I have mentioned some of the activities of the Financial Literacy Center (FLC) in previous posts and I want to discuss them further here. We place a high value on creativity and ingenuity in the design of financial literacy programs and have found that this is particularly important when trying to reach certain segments of the population such as the young and those not in school and not in the workplace.
One needs to think outside the box to find effective solutions to financial illiteracy. One of our teams has certainly gone in that direction. Doorways to Dreams Fund (D2D) has been developing video games targeted to low-income individuals to provide training in critical financial literacy areas, including household budgeting, consumer decision making, and cost-effective use of financial service providers.
The team has already launched Celebrity Calamity (http://www.d2dfund.org/first_game), a game targeted to lower-income women aged 18-30, especially single mothers. Players become the financial manager for up-and-coming celebrities who spend beyond their means. To be successful, players must effectively use a bank account, debit card, and credit card, so the game teaches the importance of paying off credit card balances, minimizing credit card finance charges, avoiding fees (including bank overdrafts, late payments, and over-the-limit fees), and making informed annual percentage rate choices. The game also includes a number of implicit learning objectives, such as raising awareness of spending behavior and the value and utility of saving money.
The game that the FLC supported and that D2D is now completing is called Bite Club. Designed for lower-income adults, this game is inspired by the very popular casual video game Diner Dash. Bite Club offers players a simulated experience in which they face the real-world tension between managing debt payments and current spending needs on the one hand and saving for the long-term goal of retirement on the other. For low-income and minority adults, building retirement savings may seem completely out of reach, given pressing needs to pay down debt and manage daily expenses. Bite Club players experience the natural tension that exists among debt service, spending, and long-term saving as the game unfolds.
I want to explain the workings of the game to show you what I mean when I say we need to think outside the box! To win, players must successfully manage a “day club” for vampires. By featuring vampires, who live forever, the game is able to highlight the impact of long-term savings. Bite Club is a 15-round game with three years’ time passing between each round, allowing the game play experience to span 45 years. In effect, the players enter a financial simulation running from age 22 to age 67.
The core challenges of the game include the following:
• Running a club for vampires that offers patrons seating areas with tables and couches, a bar (type A, B, or O blood!), a DJ booth with interactive song selections, and a dance floor.
• Servicing the four stations of the club in order to satisfy a variety of vampire customers and earn revenue.
• Making financial management decisions related to paying off debt, managing current consumption, and saving for retirement.
• Reacting to a variety of savings offers, which include retirement “open enrollment” and additional long-term savings promotions.
The core instructional design content includes
• Saving for Retirement. Players’ characters long to move to the “No Sun-belt” for retirement, but because vampires are immortal, they must save a substantial amount of money to finance their retirement dream, and they must reach this retirement savings goal before they can close down their “day club” and retire.
• Paying Down Debt. Players start with credit card debt (from purchases of items needed to open the club) from the Werewolf Bank. And in order to retire, players must pay off low annual percentage rate student loans from their university business classes.
• Managing Current Consumption. The club must be managed effectively to continue to satisfy customers. Players are offered the option to purchase various upgrades, some of which are valuable (needs) and some of which are merely aesthetic (wants).
Why this approach to improving financial literacy? As many as 72% of Americans play video games, with rates of play highest among those under age 35. Moreover, video games are the fastest growing form of entertainment in the United States. We need to find ways to engage individuals in financial education. Learning through traditional venues like classrooms and the workplace are not feasible or desirable for all populations.
Thinking outside the box requires creativity and ingenuity. Nick (Maynard), Tim (Flacke), Peter Tufano, and others at D2D have been willing to experiment with new ways to improve financial literacy. They have been willing to think differently and consider unique approaches. Often it seems this kind of thinking requires the creative mind of a child not yet locked into traditional ways of thinking. I was in Boston Common last summer and saw a group of people around a guard riding a tall, beautiful horse. I joined them to admire the horse. Everyone in the group had comments on the horse, very similar to what I was thinking too, until a little girl looked up and asked, “Does this horse smile?” Now, who would have thought of that?
About Business & Finance empowers people to make the most of their financial lives. Whether you want to plan a family budget, make the most of your savings.
