• American households face major financial challenges in the years ahead.
• CUs that focus too narrowly on education will miss opportunities to grow long-term market share.
• Board focus: Money Mission is a new program to educate 16- to 19-year-olds in the fundamentals of financial literacy.
Lost among the heated rhetoric of the recent midterm elections and the national blame game that is American politics is a disturbing truth with long-term consequences: American households will face major financial challenges, and many are woefully unprepared.
Two storms gathering on the horizon will severely test American households:
• The first storm is the fraying social compact between employers, employees, and government that’s placing the responsibility for long-range personal and household financial well-being squarely on individuals’ shoulders.
• The second storm involves a dramatically evolving economy and job market that will require more Americans to attain higher levels of education if they hope to achieve a sustainable middle-class existence.
The impending collision
These two storms are about to collide and wreak havoc on the middle class. Credit unions need to be strengthening their member education and financial literacy programs to help their members weather the storms. But limiting these programs to educating members about the credit union difference, managing a household budget, or buying a car is short-sighted and insufficient.
Credit unions that are too narrowly focused on education will miss opportunities to grow long-term market share. Instead, think of your financial literacy and education programs as investment “seedlings” that help members cope with serious economic and financial challenges.
Will these efforts pay immediate dividends? Probably not. But as credit unions truly fulfill their social mission while outflanking larger competitors, they can’t adopt a cause that’s more urgent and important than member education.
The need is greater than ever before, said Ted Beck, president/CEO of the National Endowment for Financial Education (NEFE), during testimony a few years ago before a subcommittee of the House Financial Services Committee. “This is because the responsibility for financial security has been transferred from institutions to individual Americans. The burden of carrying such responsibility has been incurred within a relatively short time frame, causing concern, frustration, even fear among members of the public.”
The recession and tepid recovery emphasize the urgency. The recession’s toll on jobs and households and the near collapse of the nation’s financial system underscored consumers’ vulnerability. And the national debate over government’s role in stimulating the economy and providing security for household finances too often ignores the gathering storms.
But as Congress debates creating jobs, the focus of public policy is still partisan and relatively short-term. Broader systemic changes are threatening households’ financial health. Education and financial literacy should be a national priority. These systemic changes focus on the general public’s financial illiteracy, but a more holistic approach linking literacy with jobs and postsecondary education is still rare.
The Fair and Accurate Credit Transactions Act of 2003 did mandate the creation of the Financial Literacy and Education Commission under the Treasury Department. This was a start. The commission’s 2010 report echoes Beck’s congressional testimony.
“The increasing complexity of the financial landscape, coupled with the economic difficulties many families currently face in the U.S., illustrate the need for improved knowledge, attitudes, and behaviors related to personal finance,” according to the report. “But as a December 2009 national study by the FINRA Investor Education Foundation showed, many people living in the U.S. struggle to make ends meet, don’t adequately plan ahead for emergencies and predictable life events, have difficulty managing mortgages and saving and investing products, and lack basic financial knowledge and decision-making skills. The national study found these problems to be especially prevalent in lower-income, less educated, and Hispanic and African-American populations.”
The commission developed clear definitions for financial literacy and financial education:
• Financial literacy is the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.
• Financial education is the process by which people improve their understanding of financial products, services, and concepts so they’re empowered to make informed choices, avoid pitfalls, know where to go for help, and act to improve their present and long-term financial well-being.
Given their closeness to members, credit unions are uniquely positioned to guide consumers through the complexities of modern financial life and position them for success. This includes traditional financial literacy and education programs, but it also entails nontraditional initiatives, such as helping members attain the level of education necessary to compete for higher paying jobs in the new economy.