Financially savvy consumers are good customers for financial services. They save for retirement and pay back loans. Those are among the findings of research looking into the effects of formal financial education. And, as readers of this blog already know, customer education is central to risk management.
Using data from the National Financial Capability Study, researchers at the University of Nebraska found that financial education encouraged positive behaviors in the long run, such as saving for retirement or setting up an emergency fund. For short-run behavior, which the researchers defined as tasks that "give continual feedback," the evidence was mixed. They hypothesized that, in the short run, people learn good behavior better from getting negative feedback like late fees.
A paper by researchers at the Federal Reserve Board looked at three states (including Georgia, Idaho, and Texas) that began requiring financial education in 2007. Students in school after the requirement was implemented had higher relative credit scores and lower relative loan delinquencies than young people in bordering states without financial education. The effects lasted for four years after high school graduation. Among the goals of the Georgia curriculum is one that says students should be able to "apply rational decision making to personal spending and saving choices" and "evaluate the costs and benefits of using credit." Through age 22, the researchers found that the students who studied personal finance were better off than peers who had not, as measured by relative credit scores and delinquency rates.
What this means: if I learn in middle school that cost should factor into college choice, perhaps I'll decide to take on less student loan debt when it's time to choose a college. If one of my college professors stresses the importance of saving for retirement, perhaps I'll be more likely to make sure I participate in my employer's 401(k) and qualify for its full match. If I receive regular reminders about phishing attacks, perhaps I would be less likely to reply to or open a link in a phishy email.
April is Financial Literacy Month. For parents, teachers, and financial institutions, it's encouraging to know that split-second timing is not necessarily critical to effective financial learning. Financial education need not be delivered at life's crossroads, but everyone should have an overview of the route before getting on the road.
Finally, let me share some tips:
- For parents of young children: Use these parent Q & A resources during story time. They are designed to help you talk about the importance of making careful decisions when saving versus spending and other personal finance topics related to their daily lives.
- For teachers: The Federal Reserve Bank of Atlanta offers professional development programs for teachers, designed to enhance classroom instruction of economics and personal finance, including a free webinar on April 16, "Personal Finance Basics: Classroom Resources."
By Claire Greene, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed