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

Abstract

Attention to financial literacy has grown in recent years, in large part because technological, market, and legislative changes have resulted in a more complex financial services industry that requires consumers to be more actively involved in managing their finances. Consumer and community interest groups, banking companies, government agencies, and policymakers, among others, have become concerned that many consumers lack a working knowledge of financial concepts and the tools they need to make decisions most advantageous to their economic well-being. As a result, considerable resources have been devoted to financial literacy, with a wide range of organizations providing training, including banks, consumer and community groups, employers, and government agencies. Overall, studies suggest that financial literacy training can lead to better decisionmaking; however, the findings raise numerous questions about the best means of providing that training, the most appropriate setting, and the most opportune timing. Findings from recent research on personal money management styles, combined with awareness of human behavioral traits, offer insights that may be useful in developing successful training programs and strategies.

Learning by doing: the role of financial experience in financial literacy

“…The predominant method used to overcome this weakness has been through financial education 1 . Financial education programmes have been provided in many settings, such as inclusion in high school curricula (Bernheim et al 2001; Sherraden et al 2007; Mandell 2008), workplace education programmes (Bernheim and Garrett 2003), education efforts by banks (Braunstein and Welch 2002) and advertisements and web-based solutions. To date, however, evaluations of these programmes have generally shown little success in improving financial literacy and changing financial behaviour (Braunstein and Welch 2002; Lyons et al 2006; Mandell 2008).…”

“…A survey of the literature by Braunstein and Welch (2002) concludes that programmes that take a specific goal-orientated approach to financial education, such as those aimed towards improving home ownership (Hirad and Zorn 2001), improving workplace retirement scheme participation (Bayer et al 1996; Lusardi and Mitchell 2009) or offering credit counselling (Elliehausen et al 2003) have a positive effect on financial behaviour. However, other studies find that similar goal-orientated programmes like retirement seminars are ineffective in changing financial behaviour (Madrian and Shea 2001; Duflo and Saez 2003; Choi et al 2006).…”

“…However, other studies find that similar goal-orientated programmes like retirement seminars are ineffective in changing financial behaviour (Madrian and Shea 2001; Duflo and Saez 2003; Choi et al 2006). Braunstein and Welch (2002) also conclude that more general programmes aimed at improving overall financial knowledge, as opposed to providing just goal-orientated information, have limited success. For example, Mandell (2008) examines the financial literacy of high school seniors via a national survey conducted periodically by the Jump$tart coalition 2 .…”

“…A high level of financial literacy among the population is increasingly necessary as financial markets are becoming more complex due to a greater diversity and sophistication in financial instruments. In addition, many governments are shifting the responsibility for retirement savings to individuals (Braunstein and Welch 2002; Lusardi, 2008). Hence, individuals need to understand the relationship between risk and return, how to assess risk, the concept of risk diversification and how to monitor the performance of their investments, taking into account fees and related transaction costs.…”

The Potential for Literacy to Shape Lifelong Cognitive Health

“…Older adults with low health literacy—the ability to comprehend and make decisions about health information—often experience poorer health outcomes compared with proficient age- and health-matched individuals (Morrow et al, 2006; Sparks & Nussbaum, 2008). Financial literacy can impact employment, income, and retirement preparedness (Braunstein & Welch, 2002; Lusardi & Mitchell, 2007). Literacy has even been argued to be a keystone to promoting safety at home and in the workplace (Szudy & Arroyo, 1994).…”