Post mega conference
The first conference of the Financial Literacy Research Consortium was held last Thursday and Friday, November 18 and 19, in Washington, DC. The Financial Literacy Center was in charge of organizing it, and I just want to say how happy I am about the outcome. There are as many as five things I want to highlight about the conference.
David Rust, the Deputy Commissioner for the Office of Retirement and Disability Policy at the Social Security Administration (SSA), opened the conference. As he described the work that SSA is doing to promote financial literacy, the image of a family doctor came to my mind. In the same way that a family doctor attends to his patients over time, caring for them at each stage of the life cycle, treating illness when necessary and preserving health when possible, so Social Security has been taking care of individuals, supporting them when they face problems such as disability. And with the financial literacy initiative, SSA is aiming to preserve and promote future financial stability by making sure that people are accumulating enough for retirement and are well equipped to make savvy financial decisions. SSA is ideally situated to promote financial literacy: it is an institution that is focused on the long term and that has the patience to wait for results in the long run. And investments in financial literacy will bear fruit in the long term, in line with the horizon of SSA.
Michael Barr, the Assistant Secretary for Financial Institutions at the U.S. Department of Treasury, delivered the keynote address at lunch. Michael is also a top law scholar and a faculty member at the University of Michigan Law School. He gave one of the most articulate descriptions of the role of financial literacy and financial regulation that I have heard. He generously interacted with the audience after his talk, and the many questions that were asked are a testament to the importance of the work he is doing. The Treasury Department is playing a significant leadership role in the field of financial literacy, and I am proud that Michael Barr is at the helm of many initiatives, including the important work of building the new Consumer Financial Protection Bureau.
Punam Keller, the Charles Henry Jones Professor of Management at the Tuck School of Business, delivered the closing talk. Punam is an expert on marketing strategy and social marketing and she is also the Marketing Director for the Financial Literacy Center. She described why financial literacy needs a marketing strategy and gave many tips on how social marketing can be of help in designing programs that are effective in influencing behavior. Punam is one of the most engaging, energetic, and brilliant speakers I have heard, and I am very happy to have been able to collaborate with her on so many projects.
The conference was large, with over 500 people registered. We designed the conference for interaction, and I believe we succeeded in engaging the audience. There were a lot of questions at the end of each session, and in the sessions I was able to attend, I learned as much from the questions that were asked as from the presentations. The agenda included an hour dedicated to visiting exhibit booths at which our team members displayed the products and projects they have been working on in the past year and interacted with conference attendees. I walked through the conference foyer during breaks and took stock of the many conversations generated by the topics presented at the conference sessions. A number of people approached me to say how much they enjoyed being involved in the conference. A sense of involvement and engagement is not a given at all conferences and one lesson I took away from this event is the value of creating a dialogue between the presenters and attendees. There is much to be gained from a conference at which everyone feels part of the conversation and everyone feels they have a chance for their voice to be heard.
Some of the programs that were presented speak of the creativity and ingenuity that is being used in designing financial literacy programs. One of the most popular presentations and exhibit booths was that of Doorways to Dreams (D2D). D2D has developed a casual video game, called Bite Club, to teach financial literacy. Bite Club, which is inspired by one of the most popular casual games of all time, Diner Dash, offers players a simulated experience in which they face the real-world tension between managing debt payments and current spending needs on the one hand, and saving for the long-term goal of retirement on the other. Players must manage a “day club” for vampires which demands they successfully pay off debt, meet current consumption needs, and save effectively for retirement. The core instructional design teaches the value of three important real world behaviors: (1) saving for retirement, (2) paying down debt, and (3) managing current consumption. In case you did not think there is a relationship between vampires and financial literacy, think again!
Let me turn now to the topic of food. As I have mentioned in previous posts, I believe food contributes to the success of any event. The food at the Ronald Reagan Center was as expected: breakfast was hearty, with plenty of bagels, muffins, juices, and strong coffee (much needed!). For lunch, we had to go for popular choices: salad as the appetizer and chicken as entrée. But the chocolate dessert was delicious, a tart with fresh raspberries on top of a good layer of melted chocolate. I gulped mine down and, since Michael Barr had to rush off at the end of his presentation, I ate part of his, too!
Presentations, keynote speeches, and photos of conference participants will be posted soon on our new web site http://www.financialliteracyfocus.org/
David Rust, the Deputy Commissioner for the Office of Retirement and Disability Policy at the Social Security Administration (SSA), opened the conference. As he described the work that SSA is doing to promote financial literacy, the image of a family doctor came to my mind. In the same way that a family doctor attends to his patients over time, caring for them at each stage of the life cycle, treating illness when necessary and preserving health when possible, so Social Security has been taking care of individuals, supporting them when they face problems such as disability. And with the financial literacy initiative, SSA is aiming to preserve and promote future financial stability by making sure that people are accumulating enough for retirement and are well equipped to make savvy financial decisions. SSA is ideally situated to promote financial literacy: it is an institution that is focused on the long term and that has the patience to wait for results in the long run. And investments in financial literacy will bear fruit in the long term, in line with the horizon of SSA.
Michael Barr, the Assistant Secretary for Financial Institutions at the U.S. Department of Treasury, delivered the keynote address at lunch. Michael is also a top law scholar and a faculty member at the University of Michigan Law School. He gave one of the most articulate descriptions of the role of financial literacy and financial regulation that I have heard. He generously interacted with the audience after his talk, and the many questions that were asked are a testament to the importance of the work he is doing. The Treasury Department is playing a significant leadership role in the field of financial literacy, and I am proud that Michael Barr is at the helm of many initiatives, including the important work of building the new Consumer Financial Protection Bureau.
Punam Keller, the Charles Henry Jones Professor of Management at the Tuck School of Business, delivered the closing talk. Punam is an expert on marketing strategy and social marketing and she is also the Marketing Director for the Financial Literacy Center. She described why financial literacy needs a marketing strategy and gave many tips on how social marketing can be of help in designing programs that are effective in influencing behavior. Punam is one of the most engaging, energetic, and brilliant speakers I have heard, and I am very happy to have been able to collaborate with her on so many projects.
The conference was large, with over 500 people registered. We designed the conference for interaction, and I believe we succeeded in engaging the audience. There were a lot of questions at the end of each session, and in the sessions I was able to attend, I learned as much from the questions that were asked as from the presentations. The agenda included an hour dedicated to visiting exhibit booths at which our team members displayed the products and projects they have been working on in the past year and interacted with conference attendees. I walked through the conference foyer during breaks and took stock of the many conversations generated by the topics presented at the conference sessions. A number of people approached me to say how much they enjoyed being involved in the conference. A sense of involvement and engagement is not a given at all conferences and one lesson I took away from this event is the value of creating a dialogue between the presenters and attendees. There is much to be gained from a conference at which everyone feels part of the conversation and everyone feels they have a chance for their voice to be heard.
Some of the programs that were presented speak of the creativity and ingenuity that is being used in designing financial literacy programs. One of the most popular presentations and exhibit booths was that of Doorways to Dreams (D2D). D2D has developed a casual video game, called Bite Club, to teach financial literacy. Bite Club, which is inspired by one of the most popular casual games of all time, Diner Dash, offers players a simulated experience in which they face the real-world tension between managing debt payments and current spending needs on the one hand, and saving for the long-term goal of retirement on the other. Players must manage a “day club” for vampires which demands they successfully pay off debt, meet current consumption needs, and save effectively for retirement. The core instructional design teaches the value of three important real world behaviors: (1) saving for retirement, (2) paying down debt, and (3) managing current consumption. In case you did not think there is a relationship between vampires and financial literacy, think again!
Let me turn now to the topic of food. As I have mentioned in previous posts, I believe food contributes to the success of any event. The food at the Ronald Reagan Center was as expected: breakfast was hearty, with plenty of bagels, muffins, juices, and strong coffee (much needed!). For lunch, we had to go for popular choices: salad as the appetizer and chicken as entrée. But the chocolate dessert was delicious, a tart with fresh raspberries on top of a good layer of melted chocolate. I gulped mine down and, since Michael Barr had to rush off at the end of his presentation, I ate part of his, too!
