Financial Literacy Strategies: Where do We Go from Here?

Abstract

The evolution of market economies has dramatically broadened the opportunities of consumers, workers, investors, and firms. Financial services have become especially free and accessible, but also increasingly complex. For the new financial freedom to help most people, they must understand their choices and the likely implications of alternative decisions. Unfortunately, many Americans have a weak grasp of basic personal finance principles. This paper emphasizes the importance of financial literacy in an increasingly complex market economy and examines the current state of financial education in the U.S. and abroad. We explore two methods of delivering financial knowledge—through broad financial curriculums and through more focused teachable moments. After examining the pros and cons of each, along with the evidence about their effectiveness, we suggest that a combination of the two perspectives, with the specific topics and behavioral strategies varying by target audience. We conclude by calling for a more rigorous evaluation of the effects of existing programs. About the Authors: Robert I. Lerman is Professor of Economics at American University and a Senior Fellow at the Urban Institute in Washington, DC. Dr. Lerman's research deals primarily with factors influencing poverty and income inequality and the policies aimed at reducing these problems. His current studies deal with asset building among low-income families, on the interaction between marital stability and earnings, and with the impact of public and private initiatives to strengthen marriage. His research has appeared in monographs, book chapters, and in a variety of journals, including the American Economic Review, Journal of Political Economy, Journal of Human Resources, Economica, National Tax Journal, and Review of Income and Wealth. Elizabeth Bell joined the Urban Institute's Executive Office Research center and the Urban- Brookings Tax Policy Center in July 2004. Her work primarily focuses on the distribution of tax incentives and spending in social welfare and private savings programs. Her current projects include examining trends in asset and liability holdings and programs that encourage asset- building for low-income families.