Does Financial Education Improve Financial Literacy? (Part 1)
One of the most common questions in financial education is: How do you improve a person’s financial well-being? In this field, that’s one loaded question.
So, in the process of trying to figure out the relationship between financial education and financial well-being, I felt compelled to create a flowchart that illustrates how most people likely envision the process:
I mean, the flow seems to make sense, right? But is this really how it works? In this three-part blog series, I will delve deeper into this flowchart, identify the flaws in this model and ultimately offer insights into possible solutions.
I would argue that, in human services and related fields, the terms “financial education” and “financial literacy” are often used interchangeably and without much clarity as to what they exactly mean. While they are related, they are not the same thing. Let’s begin with a look at Financial Education for adults and some of the pitfalls and possible areas of improvement that we can implement within our industry.
What is Financial Education?
Financial education is the process of teaching people about various aspects of personal finance. The goal or purpose of financial education is to increase financial literacy and improve capability.
Financial Education for adults typically involves offering structured learning experiences, resources and tools to help individuals manage their finances effectively. It can take many forms like classroom-based instruction, workshops, seminars, online courses, one-on-one coaching, educational materials and interactive tools. Each format is designed to equip individuals with the knowledge, skills and confidence needed for effective financial management.
The hope, or assumption, is that with access to more financial education, a person’s financial literacy increases, resulting in more effective decision-making and behaviors.
Unfortunately, there is not a tremendous amount of data to support this hypothesis.
Limitations of Current “Financial Education”
One of the major issues we face in financial education is the widespread assumption that people will act rationally upon the information that is provided. The content and delivery are usually based in neo-classical economics, which assumes rational behavior in everyone. It seems logical that people should act rationally but in reality, many people —despite having access to financial education or possessing high financial literacy—continue to make decisions that many of us would call “irrational.”
Another challenge is that financial education has pigeon-holed itself by adhering to standards that may not be immediately relevant to the wider population. In fact, current “financial education standards” are primarily designed for K-12 students within the school system. And these standards, developed by government and financial institutions, are built on assumptions of middle-class/upper middle-class values and goals which don’t align with the diverse financial realities of many people.
The content tends to be built on standardized assumptions about the individual’s current financial position and financial goals. Those standards basically boil down to this:
Assumption of income
Budgeting
Saving
Investment
Retirement
(Optional topics may include insurance (risk mitigation), credit and taxes.)
For someone with little or no income, the very first assumption does not meet the participant where they are. Therefore, the subsequent topics can seem irrelevant or meaningless, leading participants to feel that those financial education classes do not address their specific needs or situation.
And lastly, a third issue concerns how financial education programs are delivered. Overall, I believe that education and training for adults outside of post-secondary education are poorly structured. Financial education is frequently delivered as one-off classes or a few brief sessions on specific topics based on the standards discussed above. These short classes tend to expect adults to learn new information the first time they hear it without appropriate review, support or practice. And additionally, without proper training in adult learning principles or experience interacting with people experiencing economic stress or trauma, financial education may fail to effectively reach and benefit all participants.
Solutions & Final Insights
Clearly, exploring the question, “Does Financial Education Improve Financial Literacy?” reveals significant challenges in the field. While financial education aims to enhance financial literacy and decision-making, the effectiveness of these programs is limited by various shortcomings.
To address these issues, we can take a couple of key actions. First, we can stop oversimplifying the process of personal finance and economic development. That is, we should anticipate that people are going to act irrationally – maybe not every time – but we shouldn’t be surprised when they do.The process of making almost any kind of change in life can be challenging with lots of ups, downs and sideways turns. Financial education curricula should accommodate this aspect of human behavior.
Second, we should move beyond the mindset that financial education always begins with budgeting. Not everyone is on the path to investing and retirement savings—at least not immediately. Instead, we should tailor our teaching to align with the individual goals and values of participants, rather than trying to fit everyone into a one-size-fits-all model.
Stay tuned as we continue to explore the concept of financial well-being in the next installments of this series.
