A multi-school, multi-state survey of 513 students is utilized to determine the financial literacy of college students as it relates to their own financial situation. We find that over one fourth of college students are not participants in the financial system, over one third do not know how much credit card or student loan debt that they currently owe, and they overestimate their future earnings by more than 20%. We do find that these troubling statistics are lowered when the students receive their financial information from college personnel rather than high school personnel and family and friends. Our findings illustrate the importance of financial literacy training for all college students.
Financial education across the curriculum?
The paper (April 2014) is by Kerry M. Tew & Philip L. Tew.
Micro-entrepreneurs often lack the financial literacy required to make important financial decisions. We conducted a randomized evaluation with a bank in the Dominican Republic to compare the impact of two distinct programs: standard accounting training versus a simplified, rule-of-thumb training that taught basic financial heuristics. The rule-of-thumb training significantly improved firms' financial practices, objective reporting quality, and revenues. For micro-entrepreneurs with lower skills or poor initial financial practices, the impact of the rule-of-thumb training was significantly larger than that of the standard accounting training, suggesting that simplifying training programs might improve their effectiveness for less sophisticated individuals.
The rule-of-thumb training taught mainly to keep personal and business financial accounts separated, and also to include a fixed salary as a business expense. Those measures are important for the sustainability of the business and to prevent capital depletion.
The paper is by Alejandro Drexler, Greg Fischer & Antoinette Schoar. A draft is here.
Some benefits of it:
Financial literacy is positively related to participation in financial markets and negatively related to the use of informal sources of borrowing. Individuals with higher rates of financial literacy are significantly more likely to report having more unspent income at the end of the month and higher spending capacity. The relationship between financial literacy and the availability of unspent income is more evident during the financial crisis, suggesting that better financial literacy may better equip individuals to deal with macroeconomic shocks (Klapper and Lusardi 2012).
"[La]ck of numeracy is not only widespread but is particularly severe among some demographic groups, such as women, the elderly, and those with low educational attainment" (Lusardi 2012). Donohue (2012) offers a critical view. See also this abstract (2012) on the challenges of financial literacy among "millennial consumers."
Addendum:
See also this report (2009) that claims that FL is critical for promoting access to finance in developing countries.
If financial literacy is that important, one wonders how can it be improved. It seems that lack of financial literacy is a part of a wider problem: a problem with basic education in general. But there might be some intriguing policy recommendations. Think about the possibility of financial literacy across the curriculum in primary and secondary schools. The other response can come from social entrepreneurs. There are some examples:
The Heartland Institute, (US).
Hazel Joyce Wiley, (US).
I don't see much being done in developing countries. There are some exceptions.
