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Creating financial capability in the next generation: an introduction to the special issue.

The Great Recession revealed the financial vulnerability of millions of US households. In its aftermath, researchers and policymakers have turned their attention to improving the next generation's knowledge of personal finance and its access to secure financial offerings (US Department of the Treasury 2014). Nearly all experts agree that such efforts should start early in children's lives. Less clear, however, is the age or stage at which to start these processes, and no consensus has identified the programs and policies best suited to accomplish this important goal. This special issue of The Journal of Consumer Affairs, which we developed in collaboration with the Financial Literacy and Education Commission (FLEC), presents a collection of studies that explore starting early to develop financial capability. The concept of financial capability combines people's ability to act with their opportunity to act in their best financial interests (Sherraden 2013, 3). It takes into account what people know and the skills they have to manage their financial affairs. And it also takes into account opportunities to improve their financial well-being. People need both--financial ability (i.e., knowledge and skills) and financial inclusion (i.e., safe and appropriate financial policies, products, and services)--to build financially secure and hopeful lives.

THREE TRENDS

Efforts to increase financial capability are occurring in the context of three trends. The first is the rising complexity of everyday financial decision making. Recent national surveys show that the financial knowledge and skills of Americans, including those of young people, are not keeping pace with the demands of financial life (FINRA Investor Education Foundation 2013; Lusardi, Mitchell, and Curto 2010; Mottola 2014). People are often unprepared to use the quickly expanding array of available financial products and services. These include mainstream and alternative financial products as well as emerging technologies in financial services. With the entrance of big box stores and mobile technology into financial services, the landscape is changing and it is becoming easier for people to conduct financial transactions without a traditional bank account, yet these new offerings add to the complexity (Tabuchi and Silver-Greenberg 2014). Although young people likely have an advantage over older generations in making sense of emerging technologies, the proliferation of products and platforms challenges the understanding and skills of many.

A second trend is that young people confront high-stakes financial decisions earlier in life than was common a generation ago. For example, many take on levels of student debt and other debt that their parents did not experience at their age. They are often unprepared to make such critical financial decisions, which can have profound impacts on educational, vocational, and financial well-being over the life span (Emmons and Noeth 2014). For example, the share of young households (headed by someone under age 40) with student loan debt increased from 22.4% in 2001 to 38.8% in 2013, and average debt levels nearly doubled during the same period, rising from $16,900 to $29,800 (Bricker et al. 2014). Although the economic advantages of postsecondary credentials are clear and some loan programs consider a borrower's income in setting payment levels, the age at which a youth takes on student debt is correlated with the size of the debt, and high debt makes it difficult to develop a solid financial footing (Elliott and Nam 2013; Huang et al. 2015). The difficulty is even greater for youth who accumulate education debt but do not graduate.

A third trend is that many families with children are struggling financially. Young and minority families fared poorly in the Great Recession (Emmons and Noeth 2014), and one in five children lives in poverty (Gabe 2014). In the low-wage job sector, many families lack workplace benefits such as insurance and retirement savings (Crain and Sherraden 2014). Low-income families have lost social benefits as lawmakers have shifted the financial burdens for education, health care, and retirement onto the shoulders of consumers (Cooper 2013; Davis et al. 2013; Pavetti, Finch, and Schott 2013). On the asset side, low-income US households lack access to generous federal subsidies for homeownership and retirement savings--the two principal ways in which most US households accumulate assets (Howard 1997; Sherraden 1991 ; Steuerle et al. 2014). Dispensed in the form of tax benefits, they largely are inaccessible to low-income households, which have no or low tax liability (Greer and Levin 2014; Woo, Rademacher, and Meier 2010). No equivalent policies help low-income families accumulate assets (Sherraden 1991). (1)

A recent Survey of Consumer Finances report on family finances finds that families at the bottom of the income distribution continued to experience substantial declines in economic well-being between 2010 and 2013, after the end of the Great Recession (Bricker et al. 2014). Over that period, declines in average real incomes, retirement account ownership, and amount of retirement savings continued a downward trend that began in 2007. The trend was most pronounced among families at the bottom of the income distribution (Bricker et al. 2014).

Similarly, many families lack emergency savings, and this makes it difficult for them to cope with common financial exigencies such as a car repair or a trip to the hospital (Grinstein-Weiss et al. 2015a). Half of American households--and 60% of low-income households--report that they could not come up with $2,000 in an emergency (Grinstein-Weiss et al. 2015c; Lusardi, Schneider, and Tufano 2011 ; see also FINRA Investor Education Foundation 2013). Without stored liquid assets, households often turn to costly alternative financial services, sometimes transforming a minor emergency into a major financial setback (Shah, Mullainathan, and Shafir 2012).