Presentations, keynote speeches, and photos of conference participants will be posted soon on our new web site http://www.financialliteracyfocus.org/
Mega conference
I am writing this blog to make sure all my readers are aware of the First Annual Conference of the Financial Literacy Research Consortium. The conference, titled “New Insights and Advances in Financial Literacy: Translation, Dissemination, Change,” will be held on November 18 and 19, 2010, in Washington, D.C., at the Ronald Reagan Building and International Trade Center.
For those of you who do not know it, the Financial Literacy Research Consortium (FLRC) consists of three centers: (1) the Financial Literacy Center, which is a consortium of three institutions under the coordination of the RAND Corporation, (2) the Center for Financial Literacy at Boston College, and (3) the Center for Financial Security at the University of Wisconsin-Madison. The FLRC was established in October 2009 and is supported by the Social Security Administration.
We (the Financial Literacy Center) are hosting this conference and have been very busy preparing for this day-and-a-half event, which will bring together scholars from the Consortium to present their research and discuss how programs, educational products, and policies can best promote financial planning and financial security.
The conference is designed for interaction. For example, it include a series of workshops on innovative products, small seminars that focus on different stages of the life cycle, and a product fair at which participants can try out new educational products and interact with the developers. We are expecting as many as 400 attendees and the agenda features topics that span from video games that teach the perils of debt to building an effective web site for financial literacy to discussions of effective financial education programs. You can find the program and the link to the conference registration at http://www.rand.org/events/2010/11/18/.
A short description of the projects that our center has done in our first year and that will be presented at the conference is posted at http://www.rand.org/labor/centers/financial-literacy/projects/ .
I was attending the Pension Research Council’s Board meeting two weeks ago at the Wharton School, and one of the Board members asked Olivia and me: “So, what are the dates of your mega conference?” I was caught by surprise, but “mega conference” is a pretty good description of our upcoming event, and that’s how we’ve been referring to it ever since!
You are invited to attend the conference, or better, the mega conference! We hope to see you there.
For those of you who do not know it, the Financial Literacy Research Consortium (FLRC) consists of three centers: (1) the Financial Literacy Center, which is a consortium of three institutions under the coordination of the RAND Corporation, (2) the Center for Financial Literacy at Boston College, and (3) the Center for Financial Security at the University of Wisconsin-Madison. The FLRC was established in October 2009 and is supported by the Social Security Administration.
We (the Financial Literacy Center) are hosting this conference and have been very busy preparing for this day-and-a-half event, which will bring together scholars from the Consortium to present their research and discuss how programs, educational products, and policies can best promote financial planning and financial security.
The conference is designed for interaction. For example, it include a series of workshops on innovative products, small seminars that focus on different stages of the life cycle, and a product fair at which participants can try out new educational products and interact with the developers. We are expecting as many as 400 attendees and the agenda features topics that span from video games that teach the perils of debt to building an effective web site for financial literacy to discussions of effective financial education programs. You can find the program and the link to the conference registration at http://www.rand.org/events/2010/11/18/.
A short description of the projects that our center has done in our first year and that will be presented at the conference is posted at http://www.rand.org/labor/centers/financial-literacy/projects/ .
I was attending the Pension Research Council’s Board meeting two weeks ago at the Wharton School, and one of the Board members asked Olivia and me: “So, what are the dates of your mega conference?” I was caught by surprise, but “mega conference” is a pretty good description of our upcoming event, and that’s how we’ve been referring to it ever since!
You are invited to attend the conference, or better, the mega conference! We hope to see you there.
Asset building or debt management?
At the risk of making my blog look dangerously like a travel diary, I write this having returned from Oxford University where I spoke about financial capability at a conference composed of academics, the insurance industry (mostly Allianz), and policy makers. Oxford has a magnificent campus, and I could devote many paragraphs describing the beautiful Corpus Christi college, where the conference was held, but I will instead write about financial capability.
