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By Pam Leibfried
Yesterday, several of my Alliant colleagues and I attended the 2016 Financial Literacy Summit at the Federal Reserve Bank of Chicago. This year’s tenth annual event, co-sponsored by the Fed and Visa, had the theme that really spoke to me, as someone who blogs about finances and teaches financial literacy classes: The Future of Innovation in Financial Literacy.
The event’s keynote speaker was Bill Morneau, the Minister of Finance for Canada, but for me, the panel discussions were the highlights. The first, led by moderator Dan Kadlec from Time magazine, was entitled From Policy to Practice: Innovative Changes in Financial Education and included panelists from Japan, Hong Kong, the Philippines and the U.S. The second panel, entitled The Future of Financial Education, was moderated by NerdWallet’s Liz Weston, and was more Americas-focused.
Here are a few of the trends, statistics and anecdotes cited at the summit that resonated the most with me:
Amias Gerety, the Acting Assistant Secretary for Financial Institutions at the Department of Treasury, shared a great analogy comparing investing and bread baking. People are impressed if you can bake bread, but they may not know that basic bread only has four ingredients. Once they know that all they need is water, yeast, salt and flour, they may be more likely to try to bake bread themselves. Similarly, people who don’t understand personal finance might think saving and investing are very complicated. But with a little knowledge, they realize they can save and invest successfully. Citing the Acorns app as an example, Gerety said that once someone realizes all they need is “pocket change and a mobile phone,” they might just think, “I can put those ingredients together!”
As banking and personal finance apps (aka FinTech) proliferate, more and more people have access to investments than ever before. But Kadlec cautioned that although there are benefits to the democratization of investing, there are inherent risks too: “Access is dangerous if you don’t know the risks.” Naoyuki Yoshino, Dean of the Asian Development Bank, agreed, saying that “financial education is more and more important as access to investment options increases.”
The ability to automate transfers (or direct deposits) to savings accounts or automate your retirement contributions through payroll deductions makes it easier and less painful to save. Personal financial management apps make it easier to budget and investment apps make it possible to open an investment account from your phone.
Gail Hillebrand discussed how the CFPB looks at financial literacy, capability and wellness:
For every financial decision, pausing and having a “stop and think moment is key,” said Hillebrand.
A key to financial success in life is to “think long-term,” said John W. Rogers, Chairman of Ariel investments.
Gerety talked about the “$400 shock parable” that examines how many consumers have enough emergency savings to withstand an unexpected $400 expense. He stated that helping people to build a buffer to absorb such shocks successfully is an “economic engine for growth” that keeps people in the workforce and increases their ability to save for retirement.
One of the biggest financial decisions most of us ever make in life is what college to attend. Ted Godner, Co-founder & CEO of Moneythink, pointed out that he considers that decision to be “really an investment decision.” Given that the main factor that causes students to drop out of college is money stresses, helping lower-income students attain the tools and resources to plan for such financial stresses can have a major impact on their chances for long-term success.
According to Jeff Crittendon, cofounder of Acorns, a savings and investing app, every single person has a stake in our economy, but most of us don’t feel a visceral connection to it. But when someone becomes an investor, they “feel a more tangible link” to financial markets and the economy overall. Describing his own experience when his dad opened a $50 investment account for him when he was a teenager, he said, “I was so excited to own something…and it shifted how I looked at things.”
Crittendon also stated that understanding how compounding works in relations to the growth of their savings accounts has helped Acorn users to better understand how compounding can work against them for loans.
One challenge for financial literacy education is the inconsistency of programs from one community to another. In the U.S., only 17 states require financial literacy education, and even in those states, the programs are not standardized. In Canada, Minister Morneau said that curriculum is locally controlled, and thus differs from province to province.
The Consumer Financial Protection Bureau’s Gail Hillebrand said that critics who say that financial literacy education doesn’t work have to realize that U.S. has never even had comprehensive financial literacy. She used the analogy of drivers education classes: Traffic school doesn’t teach you everything you need to know about driving, but it’s an important building block to have before you go out and get behind the wheels of a car.
Pam Leibfried is a marketing content specialist whose love of words led to a writing and editing career. After a brief stint teaching English, she transitioned to corporate communications and spent 20 years at The Nielsen Company before joining Alliant’s content development team. Early in her work life, Pam’s friend Matt explained the benefits of a 401(k) and her dad encouraged her to start a Roth IRA. Their good counsel prompted her to prioritize retirement savings, which just might enable her to retire early so she can read more and live out the slogan on her fave T-shirt: “I have a retirement plan: I plan on quilting.”