Does financial literacy alone lead to better financial choices?
A paper co-authored by Jonathan Morduch, a professor of public policy and economics at New York University’s Robert F. Wagner Graduate School of Public Service, and Barbara Kiviat, an academic fellow there, suggests that institutions, as well as individuals, combine financial literacy education with steps to help adult consumers make sound decisions on spending and saving.
"Maximizing the effectiveness of financial training is not just a matter of better use of classrooms and better development of training materials, but also of re-envisioning what financial literacy education can be," according to the authors. Their paper, "From Financial Literacy to Financial Action,” was published by The McGraw-Hill Research Foundation.
Morduch is managing director of the Financial Access Initiative (FAI), and Kiviat is the David Bohnett Public Service Fellow at NYU Wagner and a research associate at FAI.
The authors recommend governments, businesses, and non-profits organizations pay particular attention to five areas in financial literacy education programs, including:
· Knowing one's legal rights, the types of questions to ask financial providers, and other practical steps to gather information for financial decisions.
· Accessing financial products and options, such as 401K’s, which tend not to be readily available to low-wage workers.
· Gaining awareness of one’s susceptibility to temptation, distraction, and other personal challenges.
· Developing structures to facilitate good financial decisions, such as automatic telephone calls or text message reminders of bills coming due.
· Enlisting social networks to promote peer pressure and support for actions regarding one’s personal finance.
"To make financial education as powerful as possible, we need to focus on knowledge that is made up of more than just financial facts. Knowing basic rules of thumb and being aware of legal rights and recourse matter too," the researchers write.
"Beyond that, practitioners of financial literacy education must broaden their worldview to take into account the extent to which individuals possess self-awareness, feel support from broader social norms, can access reliable financial products, and have available workable structures to implement ideas.”
A copy of the full report, “From Financial Literacy to Financial Action,” can be found here.