies more than those with lower incomes, and they rationally acquire a higher level of financial literacy.

These models suggest that differences in financial literacy acquisition may be individually rational. Consistent with this supposition, Hsu (2011) uses data from the Cognitive Economics Survey which includes measures of financial literacy for a set of husbands and their wives to examine the determination of financial literacy in married couples. She finds that wives have a lower average level of financial literacy than their husbands (cf. the gender differences in Table 3 ), which she posits arise from a rational division of household labor with men being more likely to manage household finances. Women, however, have longer life expectancies than their husbands and many will eventually need to assume financial management responsibilities. She finds that women actually acquire increased financial literacy as they approach widowhood, with the majority catching up to their husbands prior to being widowed.

More generally, limited financial knowledge may be a rational outcome if other entities—a spouse, an employer, a financial advisor—can help individuals compensate for their deficiencies by providing information, advice, or financial management. We don't expect individuals to be experts in all other domains of life—that is the essence of comparative advantage. Specialization in financial expertise may be efficient if it allows computational and educational investment to be concentrated or aggregated in specialized individuals or entities that develop algorithms and methods to guide consumers through financial waters.

Although low levels of financial literacy acquisition may be individually rational in some models, limited financial knowledge may create externalities such as reduced competitive pressure in markets which leads to higher equilibrium prices ( Hastings et al. 2012 ), higher social safety net usage, lower quality of civic participation, and negative impacts on neighborhoods ( Campbell et al. 2011 ), children ( Figlio et al. 2011 ) and families. Such externalities may imply a role for government in facilitating improved financial decision making through financial education or other mechanisms.

Individuals may also be subject to biases such as present-bias that lead to lower investments in financial knowledge today but which imply ex post regret in the future (sometimes referred to as an “internality”). Barr et al. (2009) note that in some contexts, firms have incentives to help consumers overcome their fallibilities. For example, if present bias leads consumers to save too little, financial institutions whose profits are tied to assets under management have incentives reduce consumer bias and encourage individuals to save more. In other contexts, however, firms may have incentives to exploit cognitive biases and limited financial literacy. For example, if consumers misunderstand how interest compounds and as a consequence borrow too much ( Stango & Zinman 2009 ), financial institutions whose profits are tied to borrowing have little incentive to educate consumers in a way that would correct their misperceptions.

What evidence is there on whether markets help individuals compensate for their limited financial capabilities? Unfortunately, many firms exploit rather than offset consumer shortcomings. Ellison (2005) and Gabaix & Laibson (2006) develop models of add-on and hidden pricing to explain the ubiquitous pricing contracts observed in the banking, hotel, and retail internet sales industries. Both models have naïve and informed customers and show that for reasonable parameter values, firms do not have an incentive to debias naïve consumers even in a competitive market. This leads to equilibrium contracts with low advertised prices on a “salient” price and high hidden fees and add-ons which naïve customers pay and sophisticated customers take action to avoid.

Opaque and complicated fees are widespread, and several empirical papers link these fee structures to shortcomings in consumer optimization. Ausubel (1999) analyzes a large field experiment in which a credit card company randomized mail solicitations varying the interest rate and duration of the credit card's introductory offer. He finds that individuals are overly responsive to the terms of the introductory offer and appear to underestimate their likelihood of holding balances past the introductory offer period with a low interest rate. 8 In a similar vein, Ponce (2008) evaluates a field experiment in Mexico in which a bank randomized the introductory teaser rate offered to prospective customers. He finds that a lower teaser rates leads to substantially higher levels of debt, even several months after the teaser rate expires, and that the higher debt results from lower payments rather than higher purchases or cash advances. Evaluating non-randomized offers to potential customers, he shows that banks do not randomly assign teaser rates but dynamically price discriminate by targeting offers to consumers who are more likely to permanently increase their balances.

Given that many firms are trying to actively obfuscate prices, it should not be surprising that there is little evidence that firms act to debias consumers through informative advertising or investments in financial education. In models of add-on prices, firms can hide prices or make them salient. Similarly, firms can invest in advertising that lowers price sensitivity, focusing consumer choice on non-price attributes, or in advertising that increases price competition by alerting customers to lower prices. In models of informative advertising, firms reduce information costs and expand the market by informing consumers of their price and location in product space. In contrast, in models of persuasive advertising, firms emphasize certain product characteristics and deemphasize others to change consumer's expressed preferences. For example a financial firm could advertise returns for the last year rather than management fees to convince investors that they should primarily evaluate past returns when choosing a fund manager. A financially literate consumer may be unmoved by this advertising strategy, but those who are less literate might be persuaded and end up paying higher management fees.

Hastings et al. (2012) use administrative data on advertising and fund manager choices for account holders in Mexico's privatized pension system. When the privatized system started, the government presumed that firms would compete on price (management fees) and engage in informative advertising to explain fees to consumers and win their accounts. Instead, firms invested heavily in sales force and marketing, and the authors find that heavier exposure to sales force (appropriately instrumented) resulted in lower price sensitivity and higher brand loyalty. This in turn lowered demand elasticity (recall equation 2) and increased management fees in equilibrium.

Importantly, informative advertising itself may be a public good. For example, advertising that explains the value of savings to individuals can benefit both the firm that makes the investment and its competitors if it increases demand for savings products in general. On the other hand, persuasive advertising attempts to convince customers that one product is better than another so that the benefits accrue to the firm that is advertising. The market may underprovide informative advertising in equilibrium because of the inherent free rider problem. Hastings et al. (in progress) test this theory using a marketing field experiment with two large banks in the Philippines. They find evidence that if firms face advertising constraints, persuasive rather than informative advertising maximizes profits. This suggests a role for government to remedy underprovision of public goods. In particular, these results suggest that financial products firms would welcome a tax that would fund public financial education as it would expand the market (e.g., increase total savings) and commit each institution to contribute to the public good. Note in equilibrium this could change firms’ incentives for add-on pricing as well by lowering the fraction of naïve customers in financial products markets ( Gabaix & Laibson 2006 ).

