Why is Financial Education Important?

Why is financial education important? Because the health and strength of entire nations depend on the financial literacy of every individual. When people know how to make sound decisions about their personal finances, their strong financial behavior leads to financially secure lives. The fewer people who make bad decisions about their personal finances, the stronger the society will become. Instead of asking why financial education is important, perhaps we should be asking how to impart a strong personal finance education to every citizen to reap the full benefits of a financial education. When every person is financially secure, the nation will be financially secure.

Financial Education Can Improve Lifelong Financial Behavior

Although the financial consequences of being financially illiterate are well known in certain circles, others may ask, “Why is financial education important?” Does financial education really improve the financial health of those who undergo the curriculum? Financial educators can use evidence of financial behavior molding after undergoing a financial education program as direct evidence. Financial education programs, whether it be through informal means or through a structured program offered by an initiative, has the ability to produce real changes in financial behavior.

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Financial Education is Important Because it Changes Lives

Researchers asked individuals two sets of questions, one pertaining to basic financial literacy while the other related to advanced financial knowledge. The researchers then applied statistical techniques to construct indexes of financial knowledge. The probability of participating in the stock market increased 14 percentage points with a one standard deviation increase in advanced financial knowledge. In addition, a one standard deviation increase in basic financial literacy increases the probability of saving for retirement by 20 percentage points (De Nederlandsche Bank). https://www.dnb.nl

Low-income workers attending an employer-sponsored financial education program were 11.5% more likely to participate in 401(k) plans and save more for retirement than peers who elected not to attend the education initiative (National Bureau of Economic Research). http://www.nber.org/papers/w5655.pdf

Students who underwent the Moneytalks educational curriculum demonstrated positive behavioral changes. A ‘saving scale’ constructed by the author was the composite of a series of questions asking students about their savings habits. The mean value of the savings scale rose from a mean of 24.28 to 26.78, which was deemed statistically significant. Furthermore, statistically significant differences were noted for the proportion of kids who would compare price and buy on sale (University of California Agriculture and Natural Resources).
http://ucanr.edu/sites/consumereconomics/files/136495.pdf

Financial Education Can Alter Families and the Culture of Entire Nations

Only 23% of kids surveyed indicated that they talk to their parents frequently about money (Money Confident Kids). http://www.moneyconfidentkids.com/content/dam/money-confident-kids/PDFs/PKM-Surveys/2017_PKM_Results.pdf

In a survey by OECD, well over a quarter of respondents replied that their culture influenced their attitudes toward wealth (Organization for Economic Cooperation and Development). https://www.oecd.org/finance/financial-education/2017%20Seminar%20on%20financial%20education
%20and%20financial%20consumer%20protection%20LAC%20Wood%20.pdf

18% of adults cited retiring without having enough money set aside as their top personal finance worry (National Foundation for Credit Counseling).
https://www.nfcc.org/wp-content/uploads/2017/03/NFCC_BECU_2017-FLS_datasheet-with-key-findings.pdf

“We need to have financial literacy in America, not just complaining about obstructionism. We need solutions.” – Kabir Sehgal, bestselling author of 8 books

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Many People Don’t Know They Need Financial Education

15% of adults roll over $2,500 or more in credit card debt each month (National Foundation for Credit Counseling). https://www.nfcc.org/wp-content/uploads/2017/03/NFCC_BECU_2017-FLS_datasheet-with-key-findings.pdf

Only one in five (19%) say they are not knowledgeable about annuity products in retirement (1 or 2 on a 7-point scale), suggesting that many overestimate their knowledge of annuities (The American College). http://retirement.theamericancollege.edu/sites/retirement/files/2017_Retirement_Income_Literacy_Report.pdf

26% of adults admit to not paying their bills on time (National Foundation for Credit Counseling). https://www.nfcc.org/NewsRoom/FinancialLiteracy/files2013/NFCC_NBPCA_2013%20FinancialLiteracy_survey_datasheet_key
%20findings_032913.pdf

42% of millennials took out an alternative financial service (PwC). https://www.pwc.com/us/en/about-us/corporate-responsibility/assets/pwc-millennials-and-financial-literacy.pdf

“I think people don’t understand compound interest because typically no one ever explains it to them and the level of financial literacy in the US is very low.” – James Surowiecki, journalist at The New Yorker and author of “The Financial Page” column

Powerful Financial Education Programs Will Change Financial Behavior

Real behavior molding is often seen as the primary goal of financial education programs. True financial literacy represents not only knowledge of personal financial matters as represented by tests, but also the ability to apply that knowledge to the specific circumstances of an individual’s own life. The goal of all financial educators is to improve the financial lives of all learners, not simply improve their scores on a battery of tests. Personal finance education, when done correctly, is able to mold financial behaviors to better align them with the long-term financial goals of the individual.

The International Organization of Securities Commissions suggests that programs should structure part of their content around skills relating to life events and regulatory procedures. Furthermore, effective programs develop content to meet the needs of specific target audiences, such as women, minorities, and those with low investing sophistication (International Organization of Securities Commissions). https://www.iosco.org

The President’s Advisory Council on Financial Capability public libraries can be provided with financial products and given the responsibility of appropriately distributing those materials (US Dept of Treasury). https://www.treasury.gov/resource-center/financial-education/Documents/PACFCYA%20Final%20Report%20June%202015.pdf

“Financial literacy is just as important in life as the other basics.” – John W. Rogers, Jr., CEO Ariel Capital Management

The Importance of Financial Education Programs

Those who wonder why is financial education important, should be reminded of the empirical evidence that highlights the positive changes in financial behavior. The evidence shows that properly constructed financial education curriculums can offer their participants education that will change their financial behavior. Why is financial literacy important? This question must be answered on the national level. Only when the benefits of financial education are made clear to policy makers and public educators, can the necessary funding reach the programs that are trying to improve financial literacy among their communities.