Guest Editor’s Introduction to the Thematic Issue on Family Finance

Abstract

Three papers in this volume were selected after rigorous peer reviews from papers presented at research forums sponsored by the Center for Financial Security at the University of Wisconsin-Madison. They each reflect the important themes of the Center’s research. The Center is an interdisciplinary research center that does applied research on issues of importance to the financial security of individuals and families. These papers, completed during the period that the Center was one of three national centers comprising the Social Security Administration’s Financial Literacy Research Consortium, represent key issues on which the Center focuses its work: vulnerable populations, measurement of financial literacy, and the relationship between financial literacy and financial behavior. Financial literacy implies the understanding of financial concepts relevant to one’s financial circumstances and whose application in decision making would improve financial decisions to the betterment of current and/or future financial well-being. This implies that financial education is not a ‘‘one size fits all,’’ but must be shaped to the context within which families and individuals make financial decisions, both to the current context of their lives and to their likely or preferred financial life trajectories. Improving financial literacy through education implies an understanding of what should be taught, to whom, and when. These papers highlight the complexity of financial literacy education which must take account of individual’s family circumstances and initial financial beliefs and behaviors. This introduction ties these papers together by highlighting their connection to the Center’s major research themes. The three papers all deal with different but very much related aspects of financial debt. Financing current consumption through debt can be either a boon or threat to financial security. Mortgages enable the consumption of housing services in the short run and the accumulation of an asset as the mortgage is paid off. Unsecured consumer debt allows for current consumption, which may include capital building purchases (e.g., education of self or children) but its accumulation and payments are not directly tied to the growth in family assets. Both types of debt may lead to improved family financial security or lead to financial distress. Dew’s paper argues that debt matters not just for financial well-being but to family stability. Financial literacy education may be good family policy. Even if it is widely recognized that family finances matter a lot to marital satisfaction, it remains unclear what particular components of family finances matter—what types of assets and debt threaten family stability and how the acquisition process and whose decisions increase that threat. His paper shows that debt matters differently to husbands’ and wives’ marital satisfaction implying that education must go beyond the simple lessons of ‘‘thrift’’ and ‘‘savings’’ but must be aware of how couples make and manage financial decisions. The paper by Levinger, Benton and Meier hypothesizes that the knowledge of one’s creditworthiness matters to the wise acquisition of debt. It is far too simple to caution families against the accumulation of debt since debt can adjust for the disparity between income and consumption needs at any point in time, raising families’ economic wellbeing over time. But debt must be timed appropriately and have interest-term conditions that are best suited to the families’ financial circumstances. Families are better off if K. C. Holden (&) La Follette School of Public Affairs, University of Wisconsin, 1225 Observatory Dr., Madison, WI 53706, USA e-mail: kcholden@wisc.edu