Stay Informed!

By Stephanie Halligan on 04/19/2011 @ 03:30 PM

Tags: Children's Savings Accounts, Financial Empowerment, Individual Development Accounts

Three Steps to Transforming Financial Literacy into Financial Capability

It's April, which means it's National Financial Literacy Month. In a recent presidential proclamation supporting this month-long focus on financial awareness, President Barack Obama recommitted to “improving financial literacy and ensuring all Americans have access to trustworthy financial services and products.”

In recent years, the concept of financial literacy has shifted dramatically: what was once a topic usually reserved for promoting consumer knowledge and sharing savings tips, financial education has transformed into “financial capability.” Undoubtedly you've heard this new term used recently by both the public and private sector, particularly by banking institutions and through the Department of the Treasury’s National Financial Capability Challenge. The principle behind the shift in jargon reflects an industry-wide recognition that financial education alone will not increase an individual’s financial savvy or improve overall consumer behavior. Rather, financial capability implies that the average person requires access to a host of services, including financial coaching and appropriate savings products, in order to acquire both the knowledge and tools needed to survive in the financial world.

So definitions aside, how do we get from financial literacy to financial capability? As an organization, a coalition or even an individual looking to improve the financial knowhow of the everyday American, how do we increase both financial knowledge AND skills? Here are three steps to turning financial information into positive behavioral changes:

1. Create actionable learning opportunities. One of the best strategies to transforming existing financial education curriculum is to create actionable assignments at the end of each lesson. If you are teaching the class about spending behaviors and how to find money to save, challenge each of your students to transform one of their spending habits for the next 7 days and keep track of the money that they save. The same can be applied to an individual looking to increase his or her savings. Do you buy lunch every day at work just because it’s convenient? Try bringing your lunch for just 7 days and see if the benefits (saving money) outweigh the costs (preparing your own lunch). Usually just learning about useful money management techniques (i.e., “you should bring your lunch to work to save money”) is not enough to create positive savings behaviors. So don’t just absorb information, take action!
2. Promote financial education in a system reaching large numbers of children and youth. The increasing complexity of our financial system makes financial knowledge and skills even more critical to the future success of children and youth. From understanding the meaning of a credit score to learning how to finance college, financial education helps even young children gain a deeper understanding of how money works and how it affects their lives. That’s why bringing financial education into systems like school districts is so important. School-based financial education provides an opportunity to reach large numbers of children and allows students to apply basic financial education lessons to concepts that they are already learning in the classroom, like math and social studies. A number of states currently maintain financial education curriculum standards and/or require the teaching of financial literacy in schools. CFED’s Assets and Opportunity Scorecard examines how states use their public education systems to improve personal financial literacy and lists financial education policies and standards by state. Encouraging other cities and states to do the same can help a younger generation of Americans avoid the financial pitfalls of their parents.
3. Tie financial education to a practical application, like a savings account. When provided in tandem with a savings account, financial education gives children, youth, and adults a tangible opportunity to develop and test their financial decisions. Savings programs like Individual Development Accounts and Children’s Savings Accounts that incorporate both a savings account and financial education combine two powerful opportunities: a chance to save and a chance to learn. Financial education is important in these initiatives not only because of the practical knowledge that children and adults learn, but also because it can encourage participants to set their sights on long-term goals like paying for college.

We want to hear from some practitioners and financial education advocates. What are other ways of encouraging the practical application of financial education? What are you doing in your own life to develop good savings habits?

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