Even if firms do not have incentives to facilitate efficient consumer outcomes, a competitive market may generate an intermediate sector providing advice and guidance. This sector could provide unbiased decision-making-assistance that would lower decision making costs and efficiently expand the market. However, classic principal-agent problems may make such an efficient intermediate market difficult to attain.

Two recent studies highlight the limits of the financial advice industry as incentive-compatible providers of guidance and counsel on financial products and financial decision making. Mullainathan et al. (2012) conduct an audit study of financial advisors in Boston, sending to them scripted investors who present needs that are either in line with or at odds with the financial advisor's personal interests (e.g., passively managed vs. actively managed funds). They find that many advisors act in their personal interests regardless of the client's actual needs and that they reinforce client biases (e.g., about the merits of employer stock) when it benefits them to do so. Similarly, Anagol et al. (2012) conduct an audit study of life insurance agents in India who are largely commission motivated. As in the previous study, scripted customers present themselves to the agents with differing amounts of financial and product knowledge. They find that life insurance agents recommend products with higher commissions even if the product is suboptimal for the customer. They also find that agents are likely to cater to customer's beliefs, even if those beliefs are incorrect. Finally, instead of debiasing less literate consumers, agents are less likely to give correct advice if the customer presents with a low degree of financial sophistication. Together these studies suggest that with asymmetric information, there is both a principal agent problem and an incentive for advisors to compete by reinforcing biases rather than providing truthful recommendations ( Gentzkow & Shapiro 2006 ; 2010 , Che et al. 2011 ).

Overall, this section suggests that are several potential roles for government in improving financial outcomes for consumers. First, government can help solve the public goods problems which result in underinvestment in financial education. Second, government can regulate the disclosure of fees and pricing. And third, government can provide unbiased information and advice.

5.2 The Scope for Government Intervention

If there is a role for government intervention, what form should it take? We have already summarized the literature on financial education. Briefly, there is at best conflicting evidence that financial education leads to improved economic outcomes either through increasing financial literacy directly or otherwise. So while the logical public policy response to many observers is to increase public support for financial education, this option may not be an efficient use of public resources even if it will likely do no harm. 9 In some contexts, other policy responses such as regulation may be more cost effective.

One regulatory alternative is to design policies that address biases and reduce the decision making costs that consumers face in financial product markets ( Thaler & Sunstein 2008 ). Because the financial literacy literature currently offers only limited models of behavior that give rise to the observed differences in financial literacy and economic outcomes, it is difficult to turn to this literature to design policies that address the underlying behaviors that lead to low levels of financial literacy and poor financial decision making. However, the literatures in behavioral economics and decision theory have developed several models that are relevant, and policies from this literature that address behavioral biases like present bias and choice overload may provide templates for effective and efficient remedies.

Several papers in this vein have already had substantial policy influence. For example, Madrian & Shea (2001) and Beshears et al. (2008) examine the impact of default rules on retirement savings outcomes. They find that participation in employer-sponsored savings plans is substantially higher when the default outcome is savings plan participation (automatic enrollment) relative to when the default is non-participation. Beshears et al. ascribe this finding to three factors. First, automatic enrollment simplifies the decision about whether or not to participate in the savings plan by divorcing the participation decision from related choices about contribution rates and asset allocation. Second, automatic enrollment directly addresses problems of present bias which may result in well-intentioned savers procrastinating their savings plan enrollment indefinitely. Finally, the automatic enrollment default may service as an endorsement (implicit advice) that individuals should be saving. In related research, Thaler & Benartzi (2004) find that automatic contribution escalation leads to substantially higher savings plan contribution rates over a period of four years. These results collectively motivated the adoption of provisions in the Pension Protection Act of 2006 that encourage U.S. employers to adopt automatic enrollment and automatic contribution escalation in their savings plan.

Hastings and co-authors ( Duarte & Hastings 2011 , Hastings et al. 2012 , Hastings, in progress) examine Mexico's experience in privatizing their social security system and draw lessons for policy design. Hastings et al. (2012) find that without regulation, advertising reduces investor sensitivity to financial management fees and increases investor focus on non-price attributes such as brand name and past returns. In simulations, they find that neutralizing the impact of advertising on preferences results in price-elastic demand. These results suggest that centralized information provision and regulation of both disclosure and advertising are important to ensure that individuals with limited financial capabilities have access to the information necessary for effective decision making and to minimize their confusion or persuasion by questionable advertising tactics.

In a related paper, Duarte & Hastings (2011) examine the impact of an information disclosure policy mandated in Mexico. In 2005 the government attempted to increase fee transparency in the privatized social security system by introducing a single fee index which collapsed multiple fees (loads and fees on assets under management) into one measure. Prior to the policy, investor behavior was inelastic to either type of fee or, indeed, any measure of management costs. In contrast, after the policy, demand was very responsive to the fee index. Once investors had a simple way to assess ‘price’, they shifted their investments to the funds with a low index value. This example suggests that investors can be greatly helped by policies that simplify fee structures and either advertise fees or require that they are disclosed in an easy-to-understand way. This example also highlights the potential pitfalls of ill-conceived regulations. Although the policy shifted demand, it had little impact on overall management costs. This is because the index combined fees according to a formula and firms could game the index by lowering one fee while raising another. Not surprisingly, firms optimized accordingly (another example of obfuscated pricing as discussed earlier). The government eventually responded by restricting asset managers to charging only one kind of fee, obviating the need for a fee index.

