Financial Education Works!

On July 21, 2021, I had the pleasure of presenting with Dr. Abdullah Al-Bahrani and discussing financial literacy research with a group of Kentucky teachers. The teachers we talked with are working through a month long financial education professional development course taught by the Northern Kentucky University Center for Economic Education.

We did a discussion on financial literacy research because we thought it would be a great tool for teachers to have. If we could provide them with evidence that shows what they do works, they could better advocates whenever they need it. We discussed assessing financial literacy and three relevant economics papers in our presentation.

When I talk about financial literacy people often ask, “how do you measure it?” Two popular approaches to measure financial literacy are The Big Five and the Test of Financial Literacy. The Big Five is five questions and covers the topics listed out above. It is great due to its length, however, that is also a shortcoming of it. The assessment of The Big Five could be more targeted. Should 18-year-olds be expected to understand bonds or mortgages at that age?

The Test of Financial Literacy (TFL) is 45 questions and covers six topics. It was prepared for the Council for Economic Education by William B. Walstad and Ken Rebeck. While it would be difficult to include 45 questions in most surveys, the TFL throughly covers financial knowledge. The TFL is also targeted, it has the primary version, has a version targeted at upper middle school to early high school, as well as a version for students in late elementary school and early middle school.

Financial literacy research shows financial education works. Stoddard and Urban (2019) showed that high school students that went through financial education improved their financial behaviors. They were more likely to choose low-cost financing for higher education, more likely to apply for FAFSA, and less likely to hold a credit card balance.

Financial literacy research highlights gaps in race and gender. Al-Bahrani et al. (2019) shows financial education is offered at higher rates to minorities. But, they do not increase their financial literacy at the same rates whites do.

Lusardi and Mitchell (2008) outline the gender financial literacy gap. However, a working paper I am co-authoring with Dr. Abdullah Al-Bahrani, Dr. Nancy Lang, and Dr. Jamie Weather shows that a financial literacy course, rather than a economics course, could be a effective tool in closing the gender financial literacy gap.

These three pieces of research shows the tremendous positive impact financial education has. And stakeholders have an obligation to allocate resources effectively because high school and college are the most common sources for financial literacy education.