Financial inclusion plays a crucial role in fostering equitable development and improving human well-being worldwide. Various initiatives, like the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development, are dedicated to promoting financial inclusion and ensuring access to financial services for all. Equipping individuals with the necessary knowledge and skills to make informed financial decisions is the foundation upon which broader and more meaningful financial inclusion can be built. It serves as the cornerstone that empowers individuals to participate fully in the financial system and achieve greater economic stability. This fact is becoming increasingly evident from the extensive media coverage and public attention it receives. A recent Google search on the topic “financial literacy” for the past week’s news revealed over 20 pages of results, spanning various areas such as efforts at the policy and legislative levels, local initiatives, and private sector companies proving new technologies or services aimed at enhancing financial literacy. For example, the signing of Senate Bill 1165 by Connecticut Gov. Ned Lamont aims to promote financial literacy for public high school students and has received bipartisan support.
This broad coverage underscores the increasing recognition of the importance of financial literacy and its profound impact on society. Financial literacy empowers individuals to make informed decisions, responsibly manage their finances, and confidently navigate complex financial systems. Understanding budgeting, saving, and wise investing, as well as the risks and benefits of financial products, becomes possible through financial literacy. Ultimately, it plays a crucial role in achieving genuine financial inclusion.
As financial literacy gains increased attention, it becomes imperative to establish a clear definition of the concept, ensuring a common understanding of its key components. Equally important is the task of aligning learning objectives with specific financial domains, tailoring educational efforts to address relevant topics, and equipping individuals with actionable skills. To maximize the impact of financial education, exploring and implementing effective teaching methods is essential, as it can make a difference in engaging learners and fostering a deeper understanding of personal finance concepts.
The definition of financial literacy lacks consensus, with the most widely cited one originating from the US Financial Literacy and Education Commission (US FLEC) in 2009. According to US FLEC, financial literacy is “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.” However, some experts propose a more dynamic perspective. For example, Faulkner (2015) argues that financial literacy should be understood as a term that evolves based on the specific time period and circumstances in which it is used. It involves grasping financial concepts and skills that are relevant to the present and future, considering the ever-changing nature of financial systems and the diverse needs of individuals and communities.
Identifying relevant topics is equally crucial and goes hand in hand with defining financial literacy. Klapper & Lusardi (2020) evaluated financial literacy through questions on four fundamental concepts: interest rates, interest compounding, inflation, and risk diversification. The choice of these concepts is based on the premise that limited financial literacy in these areas can exacerbate consumer and financial market risks. For instance, a lack of understanding of interest compounding may result in underestimating the effective interest rate and lead to uninformed financial decisions.
Based on a literature review, Faulkner (2015) created a non-exhaustive list of topics covering various aspects of financial literacy, including understanding income, tax, workplace benefits, budgeting, saving, investing, credit, debt, insurance, risk assessment methods, and protecting against financial fraud and scams. It questioned the depth of knowledge required in specific financial areas, considering the diverse contexts individuals face and highlighted the need for flexibility in defining financial literacy based on circumstances and stages of life. Moreover, it raised important considerations that are often excluded from traditional lists, such as understanding broader economic factors and the emotional and psychological aspects of financial decision-making. The paper sheds light on the complexities of financial literacy education, offering valuable insights for formulating a strategic plan.
In the rapidly evolving fintech and AI age, it is also important to recognize the significance of broadening financial literacy training to include new concepts and technologies. As financial services become increasingly digital and innovative, individuals need to understand topics such as cryptocurrency, robo-advisors, mobile payment systems, and data privacy in order to make informed and secure financial decisions. Integrating these new elements into financial literacy programs will empower individuals to navigate the complexities of modern finance and effectively leverage the opportunities presented by technological advancements.
After identifying the key components and specific topics, the next crucial step is to concentrate on effective teaching methods. Notably, there is a wealth of academic research on teaching methods, surpassing the amount of conceptualization done on financial literacy. This indicates the significance of exploring and implementing proven strategies to enhance financial literacy education.
For instance, Lusardi et al. (2017) developed and experimentally evaluated four novel educational programs delivered online: an informational brochure, a visual interactive tool, a written narrative, and a video narrative, all aimed at explaining risk diversification, a critical concept in financial decision-making. Among these, videos proved to be the most effective in enhancing financial literacy scores and boosting confidence in financial knowledge. Although the other programs showed less pronounced effects on financial literacy, they did have a positive influence on self-efficacy. Additionally, the visual interactive tool notably increased confidence in financial knowledge as well.
Cutler (2013) suggests developing “life-stage educational models” that classify financial literacy into age-specific clusters. For example, financial literacy education for the 45-55 age group should focus on wealth accumulation (saving, investment, pension choices, debt reduction, home ownership) and potential responsibilities for aging parents (long-term care planning and financial resources).
Lastly, it is crucial for educators and financial service professionals to be mindful of the issue of financial literacy overconfidence. This phenomenon refers to the tendency of individuals to overestimate their own financial knowledge or skills, leading them to believe they are more financially savvy than they actually are (Porto and Xiao, 2016). Recognizing and addressing this overconfidence is vital to ensure that individuals receive the appropriate support and education needed to make sound financial decisions that align with their financial objectives.
References:
Cutler, N. E. (2013). Quantitative Financial Literacy: The Signal and the Noise. Journal of Financial Service Professionals, 67(2), 24–28.
Faulkner, A.E. (2015). A Systematic Review of Financial Literacy as a Termed Concept: More Questions Than Answers. Journal of Business & Finance Librarianship, 20:1-2, 7-26, DOI: 10.1080/08963568.2015.982446
Klapper, L., & Lusardi, A. (2020). Financial literacy and financial resilience: Evidence from around the world. Financial Management (Wiley-Blackwell), 49(3), 589–614.
Lusardi, A., Samek, A., Kapteyn, A., Glinert, L., Hung, A., & Heinberg, A. (2017). Visual tools and narratives: new ways to improve financial literacy. Journal of Pension Economics & Finance, 16(3), 297–323.
Porto, N., & Xiao, J. (2016). Financial Literacy Overconfidence and Financial Advice Seeking. Journal of Financial Service Professionals, 70(4), 78–88.
US FLEC (Financial Literacy and Education Commission), 2009. 2008 Annual Report to the President. Available online: https://www.academia.edu/6708140/Presidents_Advisory_Council_on_Financial_Literacy_2008_Annual_Report_to_the_President (accessed on 07/20/2023).
Like (0)