How To Improve Financial Well-Being: Financial Literacy (Part 2)
In our last blog (Part 1 of this blog series which you can read here), we explored the concept of “financial education” and identified some common misconceptions about the journey to “financial well-being”. To recap, below is the flow chart we used to illustrate how most people would assume the process of improving a person’s “financial well-being” would go:
In this blog, we’ll look at the second step… Financial Literacy.
Financial Literacy
In human services and related fields, we use the terms “financial education” and “financial literacy” interchangeably and without much clarity as to what they mean. While they are related, they are not the same thing.
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 – to, in other words, improve a person’s ability to understand and effectively use their financial knowledge and skills.
To this understanding, financial literacy is the practical outcome of financial education. It reflects how well individuals can translate their knowledge into actions that enhance their financial well-being. It is widely thought that higher levels of financial literacy are associated with better financial health and stability, and thus something that can be tested and measured. And the hope, or rather the assumption, is that with access to more financial education, a person’s financial literacy increases, resulting in more effective decision-making and behaviors. Unfortunately, this is not always the case, and there is not a tremendous amount of data to support this hypothesis.
Problems with the System
Lack of Established Standards in Adult Financial Education
Unlike the K-12 system, where financial education—if taught at all—typically follows a basic framework covering topics like income, budgeting, saving, investing, and retirement, adult financial education has no such standardized approach. They may cover some or all of those topics. Some programs might also touch on credit or risk mitigation (like insurance), but the key question is: how can we measure what’s being learned if we don’t even agree on what should be taught? Despite this lack of clarity, efforts to measure financial literacy continue.What Are We Actually Measuring?
Another challenge is defining what we’re measuring when we assess financial literacy. Two of the most widely used assessments are “The Big 3” and “The Big 5,” which have become benchmarks in both research and policy discussions. Here’s what they cover:
The Big 3:
Interest Rates
Inflation
Risk Diversification
The Big 5: (The same as The Big 3, plus...)
Understanding Mortgages
Compound Interest on Debt
[You can take the quizzes here]
But here’s the twist—these topics often are not covered in traditional financial education classes for adults. So, where are people supposed to learn them? And more importantly, do these questions truly reflect someone’s financial literacy? While these assessments may be simple, the way they are phrased clearly favors those who’ve had exposure to higher level math. This means they may be measuring math literacy more than financial literacy. So, when you hear that nearly 50% of U.S. adults are not financially literate, it’s easier to understand why that number is so high. But are these the metrics we want to base our research and policy conversations on?
Some Solutions
There are some obvious solutions to the financial education/literacy dilemma – and I realize that this is a monstrous undertaking. But I don’t think we will make any substantial changes in the current financial education/literacy outcomes if we continue to apply the same techniques.
Point #1: Improve Adult Education Standards
It is obvious that we need to start by really, deeply thinking through and establishing what adult standards should be, much like what’s in place for K-12 education. Adults should have more practical curricula that’s relevant to their real-world needs. Also, if we customize curricula to fit each person/group’s unique situation more adequately, financial goals will make it far more relevant and actionable.
Point #2: Better Measure Financial Literacy
I think it should also be obvious that we need to rethink how we measure financial literacy. Instead of focusing on math-heavy concepts like interest rates and inflation, assessments might want to evaluate how well people navigate real-life financial situations, like paying down debt or developing emergency savings. We might even consider exploring their confidence levels or perceived levels of “financial well-being” as put forth by the Consumer Financial Protection Bureau.
Point #3: Continuing Financial Education
Education can’t just be a one-time event. Isn’t this obvious too? The learning around financial education needs to be viewed and developed as an ongoing process, with lessons delivered over time, so people can absorb, practice, and apply the information in their day-to-day lives. I think it’s clear that our current approach to financial education and literacy is in need of a significant overhaul. We simply cannot expect different outcomes if we continue using outdated and fragmented methods. We really can’t believe that financial literacy is just about understanding concepts like interest rates or inflation—can we? I believe it should ultimately be about navigating real-world financial situations, perhaps even navigating them with confidence! I think if we focus on delivering relevant, personalized, and continuous education, we can help people to make more informed financial decisions, and that those decisions can turn into more effective behaviors (which we’ll explore in our next blog post!).