What do these statistics mean for children and youth? They suggest that many--especially those growing up in low-income households--experience financial vulnerability at a time in their lives when they are forming ideas and attitudes about the financial world and their place within it. The limited, and in many cases declining, financial circumstances of parents likely help to shape children's early financial socialization in an adverse way. Although we have much to learn about the specific factors that affect early financial socialization, the combination of financial challenges evidenced in the lives of this generation's children and youth make clear the need for greater financial preparedness and opportunity.

Overall, these trends call for greater understanding of financial capability and investment in the financial capability of Americans. They require new thinking about how to impart knowledge and sound financial management skills to the young. They also demand strategies for boosting financial inclusion across all segments of society.

ACTION FOR FINANCIAL CAPABILITY

A range of efforts will be needed to address the trends discussed above. Financial capability will play a key role. Financial capability is created in a variety of ways, including through financial socialization and financial education, financial advice and guidance, financial inclusion, and financial protection (Sherraden 2013).

Financial Socialization and Financial Education

Several contributions in this special issue emphasize that very young children possess the ability to develop a foundation for learning about financial matters and to apply what they learn. Drever et al. (2015), in their invited paper, "Foundations of Financial Well-Being: Insights into the Role of Executive Function, Financial Socialization, and Experience-Based Learning in Childhood and Youth," emphasize that developmentally appropriate interventions can begin to improve financial well-being as early as age 3. It is possible to develop executive function in children at that age; self-control and the ability to focus are essential elements of the foundation for financial capability. In school-age children, interventions can instill positive financial attitudes. Teaching practical financial skills to adolescents and young adults provides knowledge critical to their financial well-being. In "A Developmental Perspective on Children's Economic Agency," Friedline (2015) focuses specifically on saving. She shows that, by age 5 or 6, children are developmentally capable of using savings accounts and demonstrating saving behaviors.

Several works in this issue underscore the important role of social institutions--especially family, school, the workplace, and others that directly touch children and their parents--as targets for financial education resources. Batty, Collins, and Odders-White (2015) report in their study, "Experimental Evidence on the Effects of Financial Education on Elementary School Students' Knowledge, Behavior, and Attitudes," that children in grades 4 and 5 are capable of learning financial concepts and engaging in positive financial behaviors. In a field test, the authors find evidence that financial education outcomes persist among elementary school students in two dissimilar districts: after modest amounts of financial education, the students retained lessons on financial knowledge, behaviors, and attitudes.

The article by Grinstein-Weiss et al. ("Financial Education and Savings Outcomes for Low-Income IDA Participants: Does Age Make a Difference?" [2015b]) finds that age and dosage of financial education make a difference for participants in an Individual Development Account program. They suggest that programs should take age into account.

Finally, in their study, "Evaluating a Financial Education Curriculum as an Intervention to Improve Financial Behaviors and Financial Well-Being of Survivors of Domestic Violence: Results from a Longitudinal Randomized Controlled Study," Postmus, Hetling, and Hoge (2015) address financial capability in a specific vulnerable population. Their evaluation of a financial education curriculum for survivors of domestic violence finds improvements in financial knowledge, financial intentions, and financial behavior as well as a reduction in financial strain. They also find that the improvements persist over time. On the surface, a program with domestic violence survivors between the ages of 21 and 62 years might seem to fit better with a theme of "starting over" than with "starting early"; however, it demonstrates how women with a high need for financial education can build the financial foundation of a new life for themselves and their families.

Financial Advice and Guidance

Another way to build financial capability is through sound financial advice and guidance, which begin with parents and caregivers. In addition to Drever et al. (2015), who underscore the important role of parents in preparing children for financial functioning, another contribution in the special issue discusses parental influence. Van Campenhout (2015), in "Revaluing the Role of Parents as Financial Socialization Agents in Youth Financial Literacy Programs," examines the parental role in helping youth develop financial capability. He recommends that financial literacy programs for youth integrate parents as vitally important supports. Furthermore, Van Campenhout joins several other authors in suggesting that elementary schools can equip youth for financial success, and he offers program-design recommendations that foster broad, adaptable skills suitable for today's shifting financial landscape.

Parental influence aside, there are times when young people and their parents need reliable advice and guidance, yet many households lack resources to pay for professional planners and advisors. In the United States and elsewhere, some promising models are emerging to meet this need. For example, the federal Consumer Financial Protection Bureau provides the public with answers to questions about financial matters, (2) paying for college, (3) and buying a home. (4) Social service organizations can use the bureau's free tools to help their clients set goals; choose financial products; and build skills in several areas, including managing money, credit, and debt. (5) Another example, at the municipal level, the Cities for Financial Empowerment Fund embeds financial empowerment and coaching into social services in several large municipalities. (6) The Financial Clinic in New York City offers in-person and online financial coaching (Mintz 2014; Smith, Grote, and Ron 2011). In the United Kingdom, online and in-person assistance are offered through the Money Advice Service. (7) A Financial Ombudsman Service is available there as well. (8)

Safe and Reliable Financial Products, Services, and Policies

People also require access to beneficial financial products and services, but many US households lack access to mainstream banking. In 2013, nearly 10 million households were unbanked (i.e., lacked a bank account at an insured depository institution) and nearly 25 million households were "underbanked" (i.e., they had a bank account but also used alternative financial services) (Federal Deposit Insurance Corporation 2014, 4).

