The US Department of the Treasury recently issued the new National Strategy for Financial literacy. This is much needed, in particular in a time of crisis and a good part of the report is devoted to how to help people in these difficult times and the critical role of financial education.
Since the start of the crisis, one thing has been notably absent: the voices of those who say financial education is futile and a waste of time. The long lines at food banks stand as a painful reminder of how little financial resilience many American families had and how daunting it is to manage our finances during a pandemic. It is during a storm that sailing lessons show their worth, and it is becoming painfully obvious that knowing a thing or two about financial literacy is essential—not simply to navigate our finances but to survive in a storm.
Still, images and stories of people struggling amid the turbulence of COVID-19 are no formal test of the importance of financial education. So, together with a team of co-authors, I set out to determine whether financial education is effective. The answer is important, not only because time and money are invested to provide financial education, but also because it is urgent that we figure out how to help families manage financial aspects of COVID-19, as argued in the National Strategy as well.
As we set out to review existing research, we discovered that the number of academic papers on financial literacy and financial education had exploded. It would have been tough to summarize them in a narrative, as we commonly do in the field of economics. Instead, we turned to a meta-analysis, a technique often used in medical or psychology studies that aggregates all the studies to determine whether there is a common finding. We were trying to answer a simple question: Does financial education work?
Not all financial education programs are the same, so we decided to focus on the most rigorous ones. We used Randomized Control Trials, or RCTs, because they are the gold standard of impact evaluation. These studies looked at behaviors that ranged from preparing for retirement to saving, borrowing, budgeting and planning, using insurance, and dealing with remittances. Prior to this, the most cited meta-analysis on financial education involved 13 studies only. It was good to see that the field has become rigorous and now embraces evaluation techniques used in the sciences.
Three findings stand out in our analyses. First, there is clear-cut evidence that financial education affects both financial knowledge and financial behavior. The estimates of the effects of financial education are three to five times as large as the estimates provided in previous work, including previous meta-analyses. Perhaps this is not surprising. We have learned over time about how to design more effective financial education programs.
Our second finding is that the impact of financial education is big enough to matter. And we estimate the impact of financial education to