Brief #6 in the series Opportunity and Ownership Project
The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
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Asset-building strategies for low- and moderate-income families typically rely on strengthening incentives to save and invest. But market incentives already exist, and simply adding to them is not enough. Families often need help to make informed and appropriate decisions, especially in today's complex financial marketplace. Even when incentives are strong, many families spend beyond their means, too few save enough for contingencies, and many do not take full advantage of generous employer contributions for their retirement. One reason is that many low- and moderate-income families lack the basic knowledge to save and invest wisely, build wealth, and avoid excessive debt. Another reason is the lack of institutional arrangements that make enrollment in savings programs the starting point or default option, encouraging sound financial decisions.1 This brief focuses on lack of financial knowledge and education programs to increase financial literacy. Although such programs are becoming widespread and increasingly reaching some students, workers, and recipients of support programs, the field is still in its infancy.
Financial literacy and education programs must deal with an environment where people confront an increasingly complex array of choices that many are illprepared to make. People have to do more than simply save for contingencies and borrow to buy a house or car. Many more must deal with how much debt to accumulate when investing in a postsecondary education, or with deciding whether to obtain, and how to use, home equity loans. Unlike in the past, employer pension plans seldom guarantee workers some share of their preretirement earnings. Now, more people must decide how to save sufficiently for retirement, how to select an investment strategy, and how to redeem pension savings in a way that assures enough income to maintain living standards. The growth in personal bankruptcies suggests that many people are not choosing well. Meanwhile, billions of dollars are spent encouraging them to take on more debt. The low level of financial literacy in the United States may leave many ill-prepared for wolves at their door.
This brief examines financial literacy and programs to improve financial knowledge and decisionmaking. After examining survey evidence on what people believe about personal finance, we review existing financial literacy programs and make suggestions for improving financial literacy. The comments of experts who participated in a December 200
Notes from this section of the report
1. A good example is the case of employer-sponsored 401(k) programs. When workers are forced to file a form whether they enroll or not, or when workers are automatically enrolled but allowed to opt out, a higher proportion of workers participate in the program than when workers must take action to sign up (Choi et al. 2002 and 2005).
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Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
