Who is to Blame for Poor Financial Literacy and What Can We Do?

Are children today uniquely illiterate when it comes to money and therefore are likely to make bad fiscal choices in the future, or is it that their parents never learned how to manage their money and are passing on their bad habits to their kids?

The fiscal knowledge levels of Americans of all ages is abysmal, The Economist reports. More than half of people over 50 years of age who were asked a simple problem dealing with savings, interests rates and the rate of inflation got the answer wrong.

And that is just a tiny bit of the basic knowledge a consumer must have to intelligently evaluate the terms of a mortgage or a consumer loan.

To fix this problem, British schools have recently added fiscal education to their school curriculum. Although the move brought praise from all sides of the education debate, it's possible that these lessons don't actually do much to solve the problem.

A survey by the Federal Reserve Bank of Cleveland (see sources below) reported that: "Unfortunately, we do not find conclusive evidence that, in general, financial education programmes do lead to greater financial knowledge and ultimately to better financial behaviour."

This is especially the case when children are taught the subject at school, often well before they have to deal with the issues personally. Surveys by the Jump$tart Coalition for Personal Financial Literacy, a campaign group, found that American students who had taken courses in personal finance or money management were no more financially literate than those who had not. A detailed survey of students from a Midwestern state found that those who had not taken a financial course were more likely to pay their credit card in full every month (avoiding fees and charges) than those who had actually studied the subject.

In a paper titled Financial Literacy: What Works? How Could It Be More Effective? authors William G. Gale and Ruth Levine look at how programs used to teach financial literacy in the past have failed and which new developments in the area show the most promise.

Nevertheless, the apparent success of financial planning efforts and of simplification initiatives suggests that there are both private actions and public policy strategies that can influence saving behavior. There is a key role for the private sector in enhancing financial literacy and the market is responding rapidly to try to fill the void. At the same time, there is an at least equally important role for the public sector, via a campaign that revolves around a comprehensive website, and through better coordination of existing policies toward saving. We conclude that improving financial literacy should be a first-order concern for policy-makers, and that gains could accrue not only to the affected individuals, but also to their family members and society at large.

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