Sunday, December 9, 2007

The case for improving financial literacy

The mixed evidence on the effectiveness of financial education programs has led some to question whether it is worth trying to improve financial literacy. In fact, it is not clear there is even a choice. As it was impossible to live and operate efficiently in the past without being literate, i.e., knowing how to read and write, so it is very hard to live and operate efficiently today without being financially literate. Given the complexity of current financial instruments and the financial decisions required in everyday life, from comparing credit card offerings, to choosing methods of payments, to deciding how much to save, where to invest, and how to get the best loan, individuals need to know how to read and write financially.

Note that, as with reading and writing, the objective of a policy for financial literacy should be basic knowledge. While it may not be feasible to transform financially illiterate people into sophisticated investors, it may be possible to teach them a few principles about the basics of saving and investing. Moreover, as illiteracy was not eradicated with a handful of lessons or in a matter of months, so financially illiteracy cannot be eradicated with a few seminars or one benefit fair.

Set in this framework, it is clear that some standards for financial literacy are needed. What do people need to know? What should be the pillars of financial literacy programs? Setting these standards will be the backbone of devising financial education programs. There are obvious benefits of having one institution that presides over or establishes those standards, and the Treasury Department seems an obvious candidate for this role.

Technology makes it possible to use interactive methods to teach. Thus, “students of financial literacy” do not necessarily have to attend classes at school, but can learn from courses on-line (or from CDs or DVDs) from their home. Courses can also be customized and tailored to the different needs and levels of financial knowledge. Moreover, as the evidence on the effectiveness of the stock market game in high schools seems to suggest, it may be important to find ways to make courses engaging and to stimulate interest in acquiring financial literacy.