Hastings (in progress) evaluates two field experiments as part of a household survey (the 2010 EERA referenced in Table 2 ) to further understand the impact of information and incentives on management fund choice by affiliates of Mexico's privatized social security system. Households in the survey were randomly assigned to receive simplified information on fund manager net returns (the official information required by the social security system at the time) presented as either a personalized projected account balance or as an annual percentage rate. In addition to that treatment, households were randomly assigned to receive a small immediate cash incentive for transferring assets to any fund manager that had a better net return (or a higher projected personal balance). While those with lower financial literacy scores are better able to rank the fund managers correctly when presented with information on balance projections instead of APRs (replicating prior results in Hastings & Tejeda-Ashton 2008 , Hastings & Mitchell 2011 ), she finds no impact of this information on subsequent decisions to change fund managers. Rather, individuals who receive the small cash incentive are more likely to change fund managers (for the better) regardless of the type of information received. These preliminary results suggest that incentives that both address procrastination and that are tied to better behavior may be more effective than financial education as financial education does not carry with it any incentive to act. We note that these results are still short-run and preliminary as they are based on a follow-up survey. Final results will depend on administrative records for switching which are not subject to problems inherent in self-reports. 10

Campbell et al. (2011) lay out a useful framework for thinking about potential policy options to improve financial outcomes for consumers. They suggest that evaluating consumers along two dimensions, their preference heterogeneity and their level of financial sophistication (or, in the parlance of this paper, their financial literacy), may help narrow the set of appropriate policy levers for improving consumer financial outcomes. At one extreme, take the case of stored value cards, a product used by a large number of unsophisticated consumers and for which consumer preferences are relatively homogeneous. Campbell et al. propose that in this case, since everyone largely wants the same thing, consumers are probably best served through the application of strict rules. This is likely to be more efficient and cost effective than attempting to educate consumers in an environment in which firms are less stringently regulated. In contrast, if consumers are financially knowledgeable and have heterogeneous preferences other approaches may make more sense. Although Campbell et al. do not discuss financial education in this context, it would seem that financial education, to the extent that it impacts financial literacy and economic outcomes, is a tool that holds most promise in markets for products with some degree of preference heterogeneity and that require some degree of financial knowledge. At the other extreme, there are products like hedge funds that cater to individuals with tremendous preference heterogeneity and that require a sizeable amount of financial knowledge for effective use. The latter condition may seem like a perfect reason to justify financial education. We would counter, however, that in such a context it may be difficult for public policy to effectively intervene in providing the level of financial education that would be required. For products for which extensive expertise is required, it may be more efficient to restrict markets to those who can demonstrate the skills requisite for appropriate and effective use.

Overall, the literature suggests that there are many alternatives to financial education that can be used to improve financial outcomes for consumers: strict regulation, providing incentives for improved choice architecture, simplifying disclosure about product fees, terms, or characteristics, and providing incentives to take action. Although none of the studies that we reviewed here ran a horse race between these other approaches and financial education, many of them show larger effects than can be ascribed to financial education in the existing literature. Expanding these studies to other relevant markets such as credit card regulation, payday loan regulation, mortgages, and car or appliance loans present important next steps in understanding how best to improve consumer financial outcomes.

6. DIRECTIONS FOR FUTURE RESEARCH

In this paper, we have evaluated the literature on financial literacy, financial education, and consumer financial outcomes. This literature consistently finds that many individuals perform poorly on test-based measures of financial literacy. These findings, coupled with a growing literature on consumers’ financial mistakes and documenting a positive correlation between financial literacy and suboptimal financial outcomes, have driven policy interest in efforts to increase financial literacy through financial education. However, there is little consensus in the literature on the efficacy of financial education. The existing research is inadequate for drawing conclusions about if and under what conditions financial education works.

The directions for future research depend in part on the goal at hand. If the goal is to improve financial literacy, the directions for future research that follow hinge on financial literacy and the role of financial education in enhancing financial literacy.

One set of fundamental issues relate to capabilities. What are the basic financial competencies that individuals need? What financial decisions should we expect individuals to successfully make independently, and what decisions are best relegated to an expert? To draw an analogy, we don't expect individuals to be experts in all domains of life—that is the essence of comparative advantage. Most of us consult doctors when we are ill and mechanics when our cars are broken, but we are mostly able to care for a common cold and fill the car with gas and check our tire pressure independently. What level of financial literacy is necessary or desirable? And should certain financial transactions be predicated on demonstrating an adequate level of financial literacy, much like taking a driver's education course or passing a driver's education test is a prerequisite for getting a driver's license. If so, for what types of financial decisions would such a licensing approach make most sense?

Another set of open questions relate to measurement. How do we best measure financial literacy? Which measurement approaches work best at predicting financial outcomes? And what are the tradeoffs implicit in using different measures of financial literacy (e.g., how does the marginal cost compare to the marginal benefit of having a more effective measure?).

A third set of issues surrounds how individuals acquire financial literacy and the mechanisms that link financial literacy to financial outcomes. How important are skills like numeracy or general cognitive ability in determining financial literacy, and can those skills be taught? To the extent that financial literacy is acquired through experience, how do we limit the potential harm that consumers suffer in the process of learning by doing? Is financial education a substitute or a complement for personal experience?

We need much more causal research on financial education, particularly randomized controlled trials. Does financial education work, and if so, what types of financial education are most cost effective? Much of the literature on financial education focuses on traditional, classroom based courses. Is this the best way to deliver financial education? More generally, how does this approach compare with other alternatives? Is a course of a few hours length enough, or should we think more expansively about integrated approaches to financial education over the lifecycle? Or, on the other extreme, should financial education be episodic and narrowly focused to coincide with specific financial tasks? There are many other ways to deliver educational content that could improve financial decision making: internet-based instruction, podcasts, web sites, games, apps, printed material. How effective (and how cost effective) are these different delivery mechanisms, and are some better-suited to some groups of individuals or types of problems than others? Should the content of financial education initiatives be focused on teaching financial principles, or rules of thumb? In the randomized controlled trial of two different approaches to financial education for microenterprise owners in the Dominican Republic discussed earlier, Drexler et al. (2011) find that rule-of-thumb based financial education is more effective at improving financial practices than principles-based education. How robust is this finding? And to what extent can firms nullify rules-of-thumb through endogenous responses to consumer behavior (see Duarte & Hastings 2011 )?

Even if we can develop effective mechanisms to deliver financial education, how do we induce the people who most need financial education to get it? School-based financial education programs have the advantage that, while in school, students are a captive audience. But schools can only teach so much. Many of the financial decisions that individuals will face in their adult lives have little relevance to a 17-year-old high school student: purchasing life insurance, picking a fixed vs. an adjustable rate mortgage, choosing an asset allocation in a retirement savings account, whether to file for bankruptcy. How do we deliver financial education to adults before they make financial mistakes, or in ways that limit their financial mistakes, when we don't have a captive audience and financial education is only one of many things competing for time and attention?