As you may know from previous posts, FINRA Investor Education Foundation supported the National Financial Capability Study, a project done in collaboration with the U.S. Treasury. The National Financial Capability Study consists of three linked surveys: (1) the National Survey, a nationally projectable telephone survey of 1,488 American adults; (2) the State-by-State Survey, a state-by-state online survey of approximately 25,000 American adults (roughly 500 per state, plus the District of Columbia; and (3) the Military Survey, an online survey of 800 military service members and spouses. At my visit to Oxford, I presented the data from the National Survey, administered to respondents between May and July 2009.
The National Survey shows that financial capability is low in the United States, and this lack of financial capability has important implications not only for policy but for the economic system in general. As I discussed at the conference, when people talk about financial security, they tend to focus on asset building. With the shift that occurred in the past twenty years from Defined Benefit (DB) to Defined Contribution (DC) pension plans, individuals have been put in charge of deciding how much to save for retirement and how to allocate their pension wealth. They have to make those choices in the face of financial markets and financial products that are increasingly more complex. As documented in the National Survey, people do not seem well equipped to make the necessary financial decisions. Only 30% of Americans can correctly answer three basic questions related to calculating interest payments and to inflation or risk diversification, concepts that are at the basis of most financial decisions. Several studies have argued that many workers are poorly managing their retirement accounts and pensions funds. We had a glimpse of this with the failure of Enron, which revealed that many Enron employees were heavily invested in company stock; not an ideal way to diversify risk. But DC pensions have not matured yet, and it will be another twenty years before we see how individuals have fared in mostly independent management of retirement savings and investments. Current pensions are mostly paid out by DB schemes, and even the baby boomers who are starting to retire will rely mostly on savings that were part of a DB plan or a mix of DB and DC plans.
If we want to talk about financial security and witness the impact of lack of financial literacy on financial behavior, we have to turn to debt. One other important recent change in the economy has been an increase in opportunities to borrow. Consumer credit, like DC pensions, was rare in the past but has now become available to a large share of individuals, and decisions about how much to borrow have shifted onto individuals. Consider credit cards. Credit card offers arrive in the mail and one can borrow a large amount of money by simply using more and more cards. No one is checking to see whether individuals are borrowing an amount that they can realistically repay. With sub-prime mortgages, almost anyone who wanted a mortgage could get one; banks were not checking to see whether borrowers could afford the loan contract they were getting into. I have used before the analogy of a water faucet: with plentiful and readily available credit, the faucet was fully open and one could draw as much water as was desired; it was up to the consumer alone to decide when to turn off the tap.
What are the consequences of these changes to the economy, and how well are consumers doing on debt behavior? Unlike poor asset building and asset management, the consequences of poor debt behavior can be seen in the short run. Personal bankruptcy rates have skyrocketed, tripling in a matter of ten years. Most sub-prime mortgages went bust, sinking both the banks and the consumers who engaged in them. I hardly think I have to tell you the statistics that have resulted from the National Survey (although being an academic, I will, so bear with me), because American’s problems with debt have been so widely apparent in the last few years. But the findings from the National Survey clearly document just how widespread debt is in the U.S. population. For example, 23% of Americans have engaged in high-cost methods of borrowing in the past five years (payday loans, pawn shops, and the like). In other words, more than one in five Americans has borrowed at interest rates that can be as high as 1000%. Fewer than half of those who have credit cards pay their bill in full each month, and a sizable share of those who borrow on credit cards engage in behavior that generates not only interest payments but also fees. One disturbing result is that many of those who use credit cards in ways that generate interest payments and fees are close to retirement—the people who should be at the peak of their wealth accumulation are instead borrowing at rates that are much higher than those earned on their assets. Another equally disturbing feature is that many of those who carry credit card balances do not know the interest they are paying on their balance. Similarly, many mortgage borrowers do not know some crucial terms of their mortgages. And while about half of the population have retirement accounts, many have been borrowing on those accounts, in effect borrowing on themselves.
These finding bring me to three thoughts. First, it is very limiting to assess financial security by looking at asset building only. One of the ways to help people achieve financial security may be to help them manage their debt. In any case, one cannot look at one side of a household balance sheet (assets), without focusing on the liability (debt) side. Second, we have clearly seen how poorly individuals manage debt when they are put in charge of it without any consideration of what they know and how they make financial decisions. Third, there may be another crisis brewing around DC pensions. In twenty years, when workers with DC-only pensions start retiring and are confronted with the decision of whether to take their pension payments (however small or large) in a lump sum or to annuitize, we will fully understand the consequences of the shift in pension plans. We can act now and prevent a potential crisis by empowering workers with both financial knowledge and help.
