Increasing the Efficacy of Financial Education

1. Increasing the Efficacy of Financial Education Jeanne M. Hogarth Federal Reserve Board With contributions from Marianne Hilgert (former FRB) and Jane Kolodinsky (UVM). The analysis, comments and conclusions set forth in this presentation represent the work of the authors and do not indicate concurrence of the Federal Reserve Board, the Federal Reserve Banks, or their staff.

2. Goals • What is financial education? • What do people “know?” • How does “knowing” relate to “doing?” • What works, and how do we know? • Where can we tease out improvements?

3. Why is financial education important? • Increased sophistication of financial products and services • Shifting responsibility away from institutions and towards individual • Demographic changes affecting the US marketplace • Long-term economic situation

4. What is financial education? • Knowledge • Motivation • Tools & skills (information search, decision making) • Equipped to change behavior

5. What is financial education? • Economic knowledge • When the Fed raises interest rates, what happens to your credit card interest rate? To you savings account interest rate? • Consumer knowledge • If you lease a car today and change your mind tomorrow, can you take it back, since it’s within the 3-day cooling off period?

6. What is financial education? • Stock market knowledge • Over a 25 year period, which instrument has performed better: stocks, bonds, treasury securities, or savings accounts? • Money management knowledge • How does paying your bills late affect your credit record? If you make only the minimum payment on your credit card, how long will it take you to pay it off?

7. What financial education is going on out there? • Vitt - 91 programs • Jacob – CES, credit counseling, employers, financial institutions • NEFE – 150 program resources • New funding for 36 programs out of 810 applications • FRB-San Francisco – 56 programs • Jump$tart – more than 100 partners “Everyone is doing it”

8. What financial education is going on out there? • Financial Literacy & Education Commission • Mymoney.gov; 1-888-my-money • NEFE “Not if we can help it” (smartaboutmoney) campaign • State Treasurers and State Securities Commissioners • Investor Protection Trust • Thrift Savings Plan Open Elections Act of 2004 (employee financial ed.)

9. Youth Military Low-income families First-time home buyers Employees Church members Pre-retirees Retirees Women Minority groups (Blacks, Hispanics, Native Americans) Who are target audiences? Something for everyone

10. What topics do programs cover? • Cash-flow management • Basic budgeting/financial management • Banking, check-book management • Saving and investing • Asset building • Credit management • Home buying • Retirement planning • For & in retirement

11. What do people know? Not much! • CFA/American Express studies w/ high school, college, adults (1990-93) • EBRI – RCS, 1997 • 11% have low level of financial knowledge • CFA/CES 1998 consumer survey • Ave. score = 75

12. What do people know? • ASEC 1999 student survey • 18% don’t understand financial mgt • 7% do “poor” job of money mgt • NCEE’s 2005 survey • 28% of adults & 60% of youth failed • Improved since 1999 • Jump$tart’s bi-annual surveys • RHS 2004 Financial Literacy Module

13. What do people know? • University of Michigan’s Surveys of Consumers (Nov. & Dec. 2001) • 1,004 respondents interviewed • Additional questions • true/false financial knowledge quiz • financial management practices • financial product ownership • learning experiences and preferences

14. What do people know? • Average score= 67% • Lowest item – only 18% understood “cooling off” law • Highest items – 94% know about emergency funds and the effects of late payments on your credit score

15. What do people know? • Most knowledgeable about mortgages • Average score = 81% • Less knowledgeable about credit and investments • Average scores = 62-63% • Scores were related to income, education, age, race/ethnicity, marital status & gender

16. How does knowing relate to doing? Do you know what you know because you do what you do? Or Do you do what you do because you know what you know?

