Moving From Financial Literacy to Financial Capability

06/17/2015 10:16 pm ET | Updated Jun 17, 2016

There has been an abundance of conversation recently about the lack of financial literacy among young adults in America. Much of this attention has focused on the rising tide of student loan debt among college students, and poor performance on tests such as the OCED PISA Students and Money Study. In the first study of its kind, PISA measured financial literacy among 15-year-olds around the globe. American youth scored below the average for the 18 participating countries/economies that took part in the study, and more than one in six did not reach a "baseline" level of financial literacy. While these results are not encouraging, they miss the mark by not addressing fundamental aspects of how young adults develop financial capability, as well as how financial behaviors are influenced not only by knowledge, but also by experience and external influences.

This need to address the external and personal influences on financial development was underscored in the third-year results of Money Matters on Campus, a recently released national survey of 43,000 college students. The survey found that students are taking out more and larger student loans, yet report feeling less prepared to manage their money than any other aspect of college life -- only 58 percent reported being prepared to manage money while in college.

Further, student engagement in financially responsible behaviors such as following a budget, paying credit card bills on time and saving money declined over the last three years. Respondents with a checking account, however, were found to be markedly more prepared that those who were under-banked, suggesting that increased experience with "transactional" accounts early in adult life or in high school would be a great way to promote self-efficacy.

Defining Financial Capability

To effectively address these deficiencies, it is important to begin by defining what it means to be financially capable. For college students and other young adults, it starts with developing the skills to be able to manage money independently and save for the future. This includes things such as keeping money safe, managing a bank account, understanding the differences between a debit card and a credit card, and basic budgeting. With the advent of online and mobile banking, long gone are the days of keeping a check register and balancing your checkbook each month. However, new technologies haven't replaced the fundamental reason why these exercises were (and still are) so important. Without frequent hands-on interactions with money, practitioners need to ensure students learn the benefits of verifying the accuracy of transactions and taking time to review where money actually goes.

Being financially capable also means understanding the financial concepts that students most likely get wrong on financial literacy tests, such as compound interest and the impact of inflation on buying power, as well as how financial products work, specifically student loans and credit cards. As high school students make decisions about which college to attend, for example, it is important they understand the difference between a grant and a loan, and the financial obligations taken on when signing student loan promissory notes.

Signing up for credit cards and taking on student loans are major financial decisions that many young people may not fully comprehend, so it is incumbent upon families and schools to help students navigate these complexities. Having students estimate what their total student loan debt and monthly payments are likely to be and comparing that to an estimated salary in the field they are contemplating is one way to provide a real-world perspective of the decision they are about to make.

Incorporating New Technologies in Financial Teaching

It's a natural assumption to think that young adults would be early adopters of the more sophisticated financial technologies available today, but that is not the case. As the Money Matters study found, only 14 percent of college students reported using of a mobile money management tool, and 12 percent reported that they don't check their balances online because they are too nervous. This suggests that we have a long way to go in developing tools that connect to and educate young adults in an engaging way. It also suggests that more financial education and practice needs to happen much earlier, both within families and in K-12 environments.

Effective use of technology can help students integrate good financial practices such as paying bills on time and saving resources into their day-to-day money management decisions. Moneythink, a movement of young people working to increase financial capability, has worked with high school students to develop an app called Moneythink Mobile, a "gamified Instagram for finances." With Moneythink Mobile, students use the app to complete digital challenges that build financial awareness, habits and skills, while earning points, likes and comments along the way.

Being financially capable means avoiding unmanageable debt by knowing how to manage and save money to meet current and future needs, understanding financial concepts and products, and using that information to make good decisions. We owe it to the next generation of young adults to provide more financial education and opportunities for risk-free financial practice, as well as better technological tools to support these efforts.

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