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Learning to Make Sense of Dollars and Cents

The Great Recession has for years now served as a flashpoint for public discussion about Americans' finances, exposing their poor financial health and limited financial knowledge. In addition to systematic failures in financial regulation and misconceptions of risk, some observers place blame for the crisis with individuals with limited financial knowledge, claiming that the recession's effects would not have been as wide or as deep if those individuals had simply possessed or acted upon the right financial information. And recent research findings are increasingly bringing the issue of financial education to the forefront of policy discussions about how to create and sustain financial capability in communities across America.

Financial education isn’t a panacea or a waste of time; however, an approach to financial education is needed that understands the environmental contexts in which individuals make financial decisions. In a complex financial world where responsibility is increasingly shifting towards individuals, financial education—apart from the socialization around finances that occurs within the family—is often put forward as a way to improve Americans’ financial health. This kind of education involves passing on financial knowledge either individually or in groups through workshops, seminars, trainings, and planning sessions in school or employment settings.

The Great Recession aside, there are good reasons to be concerned about the level of Americans' financial knowledge. While teaching financial education is not a guarantee of any individual’s financial competency in the real world, financial education is a key ingredient to such competency. And right now, only 9% of 15-year-olds in the United States demonstrate the type of competency on advanced financial knowledge questions that would be necessary for making informed decisions for breathtakingly common but life-altering financial decisions, such as taking out student loans, interpreting mortgage agreements, or comparing investment portfolios.

In other words, individuals may make healthier financial decisions and behave in more financially optimal ways when they are better educated. This conclusion may seem obvious, and indeed, much of the research and discussion on financial education makes the assumption that financial education can improve financial knowledge and that improved financial knowledge translates into financial competency. These assumptions need to continue to undergo empirical testing.

If these assumptions are true, then an individual's financial knowledge gained through financial education should be a strong determinant of their financial behavior. However, a recent review of over 200 studies has raised questions about the effectiveness of financial education, revealing that its influence on behavior may be relatively small and that any measurable effects disintegrate over time. Proponents of financial education raise legitimate critiques and explain these small and disintegrating effects as a lack of studies’ rigorous evaluation or consistent implementation of financial education. Many of these studies also do not measure or capture any data about financial knowledge gains that develop cumulatively during the course of a person’s life.

It’s not hard to understand why general financial education covering topics like insurance and interest rates might have little measurable effects on such behaviors as saving for emergencies, purchasing a home, or saving for retirement—because the specificities of such decisions are so particular to an individual’s life. Nor is it difficult to pinpoint why there is excitement about the potential effectiveness of financial coaching and other interventions that tailor education to needs arising from individual financial decisions. But we must remember that these interventions are costly and laborious—and therefore are difficult to scale.

Another challenge for financial educators is that the financial world can be an individualized, complicated, and unpredictable place. Could even the best advisor or accountant have adequately prepared for the financial domino effect experienced by so many during the Great Recession: becoming unemployed, exhausting their limited emergency savings, losing their home, and cashing out their 401(k)? Even older Americans, who had enjoyed sufficient resources and shown good forethought by diligently saving for their retirement years saw dramatic declines in their nest eggs, and many postponed their retirement as a result. Moreover, estimates predict that the lost incomes of younger Americans who were blocked from entering the labor market during the recession (something beyond their individual control) will translate into thousands of dollars less in earned income and retirement savings later in life. Financial education will not alter their realities.

It is not my intention to dismiss the idea of financial education; indeed, many brilliant minds are working diligently to understand and evaluate its potential. Instead, speaking against the backdrop of increasing economic volatility, rising student loan debt, and unforgiving labor market conditions, we should be reminded that healthy financial behavior is hard and that our environments—and their relative abundance or lack of resources—often work against us. Consider healthy eating for a moment. Nutritional knowledge without access to fresh fruit and healthy vegetables (or kitchen appliances to store and cook this food) is of little practical value. Likewise, an individual's financial behavior is best addressed in the context of their environment and with an understanding that an environment with sufficient resources and opportunities can better enable healthy financial behavior.

This environmental context is especially important for those whose financial health could be in jeopardy with one "wrong" financial decision. If the local bank where you cash your checks closes unexpectedly, what options do you have when you need your hard-earned money to pay the bills at the end of the week? All of a sudden, a cash advance on your paycheck—something you would have never considered before—may seem like the best (or only) option.

Individuals need real opportunities to put their knowledge into practice and these opportunities are often available only through the financial products to which they have access. Rigorous research studies find that the combination of receiving financial education and owning a savings account improves financial knowledge and increases accumulated savings and assets. In fact, some of my own research (generously funded by the FINRA Investor Education Foundation, for full disclosure) has found that young adults who are financially capable—defined as having the combination of financial knowledge and opportunity—are 176 percent more likely to afford unexpected expenses, 224 percent more likely to save for emergencies, 21 percent less likely to use alternative financial services, and 30 percent less likely to carry burdensome debt when compared to their peers who are not financially capable.

And remember that review of 200 studies on financial education? The authors were actually encouraged by the outcomes they observed when delivery of financial education corresponded with the presentation of a specific financial product or decision—what they termed "just in time" financial education (think of education delivered in the process of seeking a home loan or when applying for student aid). In other words, financial education showed promise for improving financial behavior when two conditions were in place: individuals had the knowledge and were presented with an opportunity to take action accordingly.

In light of our current and unpredictable economic conditions, we shouldn’t be asking whether or not financial education works. Instead, we should focus on building greater opportunities for more mindful forms of financial education that can work in context to promote financial capability.

An earlier version of this article appeared on the Huffington Post.


Terri Friedline is the faculty director of financial inclusion at the Center on Assets, Education, and Inclusion, a research fellow at New America, and an assistant professor at the University of Kansas School of Social Welfare. She can be contacted by email at or followed on Twitter @TerriFriedline.