Financial Education & Economic Development

Jeanne M. HogarthDivision of Consumer & Community Affairs

Federal Reserve Board, U.S.A.

With assistance from Marianne Hilgert, Jane Kolodinsky, Michael Wilson. The analysis and conclusions set forth in this presentation represent the work of the authors and do not indicate concurrence of the Federal Reserve Board, the Federal Reserve Banks, or their staff. Mention or display of a trademark, proprietary product, or firm in the presentation by the author does not constitute an endorsement or criticism by the Federal Reserve System and does not imply approval to the exclusion of other suitable products or firms.

Why is education important?

Increased sophistication of financial products and services

Shifting responsibility away from institutions and towards individual

Demographic changes affecting the marketplace

Long-term economic situation

Why is the Fed interested in financial education?

Consumer protection

Why is the Fed interested in financial education?

Community development

Why is the Fed interested in financial education?

Financial access

Education is only one pieceof the puzzle

EducationDisclosures & informationSubstantive protectionsRedressProfessional advice

How financial education works

Educated consumer

How financial education works

Educated consumerBetter use of

resources

How financial education works

Educated consumerBetter use of

resourcesIncreased economic security, better jobs, more home owners

How financial education works

Educated consumerBetter use of

resourcesIncreased economic security, better jobs, more home owners

More involved in schools, community participation

How financial education works

Educated consumerBetter use of

resourcesIncreased economic security, better jobs, more home owners

More involved in schools, community participation

Vital, thriving communities, well-educated labor force

Components of education

TopicsAudienceLearning styleStage in behavior change

What topics?

Savings None Basic (all 4 topics)

General (all 4 topics)

Cash flow, savings &

invest.

Credit, savings & investmentSavings &

investment

Investment

Cash flow &/or credit; savings, or

investment

Saving & investment

Who are target audiences?

YouthMilitaryLow-income familiesFirst-time home buyersEmployeesPre-retireesRetireesWomenMinority groups

Learning styles

VisualAuditoryKinetic

How do people learn?

517Other course

519H.S. course

521Employer

1136Media

2142Friends & family

48%68%Experience

Most important

Learned“a lot”

How do people want to learn?

Media (TV/radio, magazines, newspapers) 71%

Brochures/print materials 66Video 64Internet 56School 53Community courses 53

Stages of behavior change

Maintenance

Action

Preparation

Contemplation

Precontemplation

Components of education

TopicsAudienceLearning styleStage in behavior change

What is “success”?

Information is not educationNeed to change behaviors

Are behaviors the right outcome measures?

Satisfaction with life & lifestyleAttitudes -- feel confident Feel prepared for events

Financial education & community economic development

Opportunities Credit Union case studyPanel surveyed in 2001 and 2004

Small sample

What works and how do we know?

First level benefitsManage money, on track, paying

off debtsSecond level benefits

Expand goals, save more, more assets, income increased, job opportunities improved, housing opportunities improved

Third level benefitsSelf confident, quality of life improved, hopeful, more involved in neighborhood & community

Importance of education & savings account balances

$115

$223

$68$82

$0

$50

$100

$150

$200

$250

E ducation im portant E ducation not im portant

20012004

Savings balances

$ 0

$ 1 0 0

$ 2 0 0

$ 3 0 0

$ 4 0 0

$ 5 0 0

1 3 5 7 9 1 1 1 3 1 5 1 7Q u a r t e r s

Dol

lars

E d u c a t io n im p o r t a n t

E d u c a t io n n o t im p o r t a n t

Importance of education & loan balances

$647

$82

$369

$882

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

Education important Education not important

20012004

So what?

Those who feel education is important report positive outcomes at all 3 levelsPattern of saving is “craggy” (save up and then spend down)

When do you measure outcomes of program? How do you measure outcomes of program?

So what?

Education seems to make biggest difference at first level (manage money, pay off debts)As members (clients) stay with program, need to develop “higher” levels of financial education

Need for financial education curriculum, not just a course

So what?

People come to recognize & appreciate benefits over time

Longitudinal evaluation plan for financial education programsNeed to ask attitudinal as well as behavioral questions to get at program impacts

What works, and how do we know?

NEFE High School Financial Planning ProgramIncreased knowledge, skills, and confidence Improved behaviorsMeasured before, after, & 3 months later

Financial/consumer education in high schoolFinancial education in high school associated with higher savings and net worth as an adult

What works, and how do we know?

Credit counselingImproved credit scores, better credit management, lower delinquency

Homeownership counselingLowered 90-day delinquency rates

What works, and how do we know?

Retirement planningSave More Tomorrow

Increased participation in 401k, increased rates of contribution, high retention after 3 years

Members of TIAA-CREFRevised retirement savings goals, plan to modify saving & investment

What works, and how do we know?

Money 2000Increased savings, decreased debts

American Dream Demonstration (IDAs)Financial education increases savings (maxes out at 8-10 hours)

Money SmartIncreased financial understandingNot associated with opening bank account

What works, and how do we know?

Employee Financial EducationIncreased 401k participation & improved other financial behaviors

Financial Security in Later LifeImproved financial management practices (self-anchoring)Economic impacts averaged $870 (savings increased, debts reduced, etc.)

What is the Fed doing?

Promoting awareness of the importance of financial educationIncreasing access to information about financial products & servicesCollaborating with educational and community organizationsPromoting research and identifying best practices

Educating our employees

www.federalreserve.gov

www.federalreserveeducation.org