The housing and investment crisis beginning in 2008 revealed some of the financial dysfunction in American households. Research has shown that those with lower financial literacy are less likely to have a checking account, emergency fund or retirement plan, and are more likely to take pay-day loans, pay only minimum credit card balances, take on unaffordable mortgages and carry debt.

A 2010 paper by the Brookings Institution, “Financial Literacy: What Works? How Could It Be More Effective?” looks at existing research on a range of financial literacy programs that attempt to address these problems. Many of the conventional approaches to financial literacy, it turns out, are not sufficient.

The findings include:

• School-based: High school financial management classes do not appear to positively impact saving behavior.
• Credit Counseling: Enhanced credit counseling does not seem to lower the risk of mortgage default.
• Community-based: There are no conclusive studies measuring the efficacy of community-based education initiatives.
• Employer-based: Workplace education initiatives have been shown to raise retirement plan participation and contributions, and overall savings.
• Financial planning: Spending any time on financial planning, whether independently or with a financial professional, is associated with higher savings rates.

The authors suggest that some kinds of public awareness campaigns and online tools and resources offer additional opportunities to increase financial literacy. However, to motivate more responsible savings behavior, systems also need to be put in place to help simplify choices and encourage better decision-making.

Tags: consumer affairs, financial crisis, retirement