Academic journal article Federal Reserve Bulletin

Financial Literacy: An Overview of Practice, Research, and Policy

Academic journal article Federal Reserve Bulletin

Financial Literacy: An Overview of Practice, Research, and Policy

Article excerpt

In recent years, financial literacy has gained the attention of a wide range of major banking companies, government agencies, grass-roots consumer and community interest groups, and other organizations. Interested groups, including policymakers, are concerned that consumers lack a working knowledge of financial concepts and do not have the tools they need to make decisions most advantageous to their economic well-being. Such financial literacy deficiencies can affect an individual's or family's day-to-day money management and ability to save for long-term goals such as buying a home, seeking higher education, or financing retirement. Ineffective money management can also result in behaviors that make consumers vulnerable to severe financial crises.

From a broader perspective, market operations and competitive forces are compromised when consumers do not have the skills to manage their finances effectively. Informed participants help create a more competitive, more efficient market. As knowledgeable consumers demand products that meet their short- and long-term financial needs, providers compete to create products having the characteristics that best respond to those demands.

As concern about financial literacy has increased, so too have the number and variety of financial literacy training programs and program providers--some offering comprehensive information on savings, credit, and similar topics for a broad audience and others tailored to a specific group, such as youth or military personnel, or focused on a specific goal, such as home ownership or savings.

The findings of studies of the effectiveness of financial literacy training have been mixed. Although some programs, particularly those having discrete objectives, have succeeded in improving certain aspects of consumers' personal financial management--such as maintaining a mortgage, increasing savings, or participating in employer-sponsored benefit plans--improved financial behavior does not necessarily follow from increased financial information. The timing and format of training, as well as human traits such as aversion to change, play a role in whether programs will effect positive change that contributes to households' long-term financial well-being. Accounting for all the variables associated with financial literacy training--when, how, and where it is delivered, who is trained, and what information is presented--poses a great challenge for program developers. Given the resources now devoted to financial literacy training, this is an opportune time to evaluate the research, identify best practices, and consider public policy options that would further the goal of creating more financially savvy consumers.


Numerous factors have led to a complex, specialized financial services marketplace that requires consumers to be actively engaged if they are to manage their finances effectively. The forces of technology and market innovation, driven by increased competition, have resulted in a sophisticated industry in which consumers are offered a broad spectrum of services by a wide array of providers. Compelling consumer issues, such as the very visible issue of predatory lending, high levels of consumer debt, and low saving rates, have also added to the sense of urgency surrounding financial literacy. Other important demographic and market trends contributing to concerns include increased diversity of the population, resulting in households that may face language, cultural, or other barriers to establishing a banking relationship; expanded access to credit for younger populations; and increased employee responsibility for directing their own investments in employer-sponsored retirement and pension plans.

Technological Changes and Market Innovation

Over the past decade, technological advances have transformed nearly every aspect of the marketing, delivery, and processing of financial products and services. …

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