By Kathleen CraigAs a former banker, financial literacy is a topic I’m passionate about because a lack of financial knowledge affects people’s personal finance in impactful ways. According to a new survey from the National Financial Educators Council, a lack of personal finance knowledge costs an estimated average of $1,389.06 per individual, or $352 billion total in the U.S. each year. Additionally, nearly 20 percent of respondents said they lost over $2,500 last year due to gaps in knowledge.
Without a solid understanding of finance, individuals are at a higher risk of going further into debt. Nearly two-thirds of American families do not have the equivalent of six weeks’ savings and 78 percent of adults live paycheck to paycheck. This is putting them at risk for financial ruin if faced with an emergency. When asked how they would handle an unexpected expense, one in four said they would charge the expense to a credit card or take out a loan, adding to their debt.
Meanwhile, debt levels have continued to climb. The national student loan debt topped $1.6 trillion this year with just under 44 million borrowers. Household credit card debt is also rising, seeing its largest quarterly increase in at least 22 years, now at $860 billion, according to the New York Federal Reserve.
After all, parents cannot teach their children what they were never taught. On average, young Americans could not answer a majority of financial literacy questions correctly. As examples, nearly half of teens do not know what a 401(k) is and about a third do not know the difference between a credit and debit card.
The good news? There’s an appetite for financial education
The good news is that young adults realize they do not have a solid understanding of finance, and—even better news—they want to improve.
According to a survey allowing teenage consumers to grade themselves on their knowledge of personal finance, more than one-third (or 77 million people) gave themselves a grade of C, D, or F. But when asked if they want more education, 73 percent of teens said yes.
Adults agree. An overwhelming majority of U.S. adults say that financial education should be required in schools, according to a new study from the National Endowment for Financial Education. The survey revealed that 88 percent of respondents said their states should require high school students to take a financial education course before they can graduate. It seems adults want to empower the next generation with knowledge they did not have access to, as 80 percent reported they wish they had been required to take financial education courses in high school.
A 2020 survey of states shows progress, with 45 states offering personal finance education for grades K-12, but only 21 states are currently mandating courses to graduate high school. Fortunately, this number is likely to increase. Just this spring, Florida and Georgia became the latest states to require students to take personal financial education courses in high school.
Financial literacy impacts income equality
While this progress is positive, we should not just prioritize financial literacy at the high school level. Finances can feel overwhelming for all demographics, across age groups and income levels. Managing a budget that helps individuals meet their unique financial goals, which often evolve over time—from saving for a home to planning for retirement—can seem daunting. Therefore, financial literacy should remain a priority throughout our different life stages.
Consider this: It takes mandatory training and tests to get a driver’s license. Yet, there is no training or educational support to help consumers manage their personal finances and financial literacy is critical to having a sustainable life and to solving income inequality.
Today, Americans are shouldering more financial decisions than ever. Instead of company-managed pension plans, most Americans now participate in 401(k) plans, where they decide how much to contribute and how to invest their funds. A report by the U.S. Federal Reserve System found that many Americans are unprepared for retirement, as fewer than 40 percent felt that their retirement savings are on track and more than 60 percent admitted they had low levels of confidence when making retirement decisions.
At the same time, savings and investment options are more sophisticated than ever, all with varying interest rates. Without adequate financial education, many may find it difficult to make smart financial moves, let alone feel confident in these decisions.
In this complex and ever-changing world, personal financial education is a key building block to helping individuals become successful. It supports individuals’ well-being and promotes long-term financial wellness. But our industry can do better.
Banks are in a unique position to help
To address this clear gap in financial literacy in addition to the increasing demand for education, banks are in a unique position to help by providing customers with educational content that not only improves customers’ financial literacy but helps with their own retention and acquisition strategies.
On average, U.S. adults consume more than 10 hours of media content per day, so cutting through the noise is critical and requires targeted content. Banks can see a customer’s habits and target their messaging and content accordingly. For example, if a consumer is interested in traveling and making purchases toward their planned trip, then the financial institution can leverage marketing dollars to target that specific customer to meet their wants and needs.
The power of targeted messaging is not only about being able to connect within mobile banking but also across multiple channels, further integrating marketing efforts into other areas. Banks must think beyond traditional uses of mobile banking apps and use them as a platform to relay their message to their customers, providing content that resonates with them and grows deeper relationships.
To further improve the customer experience, creating content that is easily consumable by users is important. Consider that consumers have an average attention span of eight seconds, constantly bombarded with message after message, ding after ding with notifications and alerts.
Banks must share information with customers in a way that is easy to understand and gets their attention. By offering content that is presented in an understandable and meaningful way, financial institutions can form deeper connections with their customers and position themselves as mentors.
Banks must start by realizing the need and desire for financial education, especially as it continues to impact consumers’ wellbeing and financial futures. By catering to the rise of tech-savvy consumers with enhanced financial literacy resources, combined with personalization and targeted messaging, banks can stand out against the competition. Banks not only provide true value to their customers but can be the heroes in this dilemma.
Kathleen Craig is the founder and CEO of Plinqit with a specific focus in digital channel strategy. She was a speaker at the 2021 ABA Bank Marketing Conference. Contact her by email at [email protected], as well as on LinkedIn.