On the Financial Literacy Front, We Have Work to Do

Ten years past the onset of the financial crisis, the U.S. has recovered admirably, but one troubling fact has endured – a lack of financial acumen continues to challenge American consumers and by extension, their financial institutions. This presents a significant responsibility for credit unions and others committed to the financial well-being of consumers.

Recent news and studies validate the precarious state of many Americans’ finances, with one study from Bankrate.com showing that two in three adults in the U.S. could not cover a $500 emergency from their savings.

On top of this, a massive number of retiring baby boomers (born 1946 to 1964), many of whom are woefully unprepared to fund retirement, will put significant stress on our economic and political systems.

But just how financially illiterate are we, really? Raddon conducted a study in the last year to assess this in detail, and to educate financial institutions on what steps they can take to affect change in financial literacy.

We asked consumers about their sense of their own financial literacy and things they had done to improve it. Then, we followed up with a short quiz to find out how much they actually knew. The results, based on 1,200 respondents, were revealing:

• Fewer than half of respondents (44%) consider themselves “extremely” or “very” financially literate.
• Only 16% indicated ever having participated in a financial literacy program, with a very strong correlation with income levels. Higher-income individuals are significantly more likely to have engaged in financial literacy programs.
• Retirement planning and general financial planning are top concerns among consumers. Interestingly, debt management concerns rank lower in priority; our conclusion is that the consumer feels somewhat more educated about issues of debt since the financial crisis stemmed from too much debt.
• About two in five (38%) consider financial education programs offered by their primary financial institution to be “extremely” or “very” valuable. The good news is that among millennials (born 1979 to 1999), this increases to 55%. Even more good news: Millennials also indicated they would be more likely to bring new business to a financial institution with which they engaged in financial literacy programming.

Now for the bad news. We asked 15 questions of the survey participants to assess their actual financial literacy. The questions ranged from easy to moderately hard, and addressed topics such as savings, investing, retirement planning and debt management. We graded in the old-fashioned way – no curves or extra credit – and a passing grade was 66% (10 of the 15 questions answered correctly). Here is what we found:

• Only 45% of respondents achieved a passing grade of 66% or better.
• Debt management questions were most likely to be answered correctly, while scores were poorest in the areas of retirement planning and investing. Even among older Traditionalist consumers (born 1922 to 1945), the percent of retirement questions answered correctly was only 55% (giving further credence to the thought of a big retirement problem in the near future).
• Baby boomers were most likely to achieve a passing grade (58%) and millennials were least likely (24%).
• Interestingly, perceived level of literacy does not correlate with actual literacy. Only 54% of those who considered themselves “extremely” financially literate achieved a passing score on the quiz.
• Finally, financial literacy programs actually can help. Those individuals who had attended four or more literacy programs achieved a passing score 84% of the time, double the 42% pass rate for those not attending any literacy programs.

What can we learn from this? First, it is clear that the lack of financial literacy has serious societal impact. Financial service providers have a vested interest in changing these dynamics, as they especially will benefit from a more financially savvy public. Our research indicates those with higher degrees of financial literacy also have significantly better financial resources – they are more likely to have higher loan and deposit balances than their less financially literate compatriots.

Second, while providers are offering education, our industry is still not effectively communicating the value of financial literacy programs. Fewer than one in five consumers has participated in a financial literacy program.

Clearly there is an opportunity for financial institutions to fill the financial literacy gap. In our view, there are six components of a successful financial literacy program.

1. Make the content relevant to life stage. Our research indicates consumers do not want to know it all – they want to know what they need to know when they need to know it. In other words, modularize your financial planning, creating content that is relevant to the consumer’s life stage. Young individuals want to know how to manage debt more effectively; as they age their interest in investing and retirement planning will grow. One important caveat is that individuals do not always understand what should be in focus. For example, for the up-and-coming Gen Z (born after 2000) group, retirement planning may not be a high priority. Your responsibility is to make it one.

2. Provide simple illustrations of why financial literacy matters. A key means of creating relevancy is to provide clear examples. How many millennials realize that reducing their coffee consumption at the high-cost coffee shop from six per week to three per week would result in potentially $200,000 in additional savings at retirement? It is a powerful realization!

3. Make the content consumable. As a society, we have short attention spans. Structure the content in a way that allows an individual to engage for a reasonable period, but then step away.

4. Take advantage of all communication channels to provide financial literacy tools and content – workshops and seminars, online tools, videos and even mobile-based tools. Each generation consumes information differently and you need to be able to reach them where they are. For example, our recent study of Gen Z indicates their primary social media channel is YouTube. Videos are a great way to educate. But even in the more traditional channels, look for ways to innovate and modernize in how you deliver.

5. Utilize incentives to encourage behavioral changes. For example, gamification of finance can help consumers achieve success in changing the financial direction of their lives, as it taps into the natural desire for competition and achievement.

6. Communicate your success to the broader market. Quantify the success that you are having with your programs – for example, how much more your members are saving and investing for retirement or how they are bringing their debt to more optimal levels. This lifts up everyone involved up.

Financial literacy is a space that credit unions have the opportunity and natural inclination to claim – one that fits well with the industry’s member-first orientation. A focus on furthering financial intelligence is a commitment to the success of your members.

Bill Handel is Vice President, Research for Raddon, a Fiserv Company. He can be reached at bhandel@raddon.com.