Financial Literacy: Is It Worth the Investment?
Financial experts on morning television – and American consumers in general – acknowledge that financial education is a valuable and important part of their economic health. They admit that understanding personal financial concepts directly impacts their financial achievement. Our latest research, however, finds American consumers barely participate in financial literacy programs. Couple that low participation rate with the consumers’ inflated sense of their own financial literateness: any institution would question whether or not it’s worth the investment to offer a financial educational program that may – or may not – spark interest and draw attention.
Raddon’s study on financial literacy, Financial Literacy: Prosperity Begins with Knowledge not only explores the value of offering a financial program, ultimately finding the benefit goes to both customer and institution. We also deployed a financial literacy quiz to understand how literate consumers, and different segments of consumers, really are.
Consumers normally do not think and behave the same across the board, but one trend in financial literacy is fairly consistent: Americans consistently exhibit overconfidence in their financial knowledge level. Over 4 in 10 U.S. consumers (44%) said they were extremely/very financially literate, and as they age and their income level increases, that confidence level continues to rise. But FICO reports the national average credit score has recently reached 700 after years of being much lower (FICO scores range from 300-850; 700 is considered ‘Good’, just above the ‘Poor’ score level).
According to the Council for Economic Education, currently only 20 states require students to take an economic class to graduate high school and only 17 states require a course in financial literacy for graduation. The theory is the younger that consumers are exposed to strong financial habits, like saving, budgeting, goal-setting, the more likely they will learn and adopt those gateway behaviors, ultimately leading to even stronger financial habits.
Raddon’s study finds that the while overall financial literacy program participation is low (see Figure 2), the majority (49%) of participants attended their first literacy session between the ages of 18-34 (see Figure 3). It’s easy to make the argument you are never too old to receive financial education (think retirement readiness programs, debt consolidation, and estate management for older generations), but if consumers are going to attend an educational program, it’s most likely they’re attending at a younger age where they’re beginning to lean about and navigate their financial life milestones: purchasing a car, purchasing a home, managing student loan debt, and beginning to save or even invest.
When consumers are in need of financial information, their number one resource is their primary financial institution. And once a consumer actually attends a financial educational program, two-thirds (66%) say they will return to attend another session, Millennials (76%) and major bank customers (74%) even more so.
Even more interesting, based on accurate quiz responses, when we divided consumers into more financially literate and less financially literate groups (regardless of generation), we found very different banking behavior.
Consumers in the more literate group were more inclined to use a budget, track interest rates, display more self-sufficient behavior and were less likely to use a lobby. They also showed higher levels of certain loan and deposit product usage.
Less financially literate consumers self-reported they were less likely to use a budget or track interest rates, had higher lobby usage, and were more likely to use a branch located in a grocery store and to call a financial institution employee.
Notwithstanding the inflated sense of consumer financial awareness and room for improvement, or the overall low attendance numbers for financial programs, having a customer that is financially literate not only benefits them directly, but it’s also an asset for the financial institution. Customers who have a better sense of fiscal fundamentals exhibit strong financial behaviors and are more grounded in their personal finances, ultimately making them a more engaged customer for the institution. Their level of awareness will make them less costly to the institution, based on their level of self-sufficiency and technology usage, and they will defer to their primary financial institution as a trusted resource.