Four reasons we are not seeing better financial literacy outcomes

The end of April brings with it the end of Financial Literacy Awareness Month. During this time, I have found myself ­in several conversations about the value and importance of the topic itself. (Often, I am left feeling like I have rained on their Financial Literacy Parade; the Grinch to their Cindy Lou Who.)

­­But it’s not all bad: These conversations have helped me see that my reaction to the topic is not to the idea of financial literacy, rather the broken and inadequate approach over time.

Here are the four problems facing “financial literacy” (and what we can do about them).

Definition Problem

Stephen Herfst argues that “By being everything to everyone, you’re nothing to anyone.” Financial literacy is suffering the same fate.

The term financial literacy is incredibly broad. Investopedia defines financial literacy as the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. That is a lot of ground to cover with people.

What do we mean by “various” financial skills? I’d argue the definition is too broad. A more pointed interpretation would allow us to better-help and engage at the correct time with students.

We need to focus on very specific topics with clear correlations to individuals and their current needs. This would include education programs that have been strategically deployed to address topics like students’ first bank accounts, effective credit management, buying a house, car financing, investing, retirement savings and financing an education.

Naming Problem

Every time I hear the phrase ”financial literacy,” I get a little prickly. It is almost a visceral reaction that causes me to disengage or, even worse, argue against the value — when I know that there are millions of people who would greatly benefit from better education and understanding around basic finances.

Let’s look at the word literacy. The opposite of literate is illiterate. Being called illiterate has a significant stigma attached to it. The same is true with being called financially illiterate. Is the name itself stopping individuals from engaging with resources and improving their knowledge of financial practices? People are more apt to hide a lack of knowledge then to raise their hands and say, “I am financially illiterate, but I want to learn.”

Is our naming convention causing people to feel shame when they need to access financial literacy tools?

Ownership Problem

Because of the overly broad definition of financial literacy, there are too many owners in the current process with little to no collaboration. Currently, we have high schools, colleges, not for profit organizations, banks and government agencies all trying to address (and claim ownership of) financial literacy. What’s more, we are providing one size fits all “solutions,” which aren’t really solutions at all. This lack of collaboration and consistency makes it hard for tools to build upon someone’s preexisting knowledge.

What if we broke financial literacy into mods that had specific owners? This solution may help improve the usage of tools and yield better outcomes. We would have standardized and consistent information that is meant to be built upon; ensuring information is being reinforced and strengthened across mods.

Engagement Problem

Communication is a two-way street. We need senders of messages and receivers. Both play an important role in how successful the interactions or education is. I have seen countless colleges invest in financial literacy platforms for their students and alumni while engagement has remained low and outcomes have been difficult to measure.

Maybe this engagement problem links back to the naming problem we talked about earlier. Or, instead, timing and motivation may be off. There are many things individuals know are good for them but they are not motivated to make changes until there is some “pain” caused. Often the motivation is not generated until I am forced to do something. A solution to consider, making mods a requirement tied to other activities.

For example, high schools should include basic budgeting and financial aid education in their core curriculum. Colleges should include credit management as part of freshman seminars. Mortgages and car loan approval should have prerequisites courses to ensure borrowers understand and are educated. Employers should educate on investing and retirement savings. By creating owners and driving education that is relevant to the stage in life of the recipient then perhaps we can improve engagement with educational resources.

What’s next?

It is estimated that in 2013, more than 670 million was invested in financial literacy tools and activities in the US, however, we still have a long way to go to show that we are investing wisely. The Standard & Poor’s Global Financial Literacy Survey found that 57% of U.S. adults were “financially literate.”

To get a return on the investment being made by the government, schools and private business, we need to address the challenges in front of us. This return is not measured like most: It is seen through improvements at the individual level through increased financial mobility.

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