Finally, what is the appropriate role of government in either directly providing or funding the private provision of financial education? If financial education is a public good (Hastings et al., in progress), would industry support a tax to finance publically-provided financial education? If so, what form would that take?

If instead of improving financial literacy our goal is to improve financial outcomes, then the directions for future research are slightly different. The overarching questions in this case center around the tools that are available to improve financial outcomes. This might include financial education, but it might also include better financial market regulation, different approaches to changing the institutional framework for individual and household financial decision making, or incentives for innovation to create products that improve financial outcomes.

With this broader frame, one important question on which we have little evidence is which tools are most cost effective at improving financial outcomes? For some outcomes, the most cost effective tool might be financial education, but for other outcomes, different approaches might work better. For example, financial education programs have had only modest success at increasing participation in and contributions to employer-sponsored savings plans; in contrast, automatic enrollment and automatic contribution escalation lead to dramatic increases in savings plan participation and contributions ( Madrian & Shea 2001 , Beshears et al. 2008 , Thaler & Benartzi 2004 ). Moreover, automatic enrollment and contribution escalation are less expensive to implement than financial education programs. What approaches to changing financial behavior generate the biggest bang for the buck, and how does financial education compare to other levers that can be used to change outcomes?

Despite the contradictory evidence on the effectiveness of financial education, financial literacy is in short supply and increasing the financial capabilities of the population is a desirable and socially beneficial goal. We believe that well designed and well executed financial education initiatives can have an effect. But to design cost effective financial education programs, we need better research on what does and does not work. We also should not lose sight of the larger goal—financial education is a tool, one of many, for improving financial outcomes. Financial education programs that don't improve financial outcomes can hardly be considered a success.

Unfortunately, we have little concrete evidence to provide answers. We have a pressing need for more and better research to inform the design of financial education interventions and to prioritize where financial education resources can be best spent. To achieve this, funding for financial education needs to be coupled with funding for evaluation, and the design and implementation of financial education interventions needs to be done in a way that facilitates rigorous evaluation.

Acknowledgments

We acknowledge financial support from the National Institute on Aging (grants R01-AG-032411-01, A2R01-AG-021650 and P01-AG-005842). We thank Daisy Sun for outstanding research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Institute on Aging, the National Bureau of Economic Research, or the authors’ home universities. For William Skimmyhorn, the views expressed herein are those of the author and do not reflect the position of the United States Military Academy, the Department of the Army, the Department of Defense, or the National Bureau of Economic Research. See the authors’ websites for lists of their outside activities. When citing this paper, please use the following: Hastings JS, Madrian BC, SkimmyhornWL. 2012. Financial Literacy, Financial Education and Economic Outcomes. Annual Review of Economics 5: Submitted. Doi: 10.1146/annurev-economics-082312-125807.

NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Financial Literacy, Financial Education and Economic Outcomes Justine S. Hastings, Brigitte C. Madrian, and William L. Skimmyhorn NBER Working Paper No. 18412 September 2012 JEL No. C93,D14,D18,D91,G11,G28

1 See Dodd-Frank Wall Street Reform and Consumer Protection Act. H.R. 4173. Title X - Bureau of Consumer Financial Protection 2010, Section 1013. < http://www.gpo.gov/fdsys/pkg/BILLS-111hr4173enr/pdf/BILLS-111hr4173enr.pdf , accessed September 13, 2012>

2 By 2011, economic education had been incorporated into the K-12 educational standards of every state except Rhode Island, and personal finance was a component of the K-12 educational standards in all states except Alaska, California, New Mexico, Rhode Island, and the District of Columbia (Council for Economic Education, 2011).

3 See http://www.ja.org/about/about_history.shtml and http://www.councilforeconed.org/about/ .

4 The NFCS has three components, a national random-digit-dialed telephone survey, a state-by-state on-line survey, and a survey of U.S. military personnel and their spouses.

5 Based on author's calculations using TNE survey responses from 2012 linked to college loan taking data in Chile. See Hastings, Neilson and Zimmerman (in progress) for details on the survey and data.

6 Cole and Shastry (2010) are able to replicate the qualitative results of Bernheim, Garrett and Maki (2001) when using the same empirical specification even though they use a different source of data.

7 Financial literacy and savings are positively correlated in this model, although the relationship is not causal as both are endogenously determined.

8 See the Frontline documentary ”The Card Game” about how teaser rate policies were developed in response to customer service calls in which consumers were persistently overconfident in their ability to repay their debt.

9 See the discussion in Section 4. There is also a large literature in the economics of education documenting the fact that large increases in real spending per pupil in the United States has led to no measurable increase in knowledge as measured by ability to answer questions on standardized tests.

10 If the preliminary results hold, this policy is a very inexpensive alternative to financial education. Hastings notes that the immediate return (net of the incentive) on each incentivized offer from resorting of individuals across fund managers, before allowing firms to drop prices in response, results in $30 USD in expectation. Aggregated over 30 million account holders, this is a large savings even before allowing for secondary competitive effects, and in equilibrium it is virtually costless to implement.

RELATED RESOURCES

The following datasets with financial literacy questions that are referenced in this article are currently publically available.

2004 U.S. Health and Retirement Survey: http://hrsonline.isr.umich.edu/index.php?p=data

2010 U.S. Health and Retirement Survey: http://hrsonline.isr.umich.edu/index.php?p=data

2009 Rand American Life Panel Wellbeing 64: https://mmicdata.rand.org/alp/index.php?page=data&p=showsurvey&syid=64

2009 U.S. National Financial Capability Study: http://www.finrafoundation.org/programs/p123306

2009 Chilean Social Protection Survey (EPS): http://www.proteccionsocial.cl/index.asp

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Why Chronic Absenteeism Is a Budget Problem, Too

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Chronic absenteeism skyrocketed during the pandemic, creating headaches for teachers and school administrators eager to bring students back to regular classroom routines.

