Financial Literacy Programs and Minority Participation Presented by: Torell T. Pernell Chicago State University

Minorities and Money Minorities do not bank, buy insurance or invest in stocks in the same way as white Americans. Less than half of all Hispanics have credit cards compared to 80 percent of the population. Only 57 percent of middle-class African Americans have money invested in the stock market as opposed to 81 percent of whites. About 58 percent of Hispanic households had savings or checking accounts compared with 71 percent of black families and 93 percent of white households. Women continue to have less income in retirement than men do. Source: M. Lee, MBA, National Economic Council

The need for more minority financial literacy  African American adults were less likely than Caucasian adults to have learned personal finance information from school.  African American and Hispanic adults are significantly more likely than Caucasian adults to express concerns with assorted financial challenges  African American and Hispanic adults, significantly more than their white counterparts, strongly agree that they could use answers to everyday financial questions from a professional. Source: Consumer Financial Literacy Survey (2011).

Participation by income and gender, 2012 Vanguard defined contribution plans permitting employee-elective deferrals. Annual Income Female Male All <$30,000 51% 43% 46% $30,000–$49, $50,000–$74, $75,000–$99, $100, Source: Vanguard Capital, 2013.

Participation by income and gender, Vanguard Capital Management 2012

Average Account Balance by Salary (2007 Source: The Ariel / Hewitt Fund

Research objectives ▫ Understand the concepts of financial education ▫ Analyze the design of financial education programs ▫ Discover current financial education initiatives ▫ Analyze the effect and progress of such initiatives

Why is financial education important? What is “financial education?” What financial education initiatives are underway? Are they working and how do we know?

Why is financial education important? More savings More investments Less debt Homeownership Bank accounts 401(k), pension Higher credit score Pros Cons Less savings Less investments High debt Low-income group High prepaid cards fees Lack of 401(k), pension Lower credit score Source: Lerman and Bell, 2006.

What is “financial education?”  being knowledgeable, educated, and informed on the issues of managing money and assets, banking, investments, credit, insurance, and taxes  understanding the basic concepts underlying the management of money and assets (e.g., the time value of money in investments and the pooling of risks in insurance)  using that knowledge and understanding to plan, implement, and evaluate financial decisions. Source: J. Hogarth, Federal Reserve (2006).

What are financial literacy programs? Intended to increase financial awareness and improve financial behaviors Provides individuals with the knowledge, aptitude, and skills necessary to become questioning and informed consumers of financial services

Designing Effective Financial Literacy Programs The topics The audience Learning styles Behavior stage Source: J. Hogarth, Federal Reserve (2006).

▫ Budgeting ▫ Credit / Fico scores ▫ Credit cards ▫ Saving and investing ▫ Student loan repayment Components of financial literacy programs Source: Nelnet Loan Servicing

Are financial education programs working and how do we know? Some have shown positive results Some have shown minimal results Some have shown no results Evaluations are based on: ▫Current and past financial education knowledge ▫Current and past behaviors in managing personal finances ▫Knowledge and attitudes ▫Behaviors and outcomes o how much money has been saved? o how much debt has been reduced? o how much money has been invested? Source: Jump$tart Coalition

Effective programs need: Measurable goals Appropriate and realistic formatting Information Experience-based content Student involvement Financial literacy should be pervasive theme Determining success Source: Nelnet Loan Servicing

Potential contributors to financial education Non-profits Credit counseling services Centers for economic and financial education Local foundations Financial services sector Local/state/national government agencies US Treasury

 Research shows that financial education does not necessarily lead to behavioral changes in personal money management  Skill-building and motivation are two other issues that must be considered when providing financial education  Automatic investment programs and governmental tax incentives also help to provide motivation and to contribute to behavioral changes  Cultural, economic, and environmental conditions play a significant role in shaping the everyday financial choices of individuals Does Financial Literacy Work? Source: Journal of Financial Counseling and Planning, 2009.

Financial Education Resources Governmental agencies ▫U.S. Federal Reserve Board ▫Illinois Department of Labor ▫U.S. Treasury’s Office of Financial Education ▫U.S. Census Bureau ▫U.S. Department of Labor Private financial institutions ▫Bank of America ▫American Bankers Association ▫Ariel Mutual Fund ▫The Institute on Assets and Social Policy ▫The Urban Institute

Looking Ahead Our goal is to learn much more about the outcomes and impacts that financial education has on individuals and their communities The Federal Reserve Board is beginning a project that consists of a longitudinal evaluation of their own financial education program More financial institutions will develop and support financial literacy initiatives.

Existing programs University of North Texas - Student Money Management Center ▫ Web site, resources for students and parents ▫ Kansas State University - Power Cat Financial Counseling ▫ Recognized by the White House as a model program ▫ University of Texas - Bevonomics ▫ short courses are conducted ▫

References Braunstein, Sandra and Welch, Carolyn. “Financial Literacy: An Overview of Practice, Research, and Policy.” Federal Reserve Bulletin, Nov Gale, William G., Harris, Benjamin H., and Levine, Ruth. “Raising Household Saving.” Social Security Bulletin, Vol. 72, No. 2, Harnisch, Thomas L. “Boosting Financial Literacy in America.” Perspectives, Fall Hogarth, Jeanne M. “Financial Education and Economic Development. “ Federal Reserve Board, Nov Lee, Michael D. “Minorities and Money.” Lerman, Robert I. and Bell, Elizabeth. “Can Financial Literacy Enhance Asset Building?” The Urban Institute, Sep Lerman, Robert I. and Bell, Elizabeth. “Financial Literacy Strategies: Where Do We Go From Here?” The Urban Institute, Aug Lusardi, Annamaria. “Financial Education and the Saving Behavior of African-American and Hispanic Households.” Dartmouth College, Department of Economics, Sep Mandell, Lewis Ph.D. “The Financial Literacy of Young Adults.” JumpStart Coalition, Mandell, Lewis and Klein, Schmid Klein, Linda. “The Impact of Financial Literacy Education on Subsequent Financial Behavior.” Journal of Financial Counseling and Planning, Volume 20, Issue 1, National Strategy “Promoting Financial Success in the United States.” Financial Literacy and Education Commission, 2011.

Thank you! Torell T. Pernell Chicago State University