Academic journal article The Journal of Consumer Affairs

Financial Literacy Explicated: The Case for a Clearer Definition in an Increasingly Complex Economy

Academic journal article The Journal of Consumer Affairs

Financial Literacy Explicated: The Case for a Clearer Definition in an Increasingly Complex Economy

Article excerpt

This study explicates the concept of financial literacy, which has blossomed in use this century. Scholars, policy officials, financial experts and consumer advocates have used the phrase loosely to describe the knowledge, skills, confidence and motivation necessary to effectively manage money. As a result, financial literacy has varying conceptual definitions in existing research, as well as diverse operational definitions and values. This study dissects the differing financial literacy definitions and measures, urging researchers toward common ground. A clearer definition should improve future research, in turn helping consumers better understand and adapt to changing life events and an increasingly complex economy.

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If American consumers learned anything from the financial crisis that began in 2008, it was the importance of managing money. When the economy was booming, the personal savings rate in the United States dipped below 0% and did not climb above 0% until 2008 and the onset of the financial crisis (U.S. Department of Commerce, Bureau of Economic Analysis 2008). Although saving is only one aspect of managing money, it is important, given the volatility of the modern economic climate and related factors that are often beyond an individual's control (Perry and Morris 2005).

Government officials and consumer advocates noticed warning signs such as the depressed savings rate and took action to help consumers understand and adapt to changing life events and an increasingly complex economy. In 2006, the United States launched a first ever national strategy to improve financial literacy (U.S. Department of the Treasury, Office of Financial Education 2006). Unfortunately, the national strategy began without a clear definition of financial literacy or how it can be consistently measured. A conceptual definition of financial literacy was not adopted and added to the National Strategy for Financial Literacy until 2009; an operational definition in the form of consistent measurement criteria has yet to be added (President's Advisory Council on Financial Literacy 2009). Individuals and organizations doing basic, applied and program evaluation research had used--and, in some cases, continue to use--their own definitions and measures of financial literacy. This confusion slows progress and hinders the ability to design meaningful and effective consumer education programs.

The purpose of this study was to explicate the concept of financial literacy by analyzing the many ways in which it has been interpreted and measured in research since 2000, the start of the decade in which the push for greater education and empowerment began taking solid root. The study sought to identify existing conceptual and operational definitions of financial literacy, compare and contrast these definitions with the one the U.S. government adopted and articulate rationale for widespread adoption and use of a clear, consistent definition in research and curriculum planning. Ultimately, this study is a rally cry toward common ground for all who work to address financial literacy concerns in America, with the ultimate goal of improving consumers' self-efficacy relative to personal finance.

Helping consumers is at the heart of this rally cry. Given the increasing complexity and variety of financial products and services available, managing money can be difficult, particularly for the young or those at economic disadvantage (Consumer Bankers Association 2003; National Endowment for Financial Education 2006). However, money-related struggles do not necessarily disappear as consumers move through adulthood; they often evolve or change (Employee Benefit Research Institute 2008).

Is financial literacy the right phrase, though, to describe what a consumer needs to effectively adapt to changing needs, life events and economic forces? The question is moot. The President's Advisory Council on Financial Literacy is defined by the phrase financial literacy, as is the Financial Literacy and Education Commission, which shepherds the Taking Ownership National Strategy for Financial Literacy. …

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