At the same time, the CFPB is working to provide tools, information, and assistance to consumers as they make financial decisions.
There is much to be done to help US consumers build strong decision-making skills about money. For example, a majority of American adults say they haven’t formed a savings cushion to protect from unexpected economic shocks, according to the FINRA Foundation 2009 Financial Capability Survey. This same survey found that many Americans do not shop around, or engage only in limited comparison shopping, for the best deal on mortgages, car loans, and credit cards.
Raising the level of financial capability, which includes being able to manage financial resources effectively, will require active participation and cooperation from a wide range of entities.
The relatively new field of behavioral finance is developing and documenting an important conceptual framework about how people make financial choices. Although much of this framework is new, it includes concepts that marketers have used for a long time.
For example, advertisements often feature one attractive fact about a product, which can be an attempt to focus the consumer on that feature above others. Salespeople know that the order in which choices are presented makes a difference in what the buyer ultimately chooses.
Consumers face a marketplace in which effective marketing can make overspending and over-borrowing easy and even appear attractive. They are offered products that may appear to be cheaper than the true full cost, because some fees or costs are triggered after buying the product.
Francis Bacon said, “Knowledge is power,” but the emerging literature in behavioral economics and in financial capability suggests that knowledge is just part of the puzzle. Financial capability requires a combination of knowledge, skills, and habits, as well as access to financial products and services.
We need to build a nation where every consumer is financially capable. First, for those who are already seeking information about financial decisions, the CFPB designs and offers information, resources, and tools that enable consumers to clearly see the costs and risks of financial products and services so that they make the decisions that will best serve their own life goals.
Second, we want to help spark a national conversation about money, especially in families and schools. Parents should talk to kids. Teachers should talk to kids, to each other, and to experts who can help them learn more about financial concepts and teach those concepts more effectively.
Third, we support and stand ready to help increase the amount and effectiveness of financial education, especially in schools.
Finally, we see roles for people and institutions across society in building financial capability.
Let’s focus on some of the opportunities to give our young people a strong foundation for their financial futures.
1. Teach money concepts in the schools
Knowing how to manage money is an important life skill. Education that helps to foster familiarity with financial concepts can be integrated into all levels of educational curriculum. Too often, young people are not offered formal opportunities to learn about financial concepts and decision making. Only 14 states require a course on personal finance to be offered in school. The CFPB wants to work with teachers, administrators, and policymakers to encourage the inclusion of lessons about money that start in elementary school and build through high school graduation.
These lessons should be fully integrated with K-12 curricula. Math problems could address the benefits of compound interest on savings. Math classes could discuss the way in which the monthly payment doesn’t fully illustrate the true cost of a loan, because a loan with a higher interest rate and a longer duration can have a lower monthly payment than a shorter duration, lower-priced loan.
Language arts classes could help students develop critical thinking skills that will help them later in life when reading marketing material. And let’s hope that the recent period of economic disruption in our society associated with the mortgage crisis will soon be a lesson for history classes.
2. Add money questions to the tests and money topics to the core standards
Standardized tests that measure student progress could use questions based on money math. The President’s Advisory Council on Financial Capability has recommended integrating the essentials of personal finance into the widely used Common Core State Standards in mathematics and English language arts, which would be an important step forward.
Integrating financial lessons into nonfiction reading and into math problems would introduce students to financial basics. It would also strengthen the Common Core by engaging students with real world applications of the concepts they are learning. Even though education policy is generally a state and local matter, the CFPB is ready to work with regulators, educators, parents, the financial services sector, and others to identify ways to bring practical, sustained, effective financial education to K-12 students.
3. Teacher training in personal finance will benefit students
Approximately eight out of 10 K-12 teachers say that personal finance should be taught in school, yet only three out of 10 say they have taught lessons about money. Teachers who have taken a personal finance course are more likely to teach financial lessons, but personal finance is not a required part of teacher training.
Colleges and universities should consider offering effective financial education courses to all of their students. These courses may have special value for education students who will later become teachers, and for students studying to become social workers and may later work with families facing financial difficulties. Teachers also should receive continuing education credits or professional development credits for taking personal finance courses.
4. Other financial skills development for young people
Providing students with finance-related learning opportunities that are relevant, real, and practical may improve financial literacy. Some schools invite financial institutions to work with their students to run youth credit unions or student banks on campus. The young people who help run the program get hands-on business experience, and their peers may get their first bank accounts.
Having savings in a student’s name has been shown to make a difference in whether young people fulfill their intentions to attend a four-year college. A study in the Journal of Children & Poverty examined rates of “wilt”—when high school students who say they expect to attend a four-year college don’t reach that goal. A young person who had a savings account in his or her own name and planned to attend a four year college was six to seven times more likely to achieve that dream than a student without such an account—independent of such factors as family income and household net worth.
Some local governments are experimenting with kindergarten-to-college savings accounts that provide a small opening deposit and matching money for regular savings, so that parents and kids start going to the bank together to save for a future that includes college.
5. Roles for parents, employers, and trusted community organizations
Any discussion about how we teach our children must include parents. Through our Office of Financial Education, the CFPB is exploring how just-in-time information, together with age-appropriate activities for parents to engage in with their children, could help equip parents who want to answer their children’s questions about money choices. We are developing frequently asked questions and answers for parents, which will supplement the existing “Ask CFPB” offering that now serves U.S. adults.
As we work toward increased financial capability across the country, there are also important roles for employers and community- and faith-based organizations. Automatic enrollment in the workplace for retirement plans increases the number of employees saving for their futures. A financial education program for workers with a one-on-one financial planning component has been shown to decrease the number of 401(k) loan requests and advance pay requests, and to decrease overall financial stress. Churches, other faith communities, and other trusted community organizations can reach out to those they serve with important information about how to avoid scams and frauds, spot elder financial exploitation, and get information from sources such as “Ask CFPB.”
While researchers continue to learn more about why people behave in certain ways with money, there is work to be done right now. Money choices are a personal responsibility, but each one of us who touches the life of a young person also has a personal responsibility to enable and empower tomorrow’s consumers to learn to manage money. This will enhance both individual futures and the future of our country.