Why is Financial Education Important?
Americans Need Financial Education
Savings Rate
• The national savings rate was negative before the current recession (Bureau of Economic Analysis).
• In the late 1970s and early 1980s, the U.S. saving rate ranged between eight and ten percent. By the third quarter of 2005, the U.S. savings rate had dipped below zero. In the second quarter of 2009, the savings rate picked up to 5.0 percent as the recession further entrenched. The July, 2009 savings rate had dipped back to 4.2 percent. Each one percentage-point increase in the savings rate is associated with a decrease in spending nationally of $100 billion (Atkins and Lund, 2009).
Debt and Credit
• In January, 2009, revolving consumer debt totaled over $961 billion, and total consumer debt, excluding home mortgages, reached $2.6 trillion (Jump$tart Coalition for Personal Financial Literacy).
• The median value of outstanding debt for families holding debt increased 27 percent in just three years (from 2004 to 2007; Federal Reserve Board).
• In 2007, roughly three-quarters of families held some kind of debt, including almost 90 percent of families with a head aged 35 – 54 (Bucks et al., 2009).
• Debt as a percentage of total assets rose from 12.1 percent to 15.0 percent from 2001 to 2004 and remained there in 2007.
• Debt payments as a share of family income rose from 12.9 percent in 2001 to 14.4 percent in 2004 to 14.5 percent in 2007.
• According to a poll sponsored by the Allstate Foundation, teens as young as 13 years old report owning credit cards, and up to 50 percent of teens now use credit to make purchases rather than cash.
Bankruptcies and Foreclosures
• Personal bankruptcies increased by 29 percent from 2007 to 2008 (Administrative Office of the U.S. Courts).
• Personal bankruptcy filing rates increased markedly, at a compound annual rate of 6.4 percent, from 1980 to 2006, climbing from 13 filings per thousand people to 59.
• Mortgage delinquencies increased from 4.4 percent in the second quarter of 2006 to 8.9 percent in the second quarter of 2009 (Mortgage Bankers Association).
Teen Personal Finance Knowledge
• A survey by the Jump$tart Coalition showed that high school seniors answered correctly only 48.3 percent of questions related to personal finance. The 31-question survey revealed that high school seniors have a lot to learn about important financial concepts. Among the findings in the survey:
o Only forty eight percent correctly said that a credit card holder who only pays the minimum amount on monthly card balances will pay more in annual finance charges than a card holder who pays their balance in full;
o Only seventeen percent correctly answered that stocks are likely to yield higher returns than savings bonds, savings accounts and checking accounts over the next 18 years even though there has never been an 18-year period where this wasn’t true; and
o Only forty percent correctly answered that they could lose their health insurance if their parents become unemployed.
o Only thirty six percent think a house financed with a fixed-rate mortgage is a good hedge against a sudden increase in inflation, compared with 45 percent in 2006.
• In the Jump$tart high school survey, certain demographic trends continued. Caucasian students, for example, correctly answered 52.5 percent of the questions, while Hispanic students correctly answered 45 percent and African Americans correctly answered 41.3 percent of the questions.
o Among the college students, Caucasian college students scored 63.3 percent while Hispanics answered 59.8 percent and African Americans answered 55.3 percent of the questions correctly. In addition to the college senior and freshman findings, juniors correctly answered 62.1 percent of the questions while sophomores trailed their upperclassman with a score of 61 percent.
Financial Education Works
Financial Behavior
• Both employer and school-based financial education programs have been shown to improve household knowledge of relative asset returns and reduce employees’ ignorance of their pension plans (Maki, 2001).
• Among low- and moderate-income savers, participation in a financial education course leads to an increase in both retirement and overall savings (Bernheim, Garrett, and Maki, 2001).
• Participants in retirement planning seminars are more likely to increase their retirement goals, start new tax-deferred savings accounts, increase contributions to current retirement plans, and reallocate their investments (Clark et al., 2003).
• Retirement planning seminar attendance also appears to increase financial wealth and net worth across all education and income groups, with the greatest increases occurring in the lowest portion of the income distribution (Lusardi, 2004).
• Consistent with the findings of both Lusardi (2004) and Bayer, Bernheim, and Scholz (1996), Bernheim and Garrett (2003) found that the availability of financial education in the workplace stimulates retirement savings among individuals in the lowest half of the savings distribution. Women enrolled in a financial education seminar that focused on retirement planning and used a workbook-based curriculum were found to have increased their ability to set up a retirement plan as well as their ability to review and adjust the goals set forth by their plans (DeVaney et al., 1995).
• Loibl and Hira (2005) found financial management behaviors, as well as financial and career satisfaction, to be significantly related to self-directed financial learning.
• Individuals who participated in credit counseling reported being in better financial shape and practicing more favorable financial behaviors following the experience (Sorhaindo, 2003; Elliehausen, Lundquist, and Staten, 2007).
Employer Productivity
• Employers monitor employee financial stress as a method of reducing the likelihood of theft and embezzlement (Walpert 2000).
• Employees in a “high financial stress” group used more work time handling financial matters and were more frequently absent from work than those in moderate or low financial stress groups (Kim and Garman 2004).
• Financial problems often lead to general stress (Drentea, 2000; Mills et al., 1992), and stress has been shown in numerous studies to be detrimental to workplace productivity.
• A recent Department of Defense study cited personal financial problems as one of the top four causes of lost productivity in the military (Luther et al., 1997; Luther et al., 1998).
