Academic journal article The Journal of Social, Political, and Economic Studies

Financial Literacy Interventions: Evaluating the Impact and Scope of Financial Literacy Programs on Savings, Retirement, and Investment

Academic journal article The Journal of Social, Political, and Economic Studies

Financial Literacy Interventions: Evaluating the Impact and Scope of Financial Literacy Programs on Savings, Retirement, and Investment

Article excerpt

Individuals are taking responsibility for a growing number of financial decisions. Arguably, the most important is preparation for retirement. In this new environment, where individuals have greater responsibility for determining their own retirement income, factors such as general financial knowledge, an understanding of the retirement savings process, and recognition of the need for adequate savings have become critical to successfully achieving one's retirement objectives.

The financial environment that consumers face today has become dramatically more complicated than that of any previous generation (Lusardi 2009). Individuals are offered more borrowing options such as payday loans, debt consolidation loans, and high-interest-rate credit cards. Evidence from several studies suggests that financial illiteracy is widespread (Lusardi 2006), particularly among vulnerable demographic groups (i.e., less educated, low-income, women, and minorities). This lack of financial knowledge is a serious cause for concern given that financial literacy is believed to be an important predictor of retirement planning and other important financial decisions. Creating financial literacy interventions is an obvious and common sense response to the increased complexity of the financial world. Thus the purpose of this paper is to compare the strengths of findings across several studies with different designs and different kinds of statistical analyses, all exploring the same core question: What is the connection between financial literacy and the choices that people make about their finances? Additionally, the purpose of this paper is to evaluate the impact and scope of financial literacy and financial literacy programs on savings, retirement, and investments. Moreover, we seek to specifically examine the link between financial literacy and planning and behavioral changes among minority groups who have participated in financial literacy interventions.

The question of whether minorities, in particular African Americans and Hispanics, are financially prepared for retirement has been examined widely. Previous studies examining the financial position of households have highlighted the fact that the wealth holdings of African-Americans and Hispanics are very low (Hurst, Luoh and Stafford, 1998). Smith (1995) and Lusardi (1999, 2000) further emphasized that many African Americans and Hispanics arrive at retirement with little wealth. Other studies, which have examined portfolio choice or specific assets such as housing, stocks, IRAs and 401(k) s, have further documented that African Americans and Hispanics do not hold many of the assets commonly present in White household portfolios. For example, Haliassos and Bertaut (1995) found that minorities were much less likely to hold stocks than White households, and this remains the case even after accounting for a large set of household and industry characteristics, including income and wealth. Similarly, Charles and Hurst (2002) found that African Americans are much less likely to own a home or apply for a mortgage than Whites.

There are many reasons for this diversity in wealth accumulation. For example, African Americans and Hispanics often have lower educational attainment, lower income, and a greater experience of negative life events. In addition, African Americans and Hispanics also have been shown to possess lower financial literacy than Whites, which is correlated with poor saving and investment behavior (Hilgert, Hogarth and Beverly, 2003; Hogarth and Hilgerth, 2002). The authors found that financial literacy was directly correlated with financial behaviors such as spending properly, saving properly and investing properly for one's retirement. Consequently, lack of financial knowledge in minority communities may contribute to increased debt and bad financial practices; thus, undermining financial well-being in old age.

As awareness of the general population's lack of financial knowledge has increased, many programs have been established to provide various types of financial interventions. …

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