Since the financial literacy movement began to gain popularity some 20 years ago, many goodhearted people have believed that the consequences of bad financial decision-making could be reduced or even eliminated through financial education. This may well be the case, but to date, no one has come up with a scalable financial education program that has been shown to make adults better able to handle their finances.
While improved financial decision-making ability would be useful to everyone, the problem is most acute among minorities, including African-Americans, Hispanic Americans and Native Americans whose incomes are substantially lower than whites. By definition, lower-income families receive less to support their needs, thereby increasing the importance of careful spending and saving. They also accumulate far less wealth than families with more income, rendering them less capable of surviving unfortunate events such as illness, accident or death of a breadwinner. 2013 data from the Survey of Consumer Finances found that the median net worth of whites was nearly 13 times that of blacks.
Thus far, the bulk of financial education programs have been aimed at high school students. Unfortunately, the results were not heartening. Students who had taken a semester-long course in financial education in the past were no more financially literate than those who had not.
A 2008 national study found that on average, white high school seniors answered 52.5 percent of age-appropriate financial questions correctly while this fell to 41.3 percent for African-Americans, 45.1 percent for Hispanic Americans and 37.7 percent for Native Americans. In none of these subgroups did prior completion of a semester-long course in financial education improve mean scores.
A number of reasons have been advanced to explain why youth financial education is not more effective. These include lack of interest of young people in decisions that they may not have to make for many years (retirement, mortgages, even credit cards) and whose rules and parameters will likely change over this time. The one-off nature of a financial education class is also likely to be less effective than courses involving math, reading and writing skills that are continually reinforced. Finally, in an effort to make such courses “fun,” interactivity and expensive graphics often substitute for a more difficult and substantive examination of the consumer’s role and optimal strategy in a rapidly evolving marketplace.
If the objective of financial education is to help adults make important decisions over a lifetime, the usefulness of school-based programs is greatly diminished. Since few adults will sign up for substantive classes that are not linked to career advancement, we must look at alternative means of delivering financial education to those who need it most, when they need it most. Education at the “point of sale” is most effective because adults who are faced with an imminent and consequential decision have the greatest motivation to learn at that moment and less time to forget what they have learned. The question is how to deliver correct, unbiased, relevant education just when it is needed. For that, we need to turn to ubiquitous technology – the increasingly affordable smart phone that most of us carry for many other reasons.
When faced with an important financial decision, be it the choice of a home mortgage, a 401k plan, a life insurance policy or a credit card, two types of information are needed. One type is internal – what is my income, my net worth, my age, my family situation, my degree of risk aversion, my debt, etc. The other type is external -- what types of mortgage plans and rates are available, what are the risks and fees of the various 401k plans, etc. Just as a good (and ethical) financial advisor will always try to understand her client’s needs before recommending the optimal product, the smart phone app will have been pre-populated by the user with a lot of important, personal financial information. However, to protect the user, this information will be encoded on the smart phone and not accessible to anyone else.
The external information will come from a variety of objective databases including those from government consumer-protection agencies such as the SEC, the FTC and the CFTC as well as private sources showing mutual fund fees, mortgage rates and life insurance company ratings.
A consumer who is considering a financial purchase need only take a picture of the product’s QR code and instantaneously the smart phone will “vet” the company and product with the appropriate databases and, if legit and not overpriced, compare it to the consumer’s needs and feed back a traffic signal. A red light will say “stop and walk away,” a green light will report “this appears to be legit, reasonably priced and meet your needs” or a yellow light says “this may be OK, but do some more research or try a different product.”
While technology of this type will be useful for everyone, it will be especially useful to less-affluent minorities where few people have knowledgeable and trustworthy contacts such as lawyers, accountants, financial advisors and friends in the financial services industry who can steer them in the right direction.
Access Your Potential is a new blog series focused on exploring the importance of developing technology skills and financial acumen in minority communities. Join the conversation by emailing PurposePlusProfit@huffingtonpost.com or by tweeting with #AccessYourPotential.