By Kathleen Craig
AAs a former banker, financial literacy is a topic I’m passionate about because a lack of financial knowledge affects people’s personal finances in impactful ways. According to a new survey by the National Financial Educators Council, a lack of personal finance knowledge costs an average of $1,389.06 per individual, or $352 billion in total in the United States each year. Additionally, nearly 20% of respondents said they lost more than $2,500 in the past year due to knowledge gaps.
Without a solid understanding of finance, individuals run a higher risk of taking on more debt. Nearly two-thirds of American families don’t have six weeks’ worth of savings, and 78% of adults live on paycheck to paycheck. This puts them at risk of financial ruin in 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, which would increase 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 biggest quarterly increase in at least 22 years, now at $860 billion, according to the New York Federal Reserve.
Worse still, individuals report higher stress levels as a result. More than half (53%) of adults say thinking about their financial situation makes them anxious. And it’s no wonder Americans feel stressed. A lack of financial education is a problem that manifests early and continues into adulthood, often passed down from generation to generation.
After all, parents cannot teach their children what they have never learned. On average, young Americans could not correctly answer the majority of questions about financial literacy. For example, nearly half of teens don’t know what a 401(k) is and about a third don’t know the difference between a credit card and a debit card.
The good news? There is an appetite for financial education
The good news is that young adults are realizing that they don’t have a solid understanding of finance and, even better, they want to improve.
According to a survey of teenage consumers rating themselves on their knowledge of personal finances, more than a third (or 77 million people) gave themselves a grade of C, D or F. But when asked s wanted more education, 73 percent of teens said yes.
The adults agree. An overwhelming majority of American adults say financial education should be mandatory in schools, according to a new study from the National Endowment for Financial Education. The survey found that 88% 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 didn’t have access to, as 80% said they wished they had been forced to take financial education classes in high school.
A 2020 survey of states shows progress, with 45 states offering personal finance training for K-12 students, but only 21 states currently require courses to graduate from high school. Fortunately, this number is likely to increase. This spring alone, Florida and Georgia became the latest states to require students to take personal financial education classes in high school.
Financial literacy impacts income equality
While this progress is positive, we should not prioritize financial literacy at the high school level. Finances can seem overwhelming for all demographics, regardless of age groups and income levels. Managing a budget that helps individuals achieve their unique financial goals, which often change over time – from saving for a home to planning for retirement – can seem daunting. Therefore, financial literacy should remain a priority throughout our different stages of life.
Consider this: it takes mandatory training and testing 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 key to living a sustainable life and solving income inequality.
Today, Americans are making more financial decisions than ever. Instead of company-managed retirement plans, most Americans now participate in 401(k) plans, where they decide how much to contribute and how to invest their funds. A US Federal Reserve report found that many Americans are unprepared for retirement, as less than 40% believe their retirement savings are on track and more than 60% admit they have low trust when making retirement decisions.
At the same time, savings and investment options are more sophisticated than ever, all with variable interest rates. Without the proper financial education, many may struggle to make smart financial decisions, let alone feel confident in those decisions.
In this complex and ever-changing world, personal financial education is key to helping individuals succeed. It supports the well-being of individuals and promotes long-term financial well-being. But our industry can do better.
Banks are in a unique position to help
To fill this obvious financial literacy gap in addition to the growing 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 contributes to their own retention and acquisition strategies.
On average, American adults consume more than 10 hours of media content per day, so reducing 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 shopping in preparation for their planned trip, the financial institution can leverage marketing dollars to target that specific customer to meet their wants and needs.
The power of targeted messaging isn’t just about being able to connect within mobile banking, but also across multiple channels, further integrating marketing efforts in other areas. Banks need to think beyond the traditional uses of mobile banking apps and use them as a platform to relay their message to their customers, delivering content that resonates with them and deepens relationships.
To further improve the customer experience, it is important to create content that is easily consumed by users. Consider that consumers have an average attention span of eight seconds, constantly bombarded with message after message, chime after chime of notifications and alerts.
Banks need to share information with customers in a way that is easy to understand and capture their attention. By providing content that is presented in an understandable and meaningful way, financial institutions can build deeper connections with their customers and position themselves as mentors.
Banks must begin by realizing the need and desire for financial education, especially as it continues to impact consumer well-being and financial futures. By responding to the rise of tech-savvy consumers with enhanced financial literacy resources, combined with personalization and targeted messaging, banks can stand out from the competition. Banks not only provide real value to their customers, but can also be the heroes of this dilemma.
Kathleen Craig is the founder and CEO of Plinqit with a particular focus on digital channel strategy. She was a speaker at the 2021 ABA Bank Marketing Conference. Reach her via email at [email protected], as well as on LinkedIn.