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Jason Alderman

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Improving Financial Literacy, Here and Abroad

Posted: 06/20/2012 5:17 pm

Would you be surprised to learn that parents in many poorer countries often spend considerably more time talking with their children about money management than in wealthier countries like the U.S. and Canada? Or that people who express self-confidence about their overall financial knowledge but score poorly on financial literacy tests are likely to manage their credit cards more effectively than those who score well on tests but said they doubt their own money-management abilities? I was.

Those are just two of the interesting nuggets revealed at the sixth annual Financial Literacy and Education Summit recently hosted by the Federal Reserve Bank of Chicago and my employer, Visa Inc. A renowned group of U.S. and international financial experts tackled the theme, "International Solutions to Improving Financial Literacy," sharing successes and challenges faced in their own countries, as well as presenting new research that explores ways that financial knowledge and behavior can be improved.

Among the important topics covered were:

Educating U.S. consumers. Gail Hillebrand, Associate Director, Consumer Education and Engagement Division, U.S. Consumer Financial Protection Bureau (CFPB), explained that the CFPB, which was created in response to the mortgage meltdown, is looking at ways to provide consumers with better financial outcomes -- helping them build knowledge, skills and habits, while at the same time correcting flaws in the financial marketplace. The latter process involves creating rules for financial service providers that are clear, effective and promote transparency, access and innovation.

And, importantly: CFPB must enforce those rules fairly and consistently across all bank and non-bank providers. "Then, we want to unleash the power of informed consumer choice," noted Hillebrand.

The agency's three "Know Before You Owe" campaigns, found at www.consumerfinance.gov, explain and simplify decisions consumers must make regarding three important financial decisions: mortgages, credit cards and student loans. "We are trying to get more information and decision-making tools to the public so they can see what their choices are," she added.

As far as which approaches work for promoting financial capability and which don't, Hillebrand noted that it's all about delivering the right message at the right time -- "Just in time and just enough." You don't need to teach someone all the minutia of how their 401(k) plan works; just get across the message that the younger they start saving, the more money they'll have at retirement.

International research. Janet Bodnar, editor of Kiplinger's Personal Finance magazine, shared findings from the 2012 Global Financial Barometer, a new study cosponsored by her magazine and Visa. Some 25,500 participants around the world were asked about their personal financial habits and opinions. Assessing that data, the Barometer ranked the financial literacy levels of people in 28 countries. Among the more interesting findings:

  • Brazil topped the list as having the most financially literate people, followed by Mexico, Australia, the U.S. and Canada.
  • 68% of survey respondents had fewer than three months' worth of emergency reserves to fund basic needs during an unexpected financial event like job loss.
  • 25% of high-income respondents had less than three months of living expenses in savings. In the U.S., for example, the average person had only 2.9 months of expenses saved.
  • Asian respondents reported stronger emergency savings habits. For example, about half of those in China could survive a personal financial calamity lasting six months or longer.
  • Mexico and Brazil topped the list of places that parents talk to their kids ages 5 to 17 about money most often, with Mexicans talking to their kids at least 41.7 days a year and Brazilians 38.1. American families were in the middle of the pack at about 25.8 days out of the year.
  • When asked at what age governments should require schools to teach financial literacy, U.S. respondents ranked near the bottom at 11.9 years. By comparison, more than half of Brazilians surveyed believe such education should begin before age 9.
  • In over half the countries, a majority believe that teens and young adults do not understand financial basics, such as budgeting, savings, debt and spending responsibly.

Bodner noted that these results add to our body of knowledge about financial literacy. "You first have to identify what the problems are in your particular country, city or school, and then determine what is effective in handling those situations," she said. "This Barometer goes a long way toward starting those discussions." A more detailed summary of the Barometer's key findings can be found at Practical Money Skills.

Credit card behavior. William Walstad, the John T. and Mable M. Hay Professor of Economics, University of Nebraska-Lincoln, presented another major piece of research coauthored with his colleague Sam Allgood, which evaluated data from the FINRA National Financial Capability Study.

The authors combined people's actual financial knowledge (as measured by a financial literacy test) with their own financial self-rating to investigate the impact of financial knowledge on typical credit card use behaviors, including:

  • Paying credit card balances in full
  • Carrying over a balance and paying interest
  • Making only a minimum payment
  • Being charged late fees
  • Exceeding a credit card limit

Those surveyed were divided into four groups:

  • Skilled/confident (high test score and high self-rating)
  • Unskilled/confident (low score/high rating)
  • Skilled/insecure (high score/low rating)
  • Unskilled/insecure (low score and low rating)


Not surprisingly, skilled/confident people were much more likely to pay their bills in full and not carry a balance or be charged late fees. However, unskilled/confident people's behavior was often quite close to the skilled/confident group, whereas the skilled/insecure group (who, according to the test, had ample financial knowledge) displayed much more negative credit behavior. "This suggests that confidence has a strong role to play in financial education," noted Walstad.

Bottom line: The panelists agreed that all of the countries represented share many of the same challenges for boosting financial literacy including gaining wide access for programs to be tested, evaluating their results, and the fact that each has very diverse populations with different needs at different periods in their lives.

They also agreed that different countries can share and learn from each other's efforts. As
Oliver Jenkyn, Group Executive, North America, Visa Inc., told the more than 2,000 Summit participants attending in person or watching the webcast, "Thanks to your hard work and dedication, we have created more opportunity to reach those who need it most -- 35 countries have created a national strategy on financial education and, perhaps most importantly, parents are increasingly having 'the money talk' with their children, all around the world."

To watch a free webcast of the 2012 Financial Literacy and Education Summit, CLICK HERE.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.

 

Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney

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