17. Behavior Measures • Combined financial management practices & product ownership • Low, medium, and high levels of • Cash flow management • Savings • Credit • Investment

18. Behavior Indexes Investment Saving Credit Cash Flow Low Medium High

19. What influences “the index?” • Low, medium, and high behaviors as function of • Financial knowledge • Financial learning experiences • Economic stability • Motivation • Socioeconomic & demographic characteristics

20. What influences “the index?” • Knowledge • The more you know, the more you do • Experience • The more you’ve done, the more you do • Other influences were not consistent across all behaviors • Income, marital status/gender, race, household size, education, home ownership, economic stability, motivation

21. What financial education do people need?

22. What works, and how do we know? • NEFE High School Financial Planning Program • Increased knowledge, skills, and confidence • Improved behaviors • Measured before, after, & 3 months later • Financial/consumer education in high school • Financial education in high school associated with higher savings and net worth as an adult

23. What works, and how do we know? • Credit counseling • Improved credit scores, better credit management, lower delinquency • Homeownership counseling • Lowered 90-day delinquency rates

24. What works, and how do we know? Retirement planning • Save More Tomorrow • Increased participation in 401k, increased rates of contribution, high retention after 3 years • Members of TIAA-CREF • Revised retirement savings goals, plan to modify saving & investment

25. What works, and how do we know? • Money 2000 • Increased savings, decreased debts • American Dream Demonstration (IDAs) • Financial education increases savings (maxes out at 8-10 hours) • Money Smart • Increased financial understanding • Not associated with opening bank account

26. What works, and how do we know? • Employee Financial Education • Increased 401k participation & improved other financial behaviors • Financial Security in Later Life • Improved financial management practices (self-anchoring) • Economic impacts averaged $870 (savings increased, debts reduced, etc.)

27. What works and how do we know? Opportunities Community Dev. CU • First level benefits • Manage money, on track, paying off debts • Second level benefits • Expand goals, save more, more assets, income increased, job opp. improved, housing opp. improved • Third level benefits • Self confident, quality of life improved, hopeful, more involved in neighborhood/community

28. What works and how do we know? • Those who feel education is important report positive outcomes at all 3 levels • Those who feel education is important are “high touch” and like to stay in touch (newsletter)

29. What works and how do we know? • Pattern of saving is “craggy” (save up and then spend down) • When do you measure outcomes of program? • How do you measure outcomes of program?

30. What works and how do we know? • Education seems to make biggest difference at first level (manage money, pay off debts) • As members (clients) stay with program, need to develop “higher” levels of financial education • Need for financial education curriculum, not just a course

31. What works and how do we know? • People come to recognize & appreciate benefits over time • Longitudinal evaluation plan for financial education programs • Need to ask attitudinal as well as behavioral questions to get at program impacts

32. New evaluation initiatives • CFA evaluating multi-level impacts of Cleveland Saves • CFA/AmEx/CRC evaluating the efficacy of credit counseling • Multiple delivery techniques -- in-person, phone, web

33. New evaluation initiatives • Philadelphia FRB – home ownership counseling programs • FRB & DoD – longitudinal study on the effects of financial education on military • A word of caution – most studies based on self-selection • What would effects be if people were randomly assigned to an educational program?

34. Where can we tease out improvements?

35. How do people want to learn? • Media (TV/radio, magazines, newspapers) 71% • Brochures/print materials 66 • Video 64 • Internet 56 • School 53 • Community courses 53

36. Where do we go from here? • Micro- measures • Self-anchoring – what are your goals and are you on target for achieving them? • Macro- measures • Credit scores go up • Savings rates go up • Bankruptcies go down

37. Where do we go from here? • Information is not education • Need to change behaviors • Are behaviors the right outcome measures? • Satisfaction with life & lifestyle • Attitudes -- feel confident • Feel prepared for events – getting married, home buying, having kids, taking vacations, college, home repairs, car buying, retirement

38. Where do we go from here? • How do we link knowledge and experiences to behaviors? • Do we work to increase knowledge in the hopes of improving behaviors? • Do we try to provide better (successful?) “experiences” in the hopes of improving behaviors? • Can we find efficient and effective strategies for financial education?