Teaching Financial Literacy

Abstract

The renewed interest in teaching financial literacy can be attributed to the essential nature of the skills. The ability to understand how personal finance works is a skill that, inexplicably, has long been missing from elementary and secondary school curricula in spite of its importance. Events in the economy, particularly the Great Recession that began in 2008, brought an added sense of urgency to the work of educating the public in how to manage their finances, plan for the future, and avoid economic instability.

Overview

Since the global financial crisis that began in 2008, there have been renewed calls for a comprehensive program of financial literacy instruction to be made available in the United States. In part this is due to the large role played by subprime mortgages in the collapse. Thousands of people were lured into mortgages that they could not afford by predatory lending practices that the would-be home buyers either could not or would not see through (Reynolds, 2013). People accepted home loans they could not afford on terms that were clearly unsustainable, and eventually, when housing prices began to fall and adjustable rate mortgages saw their rates begin to climb, mortgage defaults and foreclosures began to snowball, eventually bringing down huge financial institutions in the process. Among the many reforms discussed after this debacle has been the need for financial literacy instruction, so that people will have the information and the tools they need to make reasonable choices about how to spend and save their money. Much of the attention has been devoted to the creation of financial literacy education programs within public schools, to give children access to this crucial information. However, there is also a need for adult education in financial literacy, since there are so many adults who never received such instruction during their youth (Torabi, 2012).

Many different approaches to financial literacy instruction exist. The most successful programs recognize that financial literacy instruction must do more than teach people the skills needed to balance a checkbook or read and comprehend a credit card agreement, although these are important skills that everyone should possess. To be successful, financial literacy programs must go deeper than surface level money management skills and begin to address people’s attitudes about money. Surveys and economic research show that most people approach the subject of financial management from a place of fear, anxiety, and powerlessness. There are a number of factors that have been blamed for this, including everything from the capitalist, acquisitive model of consumption prevalent in society to the massive economic inequalities described by the Occupy movement as the oppression of society by the top "1 percent."

Whatever the causes, the fact remains that a majority of people indicate that thinking about their finances is a huge source of stress, primarily because it always seems that there is not enough money to make ends meet. A proper, comprehensive program of financial literacy education attempts to change this attitude, replacing fear and anxiety with empowerment and feelings of mastery, by putting people in control not only of their money, but also of their future. This involves a reevaluation of one’s wants and needs, as well as one’s priorities in life. Instead of trying keeping up with the neighbors through unwise and short-sighted spending, people are encouraged to stop and think about what kind of life they wish to live and how they need to arrange their financial affairs in order to make that life a reality (Xu, Zia & Xu, 2012).

Applications

Financial literacy education has become an industry, with organization offering programs nationwide. The Jump$tart Coalition for Personal Financial Literacy, for example, is a non-profit organization based in Washington, DC that has more than one hundred and fifty members in its coalition. Another nonprofit devoted to promoting financial literacy is the National Endowment for Financial Education. The Financial Literacy and Education Commission was established in 2003 under the Financial Literacy and Education Improvement Act to coordinate the federal government’s efforts at financial literacy education and to work with private organizations seeking to promote financial literacy through their own programs. The Organization for Economic Co-operation and Development (OECD), an international body founded in 1961 to encourage economic development, began to include financial literacy programs as part of its mission in 2003, and in 2008 started a clearinghouse for financial literacy information, to make it easier for individuals and groups located all over the world to build their own financial literacy education programs. From the antigovernmental side, financial literacy "crusaders" spread the empowering message of financial literacy as a means of opposing existing social and political structures of power.

Financial social work is a financial literacy education model developed during the late 1990s and early 2000s. It draws upon insights from several different disciplines (psychotherapy, social work, and finance, to name a few) and it differs from traditional financial literacy education efforts in that it seeks to do more than teach financial management skills. Financial social work also attempts to help people look at their own attitudes about money, and to help them improve their own internal self talk at the same time that they gain control of their money.

Interestingly, much financial literacy education is premised on the assumption that the only thing preventing most people from responsibly managing their money is a lack of information. Models of instruction based on this view tend to assume that consumers make poor choices about their spending and saving only because they do not know any better. These models therefore seek to correct the problem by providing information about how personal finance "should" work, for example, by explaining the importance of saving, recommending percentages of income to be devoted to housing, transportation, and other categories of expense, and discussing the relative merits of various investment instruments (e.g., stocks, bonds, certificates of deposit, mutual funds) (Drake, 2014).

While this approach, which is often described as simply providing people with instructions for financial management, does work with some people, it is not considered very successful on the whole. In fact, many have pointed out that this model is designed more to address carelessness than financial illiteracy; after all, the information provided by this type of financial literacy education is already widely available to people who have the financial resources to take advantage of it. All that this traditional type of financial literacy instruction does is to gather up the information and present it in a convenient package. What it does not do, however, is give the public a reason to pay attention to it or to change its behavior to conform to its recommendations. To accomplish this, a different type of financial literacy education is required (Lambert & Lambert, 2012).

