The Case for Financial Literacy

The number of financial decisions an American citizen has to make continues to increase, and the variety and complexity of financial products continues to grow. Adults often do not fully understand debit and credit cards, mortgages, banking, investment and insurance products and services, retirement planning, and many other financial topics.

Financial literacy among our citizens is critically important to our economy. Employee pension plans are disappearing and being replaced by defined contribution retirement programs, which impose greater responsibilities on adults to save and invest. Should a significant number of retirees fail to do so, they could become a significant economic burden on our society.

Financial literacy is linked to positive outcomes like wealth accumulation, stock market participation and smart retirement planning. Illiteracy leads to falling into expensive traps like payday lending, auto title loans and high interest rates on credit due to low credit scores.

Financial illiteracy was also one of the causes of the Great Recession. To minimize the impact of any future financial crisis, Americans must be educated in personal finance. Our Center has produced a report card on the state of high school personal finance education, and we found that more high schools need to provide robust financial education. It is also clear that most young people rely on their parents for financial advice and guidance. Financial training should also take place in the home. So Mom and Dad need to be educated.

Adults who have higher levels of financial literacy make better personal finance decisions and are more likely to have a checking account, rainy-day emergency fund or retirement plan, or to own stocks. They are much less likely to use payday loans, pay only the minimum amount owed on their credit cards, have high-cost mortgages, and have higher debt and delinquency levels.

If financial literacy, like reading, writing and arithmetic, builds human capital by empowering individuals to create “capital for humans” to use in their lifetimes, then financial literacy education is a crucial national imperative. We must give individuals the knowledge and skills that can help them solve financial problems or prevent difficult financial situation from occurring.