The Influence of Financial Literacy and Financial Attitude on Financial Management Behavior

Many consumers appear to lack the financial literacy needed to make financial decisions in their self-interest. A growing number of analysts and politicians are blaming the intersection of low levels of financial literacy with complex, financially-engineered products for the current economic meltdown and have proposed a number of solutions to this problem. These solutions range from mandatory education in personal finance to required simplification of financial products and greatly increased regulation. This paper examines evidence on the effectiveness of personal finance education on both financial literacy and financial behavior. If the problem can be solved through education, it is likely to reduce the perceived need to limit choice in the marketplace for retail financial products. If education is shown to be ineffective, the future of financial product innovation and financial engineering may be greatly limited. Supporting the effectiveness of education in promoting self-beneficial financial behavior is a well-known paper by Bernheim, Garrett and Maki (2001) which linked required high school education in personal finance to higher levels of saving, decades later, in middle age. On the other hand, five national surveys of high school seniors conducted since 2000 by the Jumptart Coalition (Mandell 2001 (Mandell, 2002 (Mandell, 2004 (Mandell, 2006 (Mandell, 2009b) ) fail to show that students who have taken a semester-length course in money management or personal finance are more financially literate than those who were not given the education. This paper is based upon the first national sample of full-time undergraduate college students designed to measure financial literacy and financial behavior. The survey, which was conducted in March, 2008, also asks respondents about the financial education that they received in both high school and college. An advantage of interviewing college students is that they are legally adults, who must make many of their own financial decisions. A second advantage is that their ability to recall coursework related to personal finance is likely to be better now than later in life. The paper concludes that there is little evidence showing that full-time high school (or college) courses in personal finance increase financial literacy. However, there is compelling evidence that such courses improve financial behavior. These finding may help reconcile the results of the Jumptart surveys and those of Bernheim, Garrett and Maki and justify the continuation of such courses, even though the outcomes, as traditionally measured, are not encouraging.