Viewpoints

Financial literacy education models that seek to change people’s lives in fundamental ways go by many names, but in general they can be described as having both behavioral and psychosocial components, which is to say that in a number of ways these programs begin to resemble a form of psychotherapy, inasmuch as they seek to change both behaviors and attitudes. This is because the modern focus of financial literacy education includes an awareness that it is not enough to simply tell people what they should be doing. It turns out that in addition to being given the information needed to change their behaviors, consumers must also be guided in analyzing the thoughts and feelings underlying those behaviors, to find out what is motivating them and, if necessary, redirect that motivation in a direction other than reckless spending (Sprow, Taylor & Tisdell, 2014).

One dynamic that is often present in financial literacy education involves the intersection of differences in race, ethnicity, and class between those providing the instruction and those who are receiving it. These dynamics are relevant in part because instruction, whether related to financial management or some other subject matter, tends to be more effective when it is presented in a way that is culturally relevant to the group receiving the information. Research into the effectiveness of financial literacy education has shown that the perceptions of financial literacy instructors about their own role and about the purpose of financial literacy instruction have a strong influence on the outcomes of the instruction they provide.

Put another way, financial literacy instruction’s ability to help people is influenced by the attitude of the instructor. It matters what the instructor thinks financial literacy is for, and it matters why the instructor thinks financial literacy is necessary. It also matters what the instructor thinks of the particular people he or she is attempting to educate. If a financial literacy instructor takes the approach that people who need financial literacy education are ignorant, uninformed, and irresponsible, then it is likely that these attitudes will be apparent during the instruction and will tend to undermine its effectiveness. This is particularly true if there are pronounced differences between the instructor and/or curriculum developers and the population receiving the instruction.

For example, a financial literacy curriculum developed by white, middle class, college educated people and delivered to lower income people of color—as often happens in financial literacy education—has great potential for failing to address the needs of those whom it serves. Too many financial literacy education programs run into difficulty because they do not see the importance of tailoring instruction to the group receiving it, thus meeting people where they are rather than where the instructor would like them to be (Wilson, 2013).

For example, it is not uncommon for financial literacy curricula to include significant amounts of content focusing on various ways of investing surplus income for the future in order to maximize returns. However, when this type of instructional content is delivered to low income families whose primary financial difficulties have nothing to do with surplus income, but lack of income sufficient for their basic needs, it should not be surprising that the results are far from promising. In fact, advocates of critical theory have frequently pointed out that it is of the utmost importance to include within financial literacy education a frank discussion of issues of race, power, and authority in society. This is because these issues have a strong influence on what people can do with the information being given to them, and it is important to acknowledge the presence of these forces and how they shape people’s lives (Lucey & Laney, 2012).

Much of the effort that goes into financial literacy education is directed at those at the lower end of the socioeconomic scale. In a way, this is a reflection of one of the core assumptions of financial literacy education, which people experience financial instability and hardship simply because they lack the information they require to manage their finances effectively; all they need is to be given this information, and they will be able to gain control of their financial future (Arthur, 2012). In the same vein, the thought underlying many financial literacy education programs is that if those who are suffering from the effects of poverty are told how they should manage their money, then they will immediately be able to stop being poor.

Poverty and financial instability are created by many factors in addition to financial illiteracy: racial inequality, discrimination in all its forms, addiction, violence, and multigenerational influences all play a part. The most effective financial literacy instruction acknowledges these truths rather than blaming those who need the information. In an unexpected way, financial literacy education often winds up butting heads with narratives of social change and economic activism. This is thought to be caused by the fact that financial literacy education tends to target individuals rather than groups, because targeting groups with a message of financial empowerment is often interpreted as a call to political action contrary to the interests of the type of free market capitalism that reigns in the United States (Reynolds, 2013).

Financial literacy is presented as a set of individual skills that people should practice on their own, in private, because if it were presented in a way that focused on the economic interests and options of various social classes, then this would conflict with the historical narrative of the United States as a society free from divisions based on wealth. This is not to suggest that the financial literacy classroom is necessarily the best place (or even an appropriate place) for a discussion of the presence or absence of social classes in American society, but acknowledging that the way American attitudes about economic achievement have curtailed the dialogue about what should and should not be included in a financial literacy curriculum is an important notion to be considered. Bearing this question in mind makes for more effective financial literacy instruction and more capable members of society.

Terms & Concepts

Financial Literacy and Education Commission: The Commission was established in 2003 under the Financial Literacy and Education Improvement Act. The purpose of the Commission is to coordinate the federal government’s efforts at financial literacy education and to work with private organizations seeking to promote financial literacy through their own programs.

Financial Literacy Crusaders: Financial literacy crusaders are activists working to spread the empowering message of financial literacy as a means of opposing existing social and political structures of power. Most financial literacy crusaders have two basic goals that drive their actions. The first is to do whatever they can to alleviate financial illiteracy among the public. The second, which is derived from the first, is to help people avoid financial instability by helping them become financially literate. The assumption is that most financial instability is caused by a lack of financial literacy, and that making people financially literate will give them the tools they need to become financially stable.