But for many schools, chronic absenteeism is a source of financial strain as well.

For schools in six states, which collectively enroll more than 13 million of the nation’s 50 million public school students, lower attendance translates to less funding from the state.

One of those states, Mississippi, earlier this month approved a new funding formula that will no longer calculate funding based on attendance.

But the remaining five—California, Idaho, Kentucky, Missouri, and Texas—have no such changes on the horizon.

In fact, some states are doubling down on attendance-based funding. Idaho, for instance, recently returned to that model after giving districts a reprieve from it during the height of the pandemic, costing schools a projected $162 million in the process . And Michigan has maintained its policy of docking state funds from districts anytime their overall daily attendance dips below 75 percent of enrolled students.

Districts and states are also investing thousands of dollars in efforts to find chronically absent students, or to hire firms to do that work for them, creating another cost. Last summer, the Wichita, Kan., school district invested $70,000 in Title I funds to hire an outside company, EveryDay Labs, to help reduce the district’s rate of chronically absent students, which at that time was close to 50 percent.

Beyond the immediate fiscal impacts, students who are chronically absent are likely to struggle academically, which means schools need more resources to serve them. And schools with a large number of chronically absent students may have lower test scores that dent the district’s reputation and discourage families from enrolling in the future.

All these issues are arising at the same time as many districts across the country are already experiencing a downward trend in enrollment , brought on largely by lower birthrates as well as growing interest in private and homeschool options, and a phenomenon of thousands of missing children that is still puzzling researchers.

“Districts are experiencing a double hit when they do their projections because they’re having to project fewer students and higher absences among students that do come,” said Carrie Hahnel, a senior associate partner at the research and advocacy nonprofit Bellwether, who has conducted extensive analysis of attendance-based funding policies. “It’s just compounding the pressures they’re facing.”

Schools face a variety of funding challenges when students don’t show up

Most states allocate funds to districts each year based on the number of enrolled students.

But roughly 10 percent of states, including the two largest, use a different metric: average daily attendance. Typically, states calculate the number of days students were present during the school year, and divide that by the number of days.

More than 1 in 4 students nationwide were chronically absent —missing at least 10 percent of school days—during the 2021-22 and 2022-23 school years. Those figures represented a marked increase over pre-pandemic levels.

Even small drops in absenteeism in a state that distributes school aid based in part on attendance rather than enrollment can make a big difference for school budgets. The Keller district in Texas loses $2.4 million for each percentage-point decrease in average daily attendance, Cory Wilson, the district’s area superintendent of educational support, told the Keller school board earlier this year . That’s $70 for each of the district’s 34,000 students.

Chronic absenteeism is causing financial headaches for districts even in states where attendance numbers don’t determine funding.

The Peabody district in Massachusetts serves 6,000 students in 10 schools. More than half are students of color.

During the 2021-22 school year, 46 percent of Peabody students missed more than 10 percent of school days. As the acute effects of the pandemic receded, that percentage dropped to 31 percent the following year, and so far this school year, it’s dropped again to 22 percent.

Even with the year-over-year improvements, those numbers worry Sam Rippin, the district’s business manager.

He’s observed a substantial increase in the number of students who require costly remediation and special education services. He believes some of those referrals stem from persistent absenteeism.

Peabody is also spending money to address its chronic-absenteeism problem. The district hired a former high school principal to serve as a reengagement coordinator to visit families’ homes and help students get reacquainted with attending school regularly. He’ll earn $60,000 over six months—$10,000 from a state grant and the remainder from federal COVID-relief dollars, which expire later this year.

“We were just lucky,” Rippin said. “It’s worked for us so far.”

South Dakota also offered grants for districts to spend on efforts to reduce chronic absenteeism . The state offered those funds from its allocation of federal Bipartisan Safer Communities Act dollars, which Congress approved to help districts improve security in the wake of the fatal mass shooting in Uvalde, Texas.

Administrators in the 200-student Leola district in South Dakota began investing in Positive Behavioral Interventions and Supports, or PBIS, as chronic absenteeism grew during the pandemic. PBIS involves identifying students at high risk of failing or dropping out and developing systems to support them.

Without additional funds, the small district could only do so much with PBIS, though. With a nearly $200,000 grant from the state, the district hired a full-time employee who works with students on credit recovery and develops programming to help reduce absenteeism, said Leah DeMent, a school counselor for the district who wrote the grant application.

The grant also helped pay for three staff members to participate in a “check and connect” mentoring program that pairs adults with students to help them return to regularly attending school, DeMent said.

Efforts like those can be powerful tools in the fight against chronic absenteeism, said Sarah Lenhoff, an associate professor of educational leadership and policy studies at Wayne State University who has conducted extensive research on chronic absenteeism . But they take time, effort, and money.

By contrast, research shows that lower-lift approaches like luring students to school with pizza parties don’t tend to work well, Lenhoff said.

“A lot of the things schools are able to do with their limited funds are these low-cost things that don’t have a strong evidence base,” Lenhoff said. “The things that have some emerging evidence that they work are extremely expensive.”

Getting students back on track is no small feat

A growing body of research shows that chronic absenteeism often stems from challenges students and families face that the school district can’t control , such as difficulty accessing transportation and child care. But schools are still expected, and often obligated, to contribute to solutions.

Failing to do so can be costly for districts. An obscure policy in Michigan , for instance, requires districts to add a day to the school calendar for every day in which fewer than 75 percent of their students show up to school. If they don’t add a day, the state docks an amount of state aid proportional to the amount by which attendance fell short of 75 percent.

Lenhoff said districts like Detroit that fear dipping below that 75 percent threshold sometimes proactively close schools when they anticipate high absenteeism—around holidays or when temperatures are very high or very low, for example.

“It really comes down to giving districts that are serving more children in poverty less money to serve them,” she said.

Punishing districts where students are chronically absent only makes the problem more likely to recur, Lenhoff said. Instead, she’d prefer to see states require districts to allocate a certain amount toward evidence-based programs that address chronic absenteeism.

That approach would improve upon existing state policies that aim to discourage chronic absenteeism but might end up exacerbating it, said Ericka Weathers, an assistant professor of education policy at the University of Pennsylvania.

