Knowledge is power—especially when it comes to money. It’s why April is recognized as Financial Literacy Month, during which financial institutions, nonprofits, and other organizations promote the importance of financial literacy. The ultimate goal is to give people personal finance education and the tools to improve financial stability and wellbeing. Let’s look at how evolving the month’s purpose toward developing financial capability actually serves consumers better.
What is financial capability?
First things first: it’s important to understand the difference between financial literacy and financial capability.
Put simply, literacy is the ability to read and write. Personal financial literacy, then, is a basic understanding of financial terms and products. It’s being able to speak the language of finance.
Financial capability goes beyond financial literacy. It’s a combination of financial knowledge, confidence, and healthy habits to make informed financial decisions and create financial wellbeing, now and in the future. It’s not only speaking the language of finance, but also understanding how to steer it toward meeting your personal needs and goals.
This shift is important, because the world has changed since the first Financial Literacy Month designation in 2004. Back then, speaking the language of finance may have been sufficient. Today, though, the number and types of financial products—and even financial institutions—has grown, meaning consumers face a world of highly complex financial decision-making.
What is National Financial Capability Month?
In April, the United States observes National Financial Capability Month, previously known as National Financial Literacy Month since its inception in 2004. The purpose of this annual event is to promote financial literacy and provide Americans with impartial and reliable financial education to help them understand financial products and services. It emphasizes the importance of consumer protection laws and consumer education, with the goal of educating Americans about how to identify, prevent, and report fraudulent activities and scams.
In addition to promoting financial literacy and consumer protection, National Financial Capability Month serves as a reminder of the importance of sound financial management practices. This includes creating a budget, saving for emergencies, and investing for the future. By taking steps towards financial wellness, individuals can improve their overall financial health and achieve their long-term financial goals. Organizations and businesses also play a crucial role in supporting financial capability efforts by providing financial education and resources to their employees and customers.
A changing world of personal finance education
The way information is presented and consumed has also drastically changed. Financial education content has traditionally been text-based, so personal finance education required a lot of reading and writing. In addition, personal finance education was often delivered by a professional at a financial institution—when a consumer went in to open a checking account or take out a loan, for example.
Today’s digital-first, device-driven world puts information at consumers’ fingertips immediately. And it might not be from a trusted financial institution; it might be from a variety of organizations, including predatory lenders, for example. It’s also delivered in a variety of forms, from text articles to apps to videos.
The upside is that with more information available, consumers can do more research before making decisions. The challenge, though, is that it can sometimes be difficult for consumers to determine whether information is reliable. And, when people can take immediate action on financial products, services, and decisions—right at their fingertips—it’s critically important to not only be able to speak the language but also understand the context and consequences. This is why it’s essential to go beyond financial literacy to develop financial capability.
The cost of poor financial literacy
The reality is that millions of US adults have large gaps in their financial literacy—and it’s costing them. According to a report by the National Financial Educators Council in 2022:
- Nearly 40% of respondents said a lack of financial literacy cost them $500 or more
- 15% revealed it cost them $10,000 or more—up from 11% the prior year
- The average cost across all respondents was $1,819, an increase of $500 over 2021
- Lack of financial literacy cost US adults more than $436 billion
Without understanding the basics of personal finance, consumers may not save enough for emergencies or long-term needs like college and retirement. They may take on too much debt, with unfavorable terms. They may have difficulty bringing spending habits in line with earnings and have difficulty managing credit cards. Without a solid foundation of personal finance education, consumers lack the financial capability to be able to understand their decisions in context and make financial decisions that set them up for long-term stability and success. Experts and advocates point to research that underscores the importance of teaching personal finance before people reach adulthood, when they will face complex financial decisions with lasting consequences.
Financial education that builds financial capability
Financial education designed for sustained impact goes beyond focusing solely on financial knowledge. It also supports the development of financial confidence and healthy financial habits.
EVERFI has created personal finance education to build financial capability. It includes:
- Real-world situations and exploration of the consequences of choices, intended to build financial confidence
- Direct instruction to teach learners about money and the financial system to build financial knowledge
- Opportunities to practice financial decision-making to develop healthy financial habits
It’s built on EVERFI’s approach to financial wellbeing for individuals and communities, regardless of background or resources. Financial wellbeing, defined as the ability and willingness to make financial decisions that increase financial security and freedom now and in the future, is built on financial capability.
Consider another reason for personal finance education that builds financial capability—and it affects financial institutions’ bottom line. Consumer loyalty is more elusive than ever: according to survey data, one in five consumers has considered switching banks for enhanced services, lower fees, or better rates. Education that builds financial capability can be a differentiator that keeps consumers loyal.
There is a saying that goes, “The best time to plant a tree is 20 years ago. The second best time is now.” It is never too late to improve personal finance education knowledge. Financial institutions have an opportunity to expand the concept of financial literacy to financial capability—and April is a great time to start.