In the wake of the Global Financial Crisis of 2008, the modern societies of the world face a difficult task; to strengthen the economy, buffer impacts falling on the society and prevent future calamities from happening, particularly the United States. Short-term solutions such as reserves-reducing expenditures and other monetary policies were used to stimulate the economy, avoiding great inflationary pressures. However, these temporary band aid solutions have drawn huge criticism from economists, demanding more resolute long-term solutions.
Many theories and concepts have been brought up for the causes of sub-prime bubble in the U.S. leading to a worldwide financial meltdown across all sectors of the world's economy. Generally, these arguments fall into three broad categories; banking deregulation and an increasingly complex global economy (Anthes 2004; Kozup and Hogarth 2008; Leicht and Fitzgerald 2007), the demise of financial education in secondary schools (Anthes 2004; Edwards, Allen and Hayhoe 2007; Emmons 2005; Fox, Bartholomae and Lee 2005) and a pervasive culture of instant gratification stoked by aggressive consumer marketing and a proliferation of readily available credit (Anthes 2004; Kozup and Hogarth 2008; Leicht and Fitzgerald 2007). While the first argument can be adjusted and influenced on the governmental level, the other two posed greater concerns as it involves the cultured public. The biggest cause of financial crises of today is the general lack of financial education throughout the society, causing consumers to make bad financial decisions. It is apparent while the modern societies boasts high language literacy rates which reflects the society's knowledge and innovation, financial literacy has been ignored or never a concern.
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In this research, we shall highlight the concept of financial literacy and its importance. We shall look to investigate concerning matters such as the education system, public programs and factors that influences financial literacy. The aim of this research is to better the understanding of financial literacy so as to aid in the development of appropriate programs to increase society's financial aptitude.
FINANCIAL LITERACY - CONCEPT & DEFINITION
Before we dwell onto the core issues, it is important to conceptualize the meaning of financial literacy. Remund (2010) reviewed more than one hundred resources, including academic and professional journal articles on common conceptual definitions of financial literacy. Based upon a review of research studies he made since 2000, the many conceptual definitions of financial literacy fall into five categories: (1) knowledge of financial concepts, (2) ability to communicate about financial concepts, (3) aptitude in managing personal finances, (4) skill in making appropriate financial decisions and (5) confidence in planning effectively for future financial needs. He then proceeded to propose a singular conceptual definition of financial literacy;
Financial literacy is a measure of the degree to which one understands key financial concepts and possesses the ability and confidence to manage personal finances through appropriate, short-term decision-making and sound, long-range financial planning, while mindful of life events and changing economic conditions.
The definition incorporated ability and confidence to manage personal finances. He concluded by identifying the four most common operational definitions of financial literacy; budgeting, investing, saving and borrowing (Remund 2010).
Other concepts of financial literacy includes emphasizing on both knowledge and application of human capital specific to personal finance. Huston (2010) distinguished the term 'financial knowledge' as a component of financial literacy, lacking the important dimension of 'application' as shown in Figure 1;
Figure 1 - Financial Literacy Model (Hutson 2010)
Huston (2010) also researched and highlighted the relationship among financial knowledge, education, literacy, behaviour and well-being as show in Figure 2;
Figure 2 - Relationship of Financial Literacy with Other Factors (Hutson 2010)
Based on the figure, Huston proposed that elements such as behavioural/cognitive biases, self-control problems, family, peer, economic, community and institutional constructs, can affect financial behaviours and financial well-being. A person who is financially literate (i.e., has the knowledge and the ability to apply the knowledge) may not exhibit predicted behaviours or increases in financial well-being because of these other influences.
Both set of definitions importantly stress the validity of 'application' and 'decision-making skills' as key components to measure financial literacy. Appropriate concerns have been raised in relation to these. Remund challenged researchers to develop and validate a benchmark financial survey for all adults to standardize measurements. Also, Huston's review of seventy-one individual studies drew from fifty-two different data sets highlighted the utter lack of consistency in how researchers have defined and measured financial literacy in previous work and challenged us to make major improvements going forward.
FINANCIAL EDUCATION IN THE U.S.
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As the impending crisis grow and government policy-makers make attempts to revive the finances of the world, a question of public education comes into play. How is the financial education system within the academic institutions and public sector of modern societies today? More importantly, does it work?