Financial Social Work: Financial social work is a financial literacy education model developed during the late 1990s and early 2000s. It draws upon insights from several different disciplines (psychotherapy, social work, and finance, to name a few) and it differs from traditional financial literacy education efforts in that it seeks to do more than teach financial management skills. Financial social work also attempts to help people look at their own attitudes about money, and to help them improve their own internal self talk at the same time that they gain control of their money.

Jump$tart Coalition for Personal Financial Literacy: The Jump$tart Coalition for Personal Financial Literacy is a non-profit organization based in the United States. It was formed with the goal of providing resources to be used to educate the public with regards to managing their own finances prudently. The Coalition is based in Washington, D.C. and is made up of roughly one hundred and fifty member organizations.

National Endowment for Financial Education: The purpose of the non-profit organization is to promote financial well-being and stability through the provision of financial literacy education. In order to remain focused on these efforts, the organization has publicized eight areas of focus that it pursues as part of its overall mission.

Organization for Economic Co-operation and Development (OECD): The Organization is an international body founded in 1961 through the efforts of more than thirty countries. Its overall mission is to encourage economic development, and since 2003 the OECD has been including the development of financial literacy education programs in its work. In 2008 the OECD started a clearinghouse for financial literacy information, to make it easier for individuals and groups located all over the world to build their own financial literacy education programs.

Bibliography

Arthur, C. (2012). Financial literacy education: Neoliberalism, the consumer and the citizen. Rotterdam: Sense Publishers.

Drake, D. (2014). Business and financial literacy for law students. St. Paul, MN: West Academic Publishing.

Grohmann, A., & Menkhoff, L. (2015). School, parents, and financial literacy shape future financial behavior. DIW Economic Bulletin, 5(30/31), 407–412. Retrieved January 12, 2016 from EBSCO Online Database Education Research Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=108627120&site=ehost-live

Lambert, R. A., & Lambert, R. A. (2012). Financial literacy for managers: Finance and accounting for better decision-making. Philadelphia, PA: Wharton Digital Press.

Lucey, T. A., & Laney, J. D. (2012). Reframing financial literacy: Exploring the value of social currency. Charlotte, NC: Information Age.

Reynolds, M. (2013). Saving for the future: An introduction to financial literacy. South Egremont, MA: Red Chair Press.

Sprow Forté, K. (2013). Educating for financial literacy: A case study with a sociocultural lens. Adult Education Quarterly, 63(3), 215–235. Retrieved January 12, 2016 from EBSCO Online Database Education Research Complete. http://search.ebscohost.com/login.aspx?direct=true&db=ehh&AN=88417482&site=ehost-live

Sprow, F. K., Taylor, E. W., & Tisdell, E. J. (2014). Financial literacy and adult education. San Francisco, CA: Jossey-Bass.

Suiter, M. C., & Wolla, S. A. (2015). Considering the times: Resources for teaching economic and financial literacy in light of the Great Recession. Social Education, 79(2), 74–77. Retrieved January 12, 2016 from EBSCO Online Database Education Research Complete. http://search.ebscohost.com/login.aspx?direct=true&db=ehh&AN=102063897&site=ehost-live

Torabi, F. (2012). Financial literacy. Upper Saddle River, NJ: Pearson.

Wilson, G. (2013). 100% financial literacy success. Boston, MA: Wadsworth.

Xu, L., Zia, B., & Xu, L. (2012). Financial literacy around the world: An overview of the evidence with practical suggestions for the way forward. Washington, DC: The World Bank.

Suggested Reading

Bosshardt, W., & Walstad, W. B. (2014). National standards for financial literacy: Rationale and content. Journal of Economic Education, 45(1), 63–70. Retrieved January 12, 2016 from EBSCO Online Database Education Research Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=94004720&site=ehost-live

Durband, D. B., & Britt, S. L. (Eds.). (2014). Student financial literacy: Campus-based program development. New York: Springer.

Jarecke, J., Taylor, E. W., & Hira, T. K. (2014). Financial literacy education for women. New Directions for Adult & Continuing Education, 2014(141), 37–46. Retrieved January 12, 2016 from EBSCO Online Database Education Research Complete. http://search.ebscohost.com/login.aspx?direct=true&db=ehh&AN=94802043&site=ehost-live

Maurer, T. W. (2014). Teaching financial literacy with process-oriented guided-inquiry learning (POGIL). Journal of Financial Education, 40(3/4), 140–163. Retrieved January 12, 2016 from EBSCO Online Database Education Research Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=102237915&site=ehost-live

Taylor, E. W., Tisdell, E. J., & Forté, K. S. (2012). Teaching financial literacy: a survey of community-based educators. International Journal of Consumer Studies, 36(5), 531–538. Retrieved January 12, 2016 from EBSCO Online Database Education Research Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=79242883&site=ehost-live