Walking through the beautiful gardens of Corpus Christi and the New College in Oxford it was difficult to think of financial crises and their devastating consequences. But mistakes can build up silently and explode without much warning. We all need to be better prepared to live in today’s world of individual financial responsibility.
As you may know from previous posts, FINRA Investor Education Foundation supported the National Financial Capability Study, a project done in collaboration with the U.S. Treasury. The National Financial Capability Study consists of three linked surveys: (1) the National Survey, a nationally projectable telephone survey of 1,488 American adults; (2) the State-by-State Survey, a state-by-state online survey of approximately 25,000 American adults (roughly 500 per state, plus the District of Columbia; and (3) the Military Survey, an online survey of 800 military service members and spouses. At my visit to Oxford, I presented the data from the National Survey, administered to respondents between May and July 2009.
The National Survey shows that financial capability is low in the United States, and this lack of financial capability has important implications not only for policy but for the economic system in general. As I discussed at the conference, when people talk about financial security, they tend to focus on asset building. With the shift that occurred in the past twenty years from Defined Benefit (DB) to Defined Contribution (DC) pension plans, individuals have been put in charge of deciding how much to save for retirement and how to allocate their pension wealth. They have to make those choices in the face of financial markets and financial products that are increasingly more complex. As documented in the National Survey, people do not seem well equipped to make the necessary financial decisions. Only 30% of Americans can correctly answer three basic questions related to calculating interest payments and to inflation or risk diversification, concepts that are at the basis of most financial decisions. Several studies have argued that many workers are poorly managing their retirement accounts and pensions funds. We had a glimpse of this with the failure of Enron, which revealed that many Enron employees were heavily invested in company stock; not an ideal way to diversify risk. But DC pensions have not matured yet, and it will be another twenty years before we see how individuals have fared in mostly independent management of retirement savings and investments. Current pensions are mostly paid out by DB schemes, and even the baby boomers who are starting to retire will rely mostly on savings that were part of a DB plan or a mix of DB and DC plans.
If we want to talk about financial security and witness the impact of lack of financial literacy on financial behavior, we have to turn to debt. One other important recent change in the economy has been an increase in opportunities to borrow. Consumer credit, like DC pensions, was rare in the past but has now become available to a large share of individuals, and decisions about how much to borrow have shifted onto individuals. Consider credit cards. Credit card offers arrive in the mail and one can borrow a large amount of money by simply using more and more cards. No one is checking to see whether individuals are borrowing an amount that they can realistically repay. With sub-prime mortgages, almost anyone who wanted a mortgage could get one; banks were not checking to see whether borrowers could afford the loan contract they were getting into. I have used before the analogy of a water faucet: with plentiful and readily available credit, the faucet was fully open and one could draw as much water as was desired; it was up to the consumer alone to decide when to turn off the tap.
What are the consequences of these changes to the economy, and how well are consumers doing on debt behavior? Unlike poor asset building and asset management, the consequences of poor debt behavior can be seen in the short run. Personal bankruptcy rates have skyrocketed, tripling in a matter of ten years. Most sub-prime mortgages went bust, sinking both the banks and the consumers who engaged in them. I hardly think I have to tell you the statistics that have resulted from the National Survey (although being an academic, I will, so bear with me), because American’s problems with debt have been so widely apparent in the last few years. But the findings from the National Survey clearly document just how widespread debt is in the U.S. population. For example, 23% of Americans have engaged in high-cost methods of borrowing in the past five years (payday loans, pawn shops, and the like). In other words, more than one in five Americans has borrowed at interest rates that can be as high as 1000%. Fewer than half of those who have credit cards pay their bill in full each month, and a sizable share of those who borrow on credit cards engage in behavior that generates not only interest payments but also fees. One disturbing result is that many of those who use credit cards in ways that generate interest payments and fees are close to retirement—the people who should be at the peak of their wealth accumulation are instead borrowing at rates that are much higher than those earned on their assets. Another equally disturbing feature is that many of those who carry credit card balances do not know the interest they are paying on their balance. Similarly, many mortgage borrowers do not know some crucial terms of their mortgages. And while about half of the population have retirement accounts, many have been borrowing on those accounts, in effect borrowing on themselves.