Researches have mixed opinions on this matter, yet one thing is for sure; here have been an increase in financial education programs throughout schools in the United States recently. From 1998 to 2009, the following changes occurred: states with content standards for personal finance education in the schools rose from twenty-one to forty-four, states requiring implementation of those standards increased from fourteen to thirty-four and states requiring that a personal finance course or economics course with personal finance content be taken before graduation from high school grew from one to thirteen. It is important to note that common topics covered in high school syllabus for economics includes, inflation, credit concerns, monetary policies and banking system (Council For Economic Education 2009). Research showed that High school courses in the United States which focuses on economics and business actually reduced the probability of an adult to be 'unbanked' in the future (Grimes, Rogers and Smith 2010). The term used by Grimes, Rogers and Smith as 'unbanked' (the act or decision of not trusting savings into a bank account) follows a model he proposed as key components of financial education;
UNBANKED = f (Economic Education, Behaviour, Demographics, Region)
Grimes, Rogers and Smith's research showed that the current courses brought up awareness in financial concepts at a younger age, making them more exposed to financial services and resulting in a higher probability to trust their savings into banking accounts.
Further research done by Walstad, Rebeck, and MacDonald (2010), found that tertiary-level students exposed to the Council for Economic Education's Financing Your Future curriculum (a United States Education Board post-crisis initiative) increased financial knowledge across many concepts. The research showed a sharp increase in knowledge, comprehension and application decisions as well. For example, college students were less likely to take out a credit card without substantial income or savings after the initiative was imposed in colleges throughout the U.S. in 2009 (CEE 2009).
Besides education on the youth, public programs are important as well. Improving the financial literacy of adults is particularly challenging because they do not attend school, as do youth, and they tend not to have the time or interest in generic financial literacy classes (Parrish, Leslie and Servon 2006). An example of a government-initiated public program in the Unites States is The American Dream Demonstration, which provides low-income participants with the opportunity to save in an Individual Development Account for a home, business start-up, or an education. Participants who saved and completed a financial literacy course had their savings matched. An evaluation of the program found that rates of saving increased for every individual hour of financial education received up to twelve hours (Schreiner, Sherraden, and Beverly 2002). An evaluation of the Financial Links for Low-Income People program in Illinois offers further evidence that low-income individuals benefit from financial education and the opportunity to open a savings account. Financial Links for Low-Income People provided financial education to low-income participants, including Temporary Assistance for Needy Families recipients, a portion of whom had the opportunity to open an Individual Development Account. Participants reported that they were budgeting better, saving more, opening bank accounts, and participating in employer-sponsored retirement plans as a result of the program (Anderson, Scott and Zhan 2004).
Although most financial programs, academic or public programs, do show a positive improvement in the financial literacy rates (or in some way, aided the development of financial knowledge) within the society, evidences show that there was still not enough substantial increase in financial literacy rates in the future, especially the adults. Servon and Kaestner (2008) has identified the problem by pin-pointing the lack of integration of information with commonly exposed public mediums, such as internet banking services, working environment and news literature.
OTHER FACTORS INFLUENCING FINANCIAL LITERACY
Besides education, other factors play a major impact on financial literacy. Lusardi, Mitchell, and Curto (2010) focused their research on financial literacy and youth. They examined several factors that influence financial literacy, measured using three questions from a previous research (Lusardi and Mitchell 2006). They reported that financial literacy among U.S. youth is low; fewer than one-third of respondents demonstrated an understanding of interest rates, inflation and risk diversification, the focus of the three financial literacy questions created by them. Although cognitive ability was significantly and positively related to financial literacy, many other factors were as well, including gender and parents' education and investment experience (Lusardi, Mitchell, and Curto 2010).
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The research showed that financial literacy was also severely lacking among young adults; only 27% knew about inflation and risk diversification and could do simple interest rate calculations. Moreover, women proved to be the least financially literate. Differences between women and men persisted even after accounting for many demographic characteristics, family background characteristics and peer characteristics. Prior work showed that women tended to display low financial literacy later in life. Thus, financial illiteracy seems to persist for long periods and sometimes throughout the lifetime. The study also found an important channel through which young adults acquire financial knowledge: parents. Specifically, those whose mothers had high education or whose families had stocks or retirement savings, were more financially literate, specifically on questions related to advanced financial knowledge, such as the workings of risk diversification (Lusardi and Mitchell 2006).