Some states have truancy laws that require that students be suspended or that parents go to court or even jail if their children don’t show up to school. Taking children away from school, or taking away the option for parents to take their children to school, could end up costing the district in future years.

“If money’s taken away because kids are absent, it’s leaving less money to tackle the problems in a more restorative, preventative, and less reactive approach,” Weathers said.

The efforts backed by evidence can take time, and they’re likely to remain necessary. In California, chronic absenteeism is particularly high among younger students, researchers have found . Younger students who are chronically absent tend to continue to be chronically absent later in their K-12 careers.

During her research, Lenhoff has observed district workers who are able to make progress on two or three chronically absent students a day—helping families with day care, transportation, and other logistical concerns outside a school’s traditional purview.

“They’re working really hard to get to the bottom of these issues,” Lenhoff said. “That’s not a one-day job.”

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Health Literacy: the Path to Better Health Outcomes

This essay about health literacy emphasizes its critical role in healthcare, encompassing skills to understand and utilize health information effectively. It discusses the evolution of health literacy, including the need for analytical thinking, numeracy, and communication skills. The essay highlights the impact of inadequate health literacy, such as medication errors and disparities in healthcare access. It also suggests strategies for promoting health literacy, including clear communication by healthcare providers and targeted public health initiatives. Overall, the essay underscores the importance of health literacy in improving healthcare outcomes and achieving equity in healthcare access.

How it works

Health literacy, an indispensable yet frequently underestimated facet of healthcare, delineates the proficiency to acquire, comprehend, and employ health information to render enlightened determinations concerning one’s well-being. This concept transcends mere literacy; it encompasses a plethora of competencies enabling individuals to navigate the intricacies of healthcare systems, assimilate medical directives, and render determinations that positively influence their welfare. Grasping the significance of health literacy is pivotal for refining healthcare delivery and attaining impartial health outcomes.

The definition of health literacy has undergone metamorphosis over time to mirror the burgeoning complexity of healthcare.

Initially construed as the ability to peruse health-related information, it now enshrines proficiencies such as analytical thinking and numeracy. These aptitudes aid individuals in deciphering data, adhering to directives from healthcare providers, and assessing the credibility of diverse health resources. Health literacy also entails efficacious dialogue with healthcare professionals, ensuring that patients can articulate their symptoms, pose pertinent queries, and advocate for their requisites.

A noteworthy constituent of health literacy is the prowess to access pertinent information. In today’s digital epoch, where medical information is prolific yet at times unreliable, discerning accurate and dependable sources is imperative. This acumen assumes even greater significance when pondering how misinformation can sway determinations regarding vaccines, medications, and treatment regimens. Hence, a well-informed individual should possess the acumen to discriminate between credible, evidence-based sources and dubious content that may engender unfavorable health determinations.

Numeracy constitutes another pivotal facet of health literacy, aiding individuals in deciphering statistics and measurements employed in medical contexts. For instance, comprehending dosage instructions, monitoring blood pressure levels, and discerning the ramifications of diagnostic test outcomes necessitate rudimentary numeracy skills. Patients grappling with these competencies may encounter challenges adhering to their treatment regimens, potentially resulting in medication errors or ineffectual disease management.

Communication skills also wield considerable sway in health literacy. Patients must adeptly convey their symptoms and apprehensions to healthcare providers, who, reciprocally, should furnish lucid explanations and counsel. This reciprocal interaction ensures that patients are empowered to render well-informed determinations about their care and adhere to prescribed treatment strategies. Addressing barriers stemming from limited language proficiency or cultural disparities is imperative in fostering equitable health literacy.

The repercussions of inadequate health literacy are extensive. Individuals with deficient health literacy may misconstrue medical directives, culminating in elevated rates of hospitalization, medication errors, and preventable complications. This, in turn, augments healthcare expenditures and engenders heightened strain on healthcare systems. Furthermore, restricted health literacy disproportionately impacts marginalized communities, exacerbating health disparities and impeding endeavors to attain impartial health outcomes.

To confront these challenges, healthcare systems and professionals must actively promote health literacy. Providers should accord priority to lucid communication, employing plain language, visual aids, and teach-back methodologies to affirm patient comprehension. Additionally, public health initiatives can aid by crafting educational materials that are accessible and culturally attuned, targeting populations most susceptible to substandard health literacy. Schools and community organizations can also contribute by nurturing health literacy competencies through educational initiatives and outreach endeavors.

The digital metamorphosis of healthcare unveils novel prospects and challenges in this sphere. Digital tools such as patient portals and mobile health applications can enhance information accessibility and facilitate communication between patients and providers. Nonetheless, ensuring these tools are user-friendly and inclusive is pivotal to forestall exacerbating the digital chasm.

In culmination, health literacy constitutes a multifaceted concept encapsulating an array of competencies essential for traversing the healthcare panorama. By championing health literacy, we endow individuals with the ability to render enlightened determinations, adhere to treatment strategies, and ultimately ameliorate their health outcomes. This is indispensable in realizing a more impartial and efficacious healthcare system wherein every individual can access the care and information requisite for leading healthier lives.

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K-12 Education

California could require kids to learn how to manage money. Should voters decide curriculum?

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A ballot initiative that would require a personal finance class in high school circumvents the usual process for curriculum changes.

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School curriculum is usually the purview of education experts, but this fall it could be decided by California voters, who will vote on adding a new requirement for high school students: a one-semester class in managing personal finances.

California’s Secretary of State is poised to certify that the California Personal Finance Act is eligible for the November ballot, which would add financial literacy to the list of high school graduation requirements beginning with the class of 2030.

Students would learn about paying for college, online banking, taxes, budgeting, credit, retirement accounts, loans, how the stock market works and other topics. The issue is critical, organizers said, as students face a shifting economy and difficult decisions about college, careers and their futures.

“No one comes out of the womb knowing how to manage their credit score. It has to be taught,” said Tim Ranzetta, co-founder of a personal finance education nonprofit and a chief backer of the initiative. “And right now there’s a dramatic gap between what students know and what they need to know. We have to change that.”

