6 second take: Even before a global crisis, financial education lagged in the United States. Here are a few hard truths we should remember well into the future.
The coronavirus pandemic has highlighted the need for improved financial literacy. The financial burdens of the pandemic hit the most marginalized populations harder than other populations.
The most likely to lose their jobs were those who most needed their jobs. Jobs that disappeared during the pandemic were more likely held by women, according to calculations by consulting firm McKinsey and Company. creating a gendered burden.
The rich do not appear to have suffered the same financial consequences. The pandemic seems to have cost everyone in some way, but marginalized populations likely bore a larger financial cost. And they had the least resources to deal with financial adversity.
Government programs and stimulus checks alleviated some of the difficulties. But a lot of that funding went to people who were not having great hardships.
This is clearly evidenced by the significant reduction in debt across the pandemic. Many Americans had resources to pay down debt. But not everyone did.
Financial literacy has suffered a credibility problem, as there has been scant empirical evidence of its long-term efficacy.
Academics and practitioners have had no doubts, having seen firsthand the results in localized applications.
But broad-based results have been either lacking or disappointing. There are two significant aspects of these results that bear scrutiny.
Traditional financial literacy programs are knowledge-based. Financial literacy efforts with strictly knowledge-based programs will not show immediate results. They plant seeds; how people behave across their financial lives cannot be quickly measured. And there are many other factors affecting financial outcomes, compounding the measurement problem.
Behavior-based financial literacy programs are newer and fewer. As the tenets of behavioral finance continue to gain mainstream acceptance, this is likely to improve. Programs that change behaviors change lives.
Financial literacy is not an end to the world’s financial woes. Even with universal financial literacy education we will have poor and marginalized persons — whether or not there’s a global health crisis at hand. Some advocate that we don’t need more financial literacy, we need more social safety systems.
Advocates of social safety systems in lieu of financial literacy ignore an individual’s agency. Social programs are necessary to deal with some problems, including persons who for mental or physical reasons cannot act as their own agents.
Most individuals can act as their own agents and make independent choices in their own best interests. They may not make the choice you would make, nor the choice I would make, but they can make a choice.
Financial literacy can help people improve their agency, allowing them to make better financial decisions to serve their best financial interests.
Social programs are important, but do not, generally speaking, improve agency.
Whether one advocates for increasing or decreasing social programs is not directly relevant to the effects of financial literacy. People who get little or nothing from social programs will benefit from financial literacy and accomplish more with their resources, whether those resources are scarce or abundant.
Individuals who require significant social financial intervention will likewise benefit from financial literacy, allowing for improved use of their constrained resources. Financial literacy needs to be tailored to the audience, but is beneficial to all cases.
The U.S. Financial Literacy Education Commission’s (FLEC) 2020 U.S. National Strategy for Financial Literacy contains a wonderful set of best practices for financial educators.
The best practices list consists of eight items, five of which I would identify as applying directly to application and the other three to educators themselves. Of the five that apply directly to application, all implicitly relate to agency.
Know the population. Programs need to be tailored in a way as to be meaningful, relatable, and useful to the population. This means not only to the needs of the demographic but to the individual and their own readiness and abilities.
Provide actionable, relevant, and timely information. This addresses the historical shortcoming of knowledge-based programs: that knowledge is transient. Programs need to be targeted to the needs of the participants at the time of delivery, not merely product oriented or widely general in nature.
Improve key financial skills. Improving skills around financial decision-making provides individuals with tools they can use for a lifetime — a lifetime of better financial decisions.
Build on motivation. This recognizes that internal drivers produce lasting results that external forces cannot. People need to be aware of and develop their agency; those who do not know that they can probably won’t. Motivation is much like a muscle; it can be developed or it can atrophy.
Make it easy to make good decisions and follow through. This brings both delivery and follow through into focus. Financial education needs to meet people where they are and then serve as a resource going forward. Removing the barriers makes it easier; providing support improves outcomes. Financial literacy needs to know it is in the outcomes business.
The FLEC’s 2020 financial literacy strategy was released last October, during the thick of the pandemic. The best practices should stand the test of time; they are applicable across a range of external circumstances.
Individuals have different needs and circumstances. External circumstances can limit opportunities or options. This is the realm of social change: to level the playing field of opportunities and options.
Equality of outcomes is not possible even in narrow settings like families, where the inputs may be nearly identical. Society’s first obligation should be the leveling of opportunity. Financial literacy can help individuals capitalize on their opportunities and help them be better prepared for life’s inevitable adversities.
Financial literacy was a need and a problem long before the pandemic. Those with greater degrees of financial literacy had tools at their disposal, and hopefully were better prepared, than those lacking in these skills.
Social programs are necessary and can help in circumstances, especially when persons, for whatever reasons, are unable to do for themselves. Financial literacy is not an alternative; it is beneficial regardless of an individual’s circumstances. The opportunity to do better exists at all levels.
Financial literacy changes lives. We can improve the efficacy of programs by making use of the FLEC’s best practices, both the ones highlighted here and the others, which apply specifically to educators.
The poor can be helped and the middle class can be helped — the needs differ, and the solutions offered need to differ as well.
The problems existed before the pandemic, and they exist today. They existed before any rich persons blasted themselves into space, and they continue to exist afterward. The opportunities to improve the lives of many people through financial literacy is real.
Perhaps more people can see that now, a little silver lining in a very tragic set of circumstances.