These finding bring me to three thoughts. First, it is very limiting to assess financial security by looking at asset building only. One of the ways to help people achieve financial security may be to help them manage their debt. In any case, one cannot look at one side of a household balance sheet (assets), without focusing on the liability (debt) side. Second, we have clearly seen how poorly individuals manage debt when they are put in charge of it without any consideration of what they know and how they make financial decisions. Third, there may be another crisis brewing around DC pensions. In twenty years, when workers with DC-only pensions start retiring and are confronted with the decision of whether to take their pension payments (however small or large) in a lump sum or to annuitize, we will fully understand the consequences of the shift in pension plans. We can act now and prevent a potential crisis by empowering workers with both financial knowledge and help.
Walking through the beautiful gardens of Corpus Christi and the New College in Oxford it was difficult to think of financial crises and their devastating consequences. But mistakes can build up silently and explode without much warning. We all need to be better prepared to live in today’s world of individual financial responsibility.
Advice to Parents
Having offered advice to students in a recent blog post, I want to turn now to parents to talk about how they can be advocates for their children’s financial education. As I have mentioned in previous posts, financial literacy is a necessary skill in the modern world, akin to the skills of reading and writing. Just as, with modernization, written literacy became a critical skill, the realities of today’s economies have made financial literacy a critical skill.
What changes have made this a reality? Today’s young people are very aware of and widely exposed to money, and there are many transactions that require an understanding of basic financial concepts, from deciding what to do with allowance or gift money to managing a mobile phone account to allocating earnings from an after-school or a summer job. As they finish high school, young people confront one of their most important financial decisions: whether and how much to invest in education. The wage difference between college- and non-college-educated workers has been increasing, with individuals without a college degree seeing their wages stagnate or even decrease. Lack of a college degree may mean a lifetime of low wages. On the other hand, the cost of education has been increasing rapidly, requiring astute decisions about which college to attend, in which state, and at what cost.
And when they enter the world of work and young adulthood, today’s young people will have to make many other important financial decisions. With the shift in retirement-planning responsibility from employers and government to individual workers, young people will be in charge of deciding not only how much to save but also how to allocate their retirement wealth, and they will have to do so confronting financial markets that are increasingly complex in terms of products offered and management and understanding of those products. Not only asset building but also debt and debt management will be increasingly important. Opportunities to borrow have expanded and, in addition to financing education, young people will have to learn how to manage credit cards and other, often more expensive, methods of borrowing. In such an environment, mistakes are easy to make and, as the financial crisis has indicated, can be very expensive, and costly mistakes may ultimately mean that you—the parent—are supporting your child far beyond the time you had expected to (I know, a scary thought).
There are several reasons why financial education should be offered in school. First, the level of financial literacy is very low; in my view, too low for young adults to be able to make savvy decisions. Moreover, current studies show that financial literacy is unequally distributed in the young population. According to studies from the Jump$tart Coalition for Personal Financial Literacy, only about 9 percent of high school students can be deemed financially literate. And this small proportion of students is disproportionately comprised of white males who have financially sophisticated parents. Thus, students are going to start out on very unequal footing, and differences can only grow larger over time. And even for those belonging to the more financially literate group, it is not clear that reliance on parental know-how and guidance is an effective way of learning; parents’ experience may not apply in a rapidly changing economic environment, in particular one in which young people will be competing in global financial markets filled with people from other nations, who have been exposed to formal financial education in school.
So, what can be done to promote financial education in school? One good start is to request that your child’s high school participate in the Financial Capability Challenge. The Challenge is a voluntary online exam and classroom toolkit that helps educators teach high school students about saving, budgeting, investing, use of credit, and other important skills critical to developing strong financial knowledge and capability. The next online exam will take place between March 7 and April 8, 2011. Educators and students who score in the top 20 percent nationally and who are among the top scorers in their school will receive official award certificates.