Voters seem to agree with him. A 2022 survey of adults nationwide showed that nearly 90% support a financial literacy requirement in high school, and nearly as many wished they had taken such a course when they were students. 

That’s not surprising, considering the financial woes many people incur. The average credit card debt in California is $8,366, the sixth-highest rate in the country, and 1 in 6 borrowers nationwide are in default on their student loans . 

Financial literacy already in classrooms

But some education experts have pushed back, not because they’re opposed to financial literacy for students but because they question whether voters are best equipped to dictate what’s taught in classrooms.

Currently, the state’s History-Social Studies framework includes a one-semester course in economics , required for graduation, that covers much of the same material proposed by the financial literacy ballot initiative proponents. Financial literacy is also included in first, second and ninth grade curriculum. First graders, for example, learn that money can be exchanged for goods and services, and people make decisions about how to spend their money.

But Ranzetta said the curriculum, which was last updated in 2017, doesn’t focus enough on financial literacy. Personal finance is covered for only a few weeks in the economics course; the rest covers more abstract economic concepts like international trade, resource allocation and the benefits and drawbacks of capitalism. Individual teachers can choose how much they want to focus on certain topics.

State Superintendent Tony Thurmond wouldn’t answer questions about the ballot initiative, although he endorsed it. Linda Darling-Hammond, president of the State Board of Education, also wouldn’t answer questions. 

Leaving curriculum decisions to voters is ‘a bad idea’

The proposed ballot initiative so far has almost zero opposition, but some are questioning the idea of letting voters — and not education experts — decide what students learn in the classroom. Ordinarily, curriculum in California is developed by a group of teachers and subject-matter professionals who serve on the Instructional Quality Commission , which meets publicly six times a year. New curriculum is subject to multiple reviews, edits and public vetting, ultimately going before the State Board of Education for adoption. Local school boards can adjust curriculum according to the needs of their students.  

“Most voters don’t know much about education policy, and having them decide what can be taught in schools is a bad idea,” said Morgan Polikoff, an education professor at the University of Southern California. “We already have a process in place for adopting curriculum, and if people are unhappy with it there are plenty of avenues to have their voices heard — they can go to meetings, they can vote people out of office, they can talk to their representatives.”

“No one comes out of the womb knowing how to manage their credit score. It has to be taught.” Tim Ranzetta, co-founder of next gen personal finance

Polikoff worries that adopting curriculum through ballot initiatives could set a dangerous precedent. Religious or anti-LGBTQ curriculum, for example, could be approved by voters, setting up costly and lengthy legal showdowns with the state Department of Education. 

Curriculum can be complicated, as well. When writing new curricula, the Instructional Quality Commission looks at the broader context, making sure students get new material every year that builds on what they learned previously, subjects don’t overlap and topics are flexible enough for teachers to adapt lessons to the individual needs of their students. Textbooks and tests are also taken into consideration. 

Legislature weighs in

Most curriculum updates and changes originate with the commission, but sometimes the Legislature weighs in. The state’s new ethnic studies and media literacy requirements, for example, stemmed from Assembly bills. Another bill, AB 2097 , would add computer science as a graduation requirement.

AB 2927 , a financial literacy bill proposed by Democrat Kevin McCarty of Sacramento, would actually do almost the same thing as the ballot initiative. The bill would require financial literacy as a graduation requirement, although it would go into effect until 2031, a year later than the ballot measure.

Bruce Fuller, education professor at UC Berkeley, said he worries about the increasing politicization of curriculum — either from the Legislature or those pushing for ballot initiatives.

“We have these political interests unabashedly trying to control what’s taught in the classroom, instead of leaving it up to teachers and locally elected school boards,” Fuller said. “We should trust those folks to devise thoughtful curriculum that’s appropriate for their students.”

He also questioned the ever-growing list of graduation requirements. High schools only offer six or seven class periods a day, and with more required classes there’s less room for art and other electives. Some districts have started adding an extra period so students can fit in all the classes they need to take to graduate, finish a career pathway and qualify for California’s public universities. 

“We have these political interests unabashedly trying to control what’s taught in the classroom, instead of leaving it up to teachers and locally elected school boards.” Bruce Fuller, education professor at UC Berkeley

“I’m not sure how adding more required classes is going to motivate restless teenagers,” Fuller said. “With more requirements, we’re giving them almost no chance to study things they’re actually interested in.” 

McCarty’s bill  is not the Legislature’s first attempt to wade into financial literacy. A dozen bills requiring financial literacy have died or been vetoed in recent years, in most cases because financial literacy curriculum already exists and the state already has a system for adopting curriculum.

As Gov. Jerry Brown wrote in 2018 when he vetoed a bill that would have made financial literacy materials available to teachers: “This bill is unnecessary. The History-Social Science Framework already contains financial literacy content for pupils in kindergarten through grade 12, as well as a financial literacy elective.”

“I recognize the value of the process, but it’s slow and so far it hasn’t worked in California. The issue is too urgent and too popular to wait any longer.”      Tim Ranzetta, co-founder of next gen personal finance

Ranzetta said the Legislature’s inability to pass a financial literacy curriculum is what spurred him to take the matter directly to voters.

“I recognize the value of the process, but it’s slow and so far it hasn’t worked in California,” he said. “The issue is too urgent and too popular to wait any longer.”     

Ranzetta grew up in New Jersey, where his father was a banker and his mother was a community volunteer who raised six children. He learned financial literacy from his parents, and assumed other young people did, too. It wasn’t until he started volunteering at an East Palo Alto high school that he realized many students are clueless about money, and that ignorance can hamper them throughout their lives. But they were eager to learn, he said, and share the information with their parents.

That experience inspired him to start NextGen Personal Finance, which offers free financial literacy curriculum and training for teachers. At least 7,000 teachers in California and more than 100,000 nationwide have participated, he said.

A class that demystifies money

At Berkeley High, Crystal Rigley Janis teaches two economics classes and three personal finance classes, covering topics she wishes she knew as a young person: how to negotiate a salary, not relying on gut instinct when investing, and avoiding individual stocks in favor of index funds.

