In today’s world, financial literacy should be considered as important as basic literacy, i.e., the ability to read and write. Without it, individuals and societies cannot reach their full potential.
GFLEC Academic Director Annamaria Lusardi
Financial education works. Research shows it is an effective tool for increasing financial knowledge and improving financial behavior which, in turn, leads to stronger families and communities. Research reveals that the following promising practices are key components of effective financial education.
Financial literacy affects individuals’ financial decisions every day. If young people are to make informed decisions, it is crucial that they understand the fundamental concepts that underpin financial knowledge.
Economists and experts have identified a set of six comprehensive standards that provide a framework for personal finance curriculum. These national standards, developed by the Council for Economic Education (CEE), are based on economic concepts that can be understood by students of all socioeconomic backgrounds. Research shows that the more students are exposed to financial education, the stronger their understanding becomes. After the state of Georgia required a year-long high school course in economics and personal finance, students who had taken the course posted improved credit scores as adults.
Financial literacy results from an understanding of fundamental concepts rooted in economics and mathematics, such as interest compounding, inflation, and risk diversification. Data from the Programme for International Student Assessment (PISA) shows that strong skills in math and reading are important for navigating financial decisions. However, PISA also shows that these skills alone cannot predict financial literacy. There are unique skills and knowledge that must be acquired for students to exhibit smart financial behaviors. Individuals with higher levels of financial knowledge are more likely to plan for their retirement, have emergency savings, and pay less in credit card fees.
The skills that go with financial literacy are unique and dynamic. Students educated in financial decision making can apply their knowledge to a range of situations in an economy where financial technology, forms of payments, and policy are ever changing.
When it comes to effective financial education in the classroom, teachers are the driving force. Growing research shows that it is important for teachers to feel comfortable with both the concepts of financial education and with its pedagogical approaches. The goal is to make sure that students retain the information.
Research supported by the Jump$tart Teacher Training Alliance and the National Endowment for Financial Education evaluated a pilot teacher training program. This program used customizable, three- to five-day training sessions. The research report showed that educators significantly improved their own financial behavior and confidence in teaching the personal finance material. Additional research from the University of Delaware and the Federal Reserve Bank of Philadelphia showed that students improved their financial knowledge through the Keys to Financial Success curriculum, a one-semester course that included a teacher-training component. There is also supporting evidence globally. A research study, authored by Dr. Veronica Frisancho, conducted in Peru showed that both students and teachers improved their financial knowledge as the result of a financial education course that involved a teacher training component before course implementation.
Financial literacy is an essential skill for participation in today’s complex world. The goal of financial education is to provide students with a foundation of knowledge and the confidence and skills to apply that knowledge to their financial decisions. The classroom is an ideal environment in which to allow students to apply their knowledge and grow their skills before making costly decisions. Skills students gain through financial education have a direct affect on the decisions they make now and in the future. Research indicates that instruction that incorporates elements such as visual tools and active learning results in positive outcomes for adults.
When teaching young people, it is important to guide them to think about their future and to practice developing their financial skills. Financial education curricula with real-world application—like The Stock Market Game, High School Financial Planning Program, and programs that include experience with financial products—have shown to improve financial knowledge.
Financial education is a universal tool. It is for everyone, regardless of socioeconomic status, background, or education level. However, levels of financial literacy are not equal among the population, and research reveals that this can have a big effect on wealth inequality.
Vulnerable subpopulations—including minorities, older individuals, the less educated, and women—face unique challenges when it comes to financial knowledge. In fact, women have lower confidence and are more likely to answer “do not know” to financial literacy questions. They are also more risk-averse than men. This provides an instructional opportunity, as it indicates that women are more aware of their levels of financial knowledge.
Financial education is an essential tool for raising financial literacy and empowering the next generation. By tailoring instruction to address students’ differences, teachers can succeed in advancing effective financial education.
The need for financial education has never been greater. Curriculum should incorporate valuations that aim to understand whether financial education is improving students’ financial literacy and financial behavior. These assessments advance our understanding of what works—and what doesn’t.
Well-defined evaluations can accurately measure outcomes of financial education programs. There is growing evidence that financial education does positively impact students learning and behavior. Supported by the National Endowment for Financial Education, authors Carly Urban and Christian Stoddard find a positive impact for financial education on college-financing behaviors. Additionally, authors Cynthia L. Harter and John R.R. Harter show the effectiveness of a particular curriculum on financial learning for students. States can vary widely in their implementation, and mixed findings are often due to different approaches to program evaluation. It is important to understand what is working in financial education so that it can effectively improve the financial futures of the next generation.