|Volume 1, Issue 2, 2001||Federal Reserve Bank of Dallas|
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Greenspan on the Importance of Financial Literacy
Excerpts from remarks by Fed Chairman Alan Greenspan at the Community Affairs Research Conference of the Federal Reserve System, Washington, D.C., April 6, 2001
Education can play a critical role in equipping consumers with the fundamental knowledge required to choose among the myriad of products and providers in the financial services industry. This is especially true for populations that have traditionally been underserved by our financial system. In particular, financial literacy education may help to prevent vulnerable consumers from becoming entangled in some types of financially devastating credit arrangements.
One long-standing source of concern is abusive lending practices that target specific neighborhoods or vulnerable segments of the population and can result in unaffordable payments, equity stripping, and foreclosure. With this issue in particular consumer and community advocates, bankers, and policymakers have all sought to raise consumer awareness about the dangers of such aberrant lending practices, and financial education is an important component of their efforts.
In addition, education can help to provide individuals with the financial knowledge necessary to create household budgets, initiate savings plans, and make strategic investment decisions for their retirement or children's education. Such financial planning can help families to meet their near-term obligations and to maximize their longer-term financial well-being.
While data available to measure the efficacy of financial education are not plentiful, the limited research available on the benefits of financial education programs is encouraging. For example, a recent study by Freddie Mac, one of the nation's largest purchasers of home mortgages, finds that homebuyers who obtain structured home-ownership education have reduced rates of loan delinquency. Similarly, an evaluation conducted by the National Endowment for Financial Education on its high school-based programs found that participation in financial-planning programs improved students' knowledge, behavior, and confidence with respect to personal finance, with nearly half of participants beginning to save more as a result of the program. And a recent study of the relationship between financial behavior and financial outcomes revealed that comprehension of the general principles of sound financial behavior, such as budgeting and saving, is actually more beneficial in producing successful financial results over time than specific and detailed information on financial transactions.
These findings underscore, in particular, the importance of beginning the learning process as early as possible. Indeed, in many respects, improving basic financial education at the elementary and secondary school level is essential to providing a foundation for financial literacy that can help prevent younger people from making poor financial decisions that can take years to overcome. For example, through a fundamental understanding of the mathematics of compounding interest, one can appreciate the cumulative benefit of routine saving. Similarly, learning how to conduct research in a library or on the Internet can be instructive in where and how to look for information to evaluate decisions.
As I noted earlier, we have seen the market respond to an increased demand for conceptual job skills by increasing the range of educational options available to individuals. We are beginning to see similar efforts to provide consumers with information and training that will improve their knowledge on financial matters throughout their lives. For example, the U.S. military, in response to surveys that revealed that nearly one-third of enlisted service members reported moderate to severe difficulty in paying bills, has mandated that all incoming enlisted personnel receive financial education as a means of reducing stress related to personal fiscal matters.
Similarly, we are starting to see some school systems introduce financial management classes as part of their high school curricula, and many employers are taking up the challenge as well. At the Federal Reserve Board, for example, interest in financial education prompted an employee committee to host a seminar on financial planning strategies, and our Consumer and Community Affairs staff recently hosted several well-attended educational programs for employees who are thinking of buying their first home.
More fundamentally, the recognition that more-productive workers and learning go hand in hand is becoming ever more visible both in the workplace and in schools. Similar collaborative efforts to increase awareness of, and access to, information that promotes financial literacy are increasingly seen as necessary to ensure that consumers can meet their immediate obligations as well as achieve their broader goals of buying a home, funding higher education for themselves or their children, and preparing for retirement. Just as we have recognized how critical it is to demystify technology and to increase workers' comfort and familiarity with the new tools required for their success, so should we work to educate consumers on evaluating the broad array of products offered by financial service providers and to empower them to make the choices that contribute to their overall economic well-being.
An example of a collaborative effort in which the Federal Reserve System is involved is the Treasury Department's financial literacy initiative. This nonpartisan, public–private endeavor promotes the development of personal financial literacy skills by capitalizing on the educational efforts of the partners. In particular, an Internet web site was created that offers users the ability to instantly access a broad spectrum of financial-management information from a wide variety of market participants, including governmental agencies, associations, and private-sector financial services providers.
e-Perspectives, Volume 1, Issue 2, 2001