These findings confirmed the results of work analyzing financial knowledge among high school students. The small fraction of students (7%) deemed financially literate in the 2006 Jump Start Coalition for Personal Financial Literacy survey were disproportionately white males whose parents had college degrees (Mandell 2008). It also confirmed findings of previous work among college students, where again parents played a role in students' financial socialization (Cude et al. 2006).
Monticone (2010) used six questions, including three that were in Lusardi, Mitchell, and Curto's research, to measure financial literacy among the Italian population. The proportion correctly answering the six questions ranged from 27% to 60%. Monticone found that wealth had a small but positive effect on financial literacy.
Given the strong link between financial literacy and financial and retirement planning found in other studies, it may be important to foster financial knowledge in the population as a whole and among more disadvantaged groups. Similarly, it may be important to develop programs targeted specifically to women, because they display not only much lower financial knowledge but also large differences in investment and saving behavior (Hira and Loibl 2008; Lusardi, Keller, and Keller 2008).
THE IMPORTANCE OF FINANCIAL LITERACY
Improving financial literacy brings about a magnitude of impacts on the economy and financial health of the society, through responsible financial behaviours. These behaviour modifications are important as it addresses major modern cultural issues such as over-credits on purchases and mortgages leading to debt burdens, handling inflation expectations and even retirement planning.
Findings suggest that approximately 32 percent of consumers overestimate their credit ratings, while only 4 percent underestimate their credit ratings. Those who overestimate their credit quality are less knowledgeable about financial matters in general and are more likely to have acquired their financial knowledge from difficult
past experiences. In addition, consumers who overestimate their credit ratings are less likely to budget, save, or invest regularly (Perry 2008). In another example, Lee and Hogarth (1999) found that approximately 40% of mortgage borrowers did not understand the interest rates associated with their loans.
When financial decisions have consequences beyond the immediate future, individuals' economic success may depend on their ability to forecast the rate of inflation. Higher inflation expectations have been reported by individuals who are female, poorer, single and less educated. Specifically, higher inflation expectations were reported by individuals who focused more on how to cover their future expenses and on prices they pay (rather than on the US inflation rate) and by individuals with lower financial literacy (Bruine de Bruin et al. 2010).
Other researches examine potential explanations of why consumers have difficulty making personal financial decisions that will be most beneficial in the long run. Within the decision context of retirement savings, results from an experiment suggest that self-regulatory state, future orientation and financial knowledge can influence consumer evaluations and intentions related to retirement investments (i.e., a 401(k) plan in the United States). Findings suggest that consumers who express higher levels of future orientation are more likely to participate in a retirement plan, an effect moderated by self-regulatory state. Results also suggest that financial knowledge and orientation toward the future can interact to influence the likelihood of 401(k) plan participation. Among consumers with a basic level of financial knowledge, future-oriented consumers expressed a greater likelihood to participate in a retirement plan than less future-oriented consumers. However, in the absence of knowledge, consumers' orientation toward the future did not influence the likelihood of 401(k) plan participation (Howlett, Kees and Kemp 2008).
Several studies have also linked consumer financial knowledge with responsible financial behaviour. For example, Chang and Hanna (1992) found that increased levels of financial information resulted in more-efficient decisions. Hogarth and Hilgert (2002) and Hilgert, Hogarth, and Beverly (2003) found that consumers who are financially knowledgeable are more likely to behave in financially responsible ways. Similarly, Perry and Morris (2005) found that consumers with higher levels of financial knowledge were more likely to budget, save, and plan for the future.
Improving the financial literacy rates of the society should be a priority for modern nations, especially those that were hit by the 2008 financial crisis. Evidences from above have shown that the lack of financial literacy impacted the economy in more ways than one and it is important for policy-makers to address. Research evidences from Huston (2010) and Remund (2010) showed that financial literacy is to not only the possession of knowledge but adequete skills in application and decision-making are required as well. These idea can bring about a revision in financial education especially in the public programs sector where Servon and Kaestner (2008) has uncovered to be lacking in the United States, especially for the adults population. They suggested integrated programs with mediums such as internet banking services and work-places to be better then class-based courses. It is important for policy-makers to address the implicit factors of the lack of financial literacy as well, a very important concern being parents,culture and gender, besides common cognitive development factors (Lusardi and Mitchell 2006; Monticone 2010). It is shown that all these understanding and initiatives to improve financial literacy in the society hopes to bring about better decisions to improve the economy through better credit ratings, inflation expectations within the society and retirement planning. In the long-run, improving financial literacy also brings about a very strong platform to protect the nation from impeding future economic bubbles and bursts.