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Media Backgrounder: Analysis of the definition, awareness, and current issues surrounding financial literacy

By: Catherine Harper Public Relations Writing September 29, 2010 Introduction Financial literacy in the United States has been a particular topic of interest in the past twenty years during the rise and fall of the economy, particularly during the recent failing of the sub-prime mortgage market and growing recession. In the face of such hard economic times, scholars, scientists and economists alike have ventured to find what level Americans apply and hold financial literacy in their personal transactions. Recently, studies have shown that financial literacy is decreasing in adults as well as adolescents and college students. What is financial literacy? The Journal of Consumer Affairs defines financial literacy as conceptualized as having two dimensions- understanding (personal finance knowledge) and use (personal finance application (Huston 2009). The 2009 FINRA National Financial Capability Survey applies this definition of financial literacy to matters of savings and planning ahead for rough economic times, retirement and childrens education; management of financial products such as credit cards, mortgages, retirement accounts, stocks, bonds and mutual funds, and risks preferences; as well as financial knowledge and decision making including self-perceptions of financial knowledge, measuring financial literacy, obtaining credit reports, checking credit scores, and understanding financial contracts. What is the problem with financial literacy? While many Americans have needed to save and cut back in harsh times of recession, studies have proven that most people will claim to know their finances and defend their financial literacy while their bank statements and personal expenditures do not reflect this ideology. As stated in the FINRA Investor Education Survey in 2009, there is a clear disconnect between financial statements and self-perception. The disconnect stems from the dropping in financial literacy rates and growing financial problems which have been occurring from a period of time starting in the 1990s. The Jumpstart Coalition performed a study in 2008 showing American financial literacy scores that have dropped about 9% in 12 years, with financial literacy at a score of 57.3% in 1997 and 48.3%in 2008. The waning financial literacy score shows that while many Americans

would like to think they are confident in their daily expenditures and savings, this is not always the case. The financial problems most Americans face stem from the complicated financial system that we see today, integrated into a long and lengthy system for saving and investing in mortgages and other such financial products, and a much larger financial market. The FINRA survey states, The price tag for many components of the American dream including purchasing a home or funding a childs college educationhas risen since the 1980s and 1990s. Especially with respect to college tuition costs, that trend promises to continue. For financial literacy, however, it is a downward sloping trend. The FINRA National Survey held true that in 2009 almost half of Americans had trouble keeping up with their expenses and bills and a quarter had reported overdrawing their checking account due to a lack of savings. Lack of savings became a trend in 2009 as shown by a Capital One bank survey entitled Americas Financial IQ Survey Shows Both Understanding and Gaps, which showed that 47% of the survey participants admitted to putting less money into savings and dipping into savings to cover day-to-day expenses. As to the overall financial literacy of Americans, in that the definition of financial literacy depends on ones ability to save their money for rainy day periods, many Americans were not saving and are thus were not financially literate. On another side of the issue and quite the opposite effect, more and more reports of household expenditures exceeding income reached the surface in 2009 and 2010. The FINRA survey reported that over the past year, household expenses (not including the purchase of a new car or other big investments) have been greater than income for more than one of every 10 Americans (12 percent) and about equal to income for 36 percent of Americans. However, according to a Cardtrak survey in January 2010, credit card debt has been decreasing due to consumer willingness to cut back their debts on credit cards. 55% of consumers said that they were making a proactive effort, and 69% of those consumers resulted in higher credit card interest rates from their efforts. Another issue with financial literacy among Americans lies among the younger adolescents and those entering the financial world, whom, shown by the National Survey of Financial Conditions, appeared to exhibit much less confidence in the area than older people. The survey by the Jumpstart Coalition showed a 48.3% average on financial scores in high school students as opposed to 62.2% in college students. As stated by the survey, Concepts like income tax, withholdings, insurance, the economy, investments and even basic checking accounts are difficult for young teenagers to absorb because most of the subject matter is abstract and lacking in immediate relevance. In Charles Shwabs 2008 book Parents & Money, statistics showed that only about one in three parents (34%) have taught their teen how to balance a checkbook, and even fewer (29%) have explained how credit card interest and fees work. However, in a 2010 survey by the College Savings Foundation, 75% of high school students nearing graduation said that it is their responsibility to pay for their college funds,