Fitzpatrick's (2015) contribution to this special issue, "Does 'Banking the Unbanked' Help Families to Save? Evidence from the United Kingdom," takes up the issues associated with access. She finds that an electronic-transfer mandate for all public benefits in the United Kingdom, along with options for a low-cost bank account, significantly increased account ownership among less educated parents with children. Moreover, the study provides initial evidence that the formerly unbanked accumulate savings when they have a bank account. In this way, bank account ownership may lead to small but significant increases in assets, and such increases have the potential to improve family financial well-being. Finally, Fitzpatrick indicates that families with low-incomes and low levels of formal education need accounts that permit withdrawals in an emergency. She notes that such accounts would protect them from potentially high-cost loans.

Without a secure place to conduct financial transactions, store money, and accumulate assets, it is difficult for people to take steps that substantially improve their financial situations over the long term. In "Increasing Youth Financial Capability: An Evaluation of the MyPath Savings Initiative," Loke, Choi, and Libby (2015) examine a financial intervention that leverages the teachable moment when a youth collects his or her first paycheck. Through the initiative, youth aged 14-16 gain financial knowledge and accumulate average savings of more than $500, building a foundation for the transition to adulthood. The study illustrates how financial knowledge can be transformed into action through a savings account designed for teens in a first job. Other vehicles, such as flexible money-management products, savings, and investment instruments, and insurance policies might be designed to fit the financial circumstances of people with low, irregular, or episodic incomes.

Several public-private partnerships provide promising models for increasing access to financial products and services. Bank On initiatives, for example, bring government, financial institutions, and community-based organizations together to provide access to free and low-cost starter bank accounts as well as financial education. (9) The Center for Financial Services Innovation provides leadership and funding for creation of quality and accessible financial products aimed at improving the financial health of US households, especially unbanked and underbanked ones. (10) A key strategy of the center is to explore the potential of new technologies, such as mobile platforms, that may offer low-cost ways to reach the unbanked but that have taken off slowly in the United States (Boshara and Emmons 2015; Huang et al. 2015). The receipt of a large refund at tax time, owing to the Earned Income Tax Credit or the Child Tax Credit, provides another opportunity for families to learn about and accumulate savings (Romich et al. 2013). The Refund to Savings initiative, for example, uses a free electronic tax-filing platform to help low-income households convert tax-refund windfalls, such as those from the Earned Income Tax Credit, into savings (Grinstein-Weiss et al. 2015c).

Policy innovations also provide opportunities for low- and moderate-income families to access financial products and accumulate assets. Individual Development Accounts (IDAs) and Children's Development Accounts (CDAs) provide subsidized asset-building opportunities for participants in projects around the country (Sherraden 2011). This special issue presents new evidence on CDA policies. In "Financial Capability and Asset Accumulation for Children's Education: Evidence from an Experiment of Child Development Accounts," Huang et al. (2015) test an effort to enhance financial access and financial knowledge as part of a CDA policy designed to accumulate assets for children's postsecondary education. Providing empirical support for the theory of financial capability, the findings indicate that access to CDAs moderates the association between financial knowledge and asset accumulation. The findings suggest the importance of interventions that improve asset accumulation for all children. Since this experiment began in Oklahoma, other states have initiated policies that offer universal access to CDAs (Clancy and Sherraden 2014).11 These policies for college savings may contribute to economic mobility. Friedline (2015) seeks to inform policy design by suggesting that CDA policies should account for children's cognitive and social development, recognize the significance of the child's name on the account, build in some flexibility, and make the most of developmental stages to enhance learning and saving (Elliott and Beverly 2011).

Consumers depend on regulation and protection to ensure that financial products and services are safe and reliable. The experience of the Great Recession illustrates how unsafe products can lead to large financial losses (Bocian etal. 2011). Although the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Consumer Financial Protection Bureau have generated crucial consumer protections, consumers continue to be challenged by new financial products and services in the mainstream and alternative financial sectors. (12) At the same time, scholars remind us that providing quality and inclusive financial products to low-income households is not as simple as promoting mainstream financial services over alternative offerings that may be more responsive to financial necessities in low-income households (Mann 2012; Servon 2014).

The final contribution in this section is an invited paper by Boshara and Emmons (2015): "A Balance Sheet Perspective on Financial Success: Why