The Financial Capability Challenge is an excellent initiative, and it provides a good incentive to both students and teachers for gaining financial education. More than 76,000 students and 2,500 educators in all 50 states participated in the 2009–2010 school year Challenge. I participated in one of the award ceremonies last spring and saw what a rewarding experience it was for the students, teachers, and parents, and I was proud to be able to be part of it.
Become an ambassador for financial literacy by asking your school to participate in this program. Make sure your children will be prepared for the new world they will be facing: for the decisions they’ll need to make about their own education and for the financial markets they’ll have to participate in if they are to provide themselves with a financially sound adulthood.
Educators can begin registering for the Challenge today at http://www.challenge.treas.gov/.
Help spread the word!
What changes have made this a reality? Today’s young people are very aware of and widely exposed to money, and there are many transactions that require an understanding of basic financial concepts, from deciding what to do with allowance or gift money to managing a mobile phone account to allocating earnings from an after-school or a summer job. As they finish high school, young people confront one of their most important financial decisions: whether and how much to invest in education. The wage difference between college- and non-college-educated workers has been increasing, with individuals without a college degree seeing their wages stagnate or even decrease. Lack of a college degree may mean a lifetime of low wages. On the other hand, the cost of education has been increasing rapidly, requiring astute decisions about which college to attend, in which state, and at what cost.
And when they enter the world of work and young adulthood, today’s young people will have to make many other important financial decisions. With the shift in retirement-planning responsibility from employers and government to individual workers, young people will be in charge of deciding not only how much to save but also how to allocate their retirement wealth, and they will have to do so confronting financial markets that are increasingly complex in terms of products offered and management and understanding of those products. Not only asset building but also debt and debt management will be increasingly important. Opportunities to borrow have expanded and, in addition to financing education, young people will have to learn how to manage credit cards and other, often more expensive, methods of borrowing. In such an environment, mistakes are easy to make and, as the financial crisis has indicated, can be very expensive, and costly mistakes may ultimately mean that you—the parent—are supporting your child far beyond the time you had expected to (I know, a scary thought).
There are several reasons why financial education should be offered in school. First, the level of financial literacy is very low; in my view, too low for young adults to be able to make savvy decisions. Moreover, current studies show that financial literacy is unequally distributed in the young population. According to studies from the Jump$tart Coalition for Personal Financial Literacy, only about 9 percent of high school students can be deemed financially literate. And this small proportion of students is disproportionately comprised of white males who have financially sophisticated parents. Thus, students are going to start out on very unequal footing, and differences can only grow larger over time. And even for those belonging to the more financially literate group, it is not clear that reliance on parental know-how and guidance is an effective way of learning; parents’ experience may not apply in a rapidly changing economic environment, in particular one in which young people will be competing in global financial markets filled with people from other nations, who have been exposed to formal financial education in school.
So, what can be done to promote financial education in school? One good start is to request that your child’s high school participate in the Financial Capability Challenge. The Challenge is a voluntary online exam and classroom toolkit that helps educators teach high school students about saving, budgeting, investing, use of credit, and other important skills critical to developing strong financial knowledge and capability. The next online exam will take place between March 7 and April 8, 2011. Educators and students who score in the top 20 percent nationally and who are among the top scorers in their school will receive official award certificates.
The Financial Capability Challenge is an excellent initiative, and it provides a good incentive to both students and teachers for gaining financial education. More than 76,000 students and 2,500 educators in all 50 states participated in the 2009–2010 school year Challenge. I participated in one of the award ceremonies last spring and saw what a rewarding experience it was for the students, teachers, and parents, and I was proud to be able to be part of it.
Become an ambassador for financial literacy by asking your school to participate in this program. Make sure your children will be prepared for the new world they will be facing: for the decisions they’ll need to make about their own education and for the financial markets they’ll have to participate in if they are to provide themselves with a financially sound adulthood.
Educators can begin registering for the Challenge today at http://www.challenge.treas.gov/.
Help spread the word!
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