and 45% of these students have already begun saving for college with about $1,000-5,000. These same students would benefit from knowing much more about financial literacy, savings, and future goals in finances, and yet literacy rates are at an all time low in young people. What are groups doing about the issue about financial literacy? In 2003, Congress formally recognized April as a month dedicated to Financial Literacy, proposed by the Jumpstart Coalition for Personal Financial Literacy in 2000. In 2009, 24% of credit unions offered services including Financial Counseling and Financial Education, 13% held Financial Literacy workshops, 8% had a First Time Homebuyers Program, and 4% hosted an in-school branching program. Leo MacNeil, SVP of Community Relations at Harbor One Credit Union, stated, During these challenging economic times, collaboration is essential to effective community outreach and success. While this has always been so, this painful recession has forced most community-based organizations to find synergy through collaboration and reduce the cost of redundancies in services. Harbor One Credit Union, through its MultiCultural Banking Center and other initiatives, has been a leader in bringing agencies together for a creative and effective discourse on the benefits of collaboration. MacNeil is not the only one actively involved at credit unions enhancing awareness in the community. For Dawn Ambuehl-Sadek, Community Education Director at FCU, the process of educating in financial literacy is a multi-step task which spans multiple avenues. Start one at a time. I started with seminars, built that program, then moved into the online, social media channel. It is a long process. There is more we can do, but you have to start with one thing, perfect it, then move on to the next, Sadek said. On top of a dedication on credit unions and banks to educate their members on the nature of their finances, Congress took an initiative on financial issues in 2008 with its DoddFrank Wall Street Reform and Consumer Protection Act, which reaches to the problem of financial illiteracy by creating a consumer financial-protection agency that protects consumers from unstable banks as well as other elements of the financial market, as well as the authority to review and streamine financial literacy programs, according to an article by James Surowiecki in the New Yorker entitled Greater Fools. What are groups not doing about the issue of financial literacy? According to an assessment by the Washington Financial Literacy Work Group of the

Senate Bill in 2008 towards financial literacy, there were three missing components which were not entirely set about in clarity in the bill, these being: 1. To identify current state funded efforts to support financial literacy, 2. Assess whether there are opportunities to create a centralized location of information regarding these existing state efforts, and 3. Identify whether there are opportunities for expanding partnerships with other community entities also providing financial literacy services While credit unions have recently increased their financial literacy services as well as an increase in state-mandated organizations providing these services across the nation, it remains to be seen in what detail these mandates hold for the enhancement of financial literacy of Americans. What do local opinion leaders state on the subject of financial literacy? Randy Walton, president of the San Marcos School Board, stated, One of the biggest gifts we could give ALL our students in SMUSD, whether college-bound or not, is an education in basic economics and financial literacy. Lately, we have all learned more than we wanted to know about bad debt and frozen credit markets and such, but it has reinforced the need to teach kids the fundamentals about taxes, markets, and, most important, personal finance, including credit and debt. The Financial Literacy Coalition of Central Texas released a comment stating, The mission of the Financial Literacy Coalition of Central Texas (FLCCT) is to foster community prosperity by enhancing the knowledge and skills Central Texans need for improved financial decision-making. Our vision is to be recognized as a trusted, unbiased, and credible source of personal financial education. The goal of FLCCT is to educate. The Financial Literacy Coalition of Central Texas is located in Austin, Texas at 1600 B. Smith Road. They are a non-profit organization that offers courses on financial literacy for both adults and adolescents. For more information visit their website: http://www.flcct.org/

Conclusion

The effects of overspending, under-saving, and under-educating on the nature of financial literacy span far wider than the knowledge of a group or population of Americans, extending rather to the economic future of the nation as a whole. As the Jumpstart Coalition survey states, The current financial crisis began with subprime mortgages that were marketed primarily to those with less income, education, and presumably less financial literacy than those who were eligible for prime mortgage. Financial literacy clearly has ongoing macroeconomic ramifications. In our nations effort to right the debts and mortgages that have gone wrong contributing to the recession, it would seem that financial literacy in Americans is one of the greatest obstacles we as a nation face in righting this wrong for future generations.

Studies: 1. [Financial Brand: Does Financial Literacy Work? April 8, 2010.] http://thefinancialbrand.com/11235/does-financial-literacy-work/ 2. [360 Financial Literacy.com. Summary of the New Financial Reform Law.] http://360financialliteracy.com/Topics/Credit-and-Debt/Credit-Cards/Summary-ofthe-New-Financial-Reform-Law?fpath=103 3. [FINRA Investor Education Foundation: Financial Capability in the United States. December 2009.] http://www.finrafoundation.org/web/groups/foundation/@foundation/documents/fo undation/p120535.pdf 4. [Tissue, Chris. Happy Financial Literacy Month! April 6, 2010.] http://www.creditunions.com/blog.aspx?id=3607 5. [Huston, Sandra J. Measuring Financial Literacy. June 1, 2010.] http://onlinelibrary.wiley.com/doi/10.1111/j.1745-6606.2010.01170.x/pdf

6. [CardTrak.com, Card Cutback, December 15, 2009.] http://www.cardtrak.com/news/2009/12/15/card_cutback]

7. [Capital One, America's 'Financial IQ' Survey Shows Both Understanding and

Gaps, April 13, 2009, http://phx.corporate-ir.net/phoenix.zhtml?c=70667&p=irolnewsArticle&ID=1275563&highlight]

8. [College Savings Foundation, The State of College Savings Survey Finds Parent Confidence Crashing As They Rely on Loans, Shift Debt Burden to Their Children, September 17, 2009, http://www.collegesavingsfoundation.org/pdf/CSF2009StateofCollegeSavingsPR 9-17-09LOGO.pdf]

9. [Charles Schwab, Schwab Parents & Money Survey Offers Prescription for Raising Financially Healthy Kids, March 26, 2008, http://www.businesswire.com/portal/site/schwab/index.jsp? ndmViewId=news_view&ndmConfigId=1010973&newsId=20080326005384&n ewsLang=en]

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