“It took me 15 years to understand those things, and it probably cost me millions of dollars,” said Rigley, who worked for several years at a wealth management firm before going into teaching. “I don’t want other people to make the mistakes I did.”

Eliza Maier, a senior, was so inspired by Rigley’s class that she opened a Roth IRA when she turned 18 and transferred money from her low-interest savings account. The class, she said, helped demystify money and the role it can play in major life choices.

“We learned that money isn’t good or bad – it’s a tool,” Maier said. “It can help you realize your goals. It can help you be prepared for whatever happens in your life. I didn’t know anything about money when I started taking this class, but I think it’s so important, especially for high school students.”

more on financial literacy

California keeps expanding school curricula. What about improving key subjects?

Why California should make personal finance a high school graduation requirement

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Carolyn Jones K-12 Education Reporter

Carolyn Jones covers K-12 education at CalMatters. A longtime news reporter, she’s covered education for nearly a decade, focusing on everything from special education to state funding policies to inequities... More by Carolyn Jones

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Enhancing Digital Media Literacy for the 2024 Election Season

| By Gale Staff |

Since the 2020 election, 16 million Americans have turned 18, boosting younger voices at the polls.

Confronted with potential misinformation and bias through social media and other news sources, how can high school educators ensure these new voters are accurately informed? That’s where digital media literacy comes in. Young voters must learn to identify facts from prejudiced or misleading information. These competencies are essential as they discover and practice what it means to be responsible citizens in the modern world.

The year 2024 hosts dozens of democratic elections worldwide. At the same time, people are losing trust in the democratic system. Mainstream media sources can lack diverse perspectives, journalists can rely on misleading headlines for clicks, and influencers can share opinions as facts on social media platforms.

For the sake of a healthy democracy, experts believe it’s vital to engage young voters early—before they reach the legal voting age. So nonpartisan groups and the federal government are urging schools to prioritize student voter registration. Most states allow citizens to register to vote at age 16 or 17, and high school teachers are integral in getting teenagers up to speed on the process.

How can you make an impact? Consider our top strategies to teach media literacy and help students discern truth from fiction and weigh different points of view.

Present a Range of Source Materials

The diversity of available content is key when discussing a major political topic. Providing students with varied perspectives helps them understand complex, multifaceted issues. Gale resources include primary and secondary sources, op-eds, images, videos, podcasts, infographics, and more. Plus, students can filter search results to reflect specific publications from international outlets.

Encourage students to seek contrasting opinions on contentious topics. For example, Gale In Context: Global Issues hosts a range of perspectives regarding the current Israeli-Palestinian conflict , which is likely a vital issue for the 2024 election. American opinions on the conflict are changing, and how the president approaches a resolution may prove instrumental to how he fares at the polls in November. Students can read a viewpoint essay from the New York Times , a report from Tel Aviv’s financial publication Globes, and an article from the Palestine News Network all through one comprehensive database .

How do the content and tone compare among news and viewpoint articles? Emphasize how informed voters take the time to understand the nuanced sides of a conflict rather than unquestioningly committing to one side.

Emphasize Source Credibility

Always check your sources. Every Gale article includes a thorough citation so students can quickly reference materials and vet the credibility of a publisher or author. At the top of each page, students will find a direct link to each article’s source. With just a click, students can see what else that author has written and identify significant trends regarding that perspective of the publication. Does the source tend to lean in either political direction? How often do they publish on a particular topic? Do they host diverse voices and consider opposing perspectives? Answering these questions helps inform the reliability of each source.

For many high schoolers who may be voting for the first time in 2024, climate change and the environment may be top of mind. But where are your students getting their information?

Gale’s impartial, science-based content can help young researchers further their understanding of the impacts of climate change. Dozens of related podcasts are available from NPR’s All Things Considered . Compare its content to a climate change-related article from a dedicated science-based newsletter, InsideClimate News .

But that’s just the first step; students must habitually screen their information sources. Just because someone shares something through social media doesn’t make it accurate. Teachers are essential to prepare students to be thoughtful and engaged citizens by leading classroom discussions about these critical modern-day research skills.

Leverage Built-In Critical Thinking Questions

One key strategy for developing discernment in young voters is thoughtfully engaging them with critical-thinking questions.

That’s why Gale experts don’t simply present information—we also provide probing questions to help students consider each topic more deeply. Educators can encourage students to reflect on these prompts independently or use these critical-thinking questions to inspire healthy classroom debate.

For example, Gale In Context: High School provides an in-depth summary page on politics and the media throughout American history. From early eighteenth-century newspapers to viral social media articles, Americans have relied on the media to help inform their voting decisions.

Ask your students to reflect on the page’s embedded critical-thinking questions, such as: “How might the way a politician engages with the media alter his or her chances at winning an election?” Stimulate discussion and ask students how political candidates have interacted with popular media channels and how those efforts were or were not successful for their campaigns.

Avoid Clickbait

Becoming an informed voter and mindful digital citizen takes time and patience—two things many busy Americans lack. Major media outlets know this, and they’ll often use eye-catching headlines, known as clickbait , to attract readers, often at the expense of journalistic professionalism. These headlines are usually alarming and purposely misleading, even though the article’s actual content may prove accurate otherwise.

Seek Out Both Sides

Gale’s databases often include helpful and frequently updated topic pages for today’s most complicated issues. Your students can access comprehensive yet accessible synopses on topics like abortion , illegal immigration , the Russia-Ukraine conflict , gun control , and artificial intelligence . These pages provide a reliable outline for controversial subjects, giving students valuable context and a solid foundation for further research. And every article includes a “More Like This” section featuring hyperlinked recommendations for in-depth study.

Digital media literacy skills are a cornerstone of a successful high school education in the twenty-first century. As technology becomes more pervasive in and outside the classroom, teachers are vital to ensuring the next generation can make voting decisions based on accurate information. Use Gale In Context to provide reliable, diverse content and help your students develop the skills they need to make informed voting decisions.

To learn more, connect with a Gale education consultant to see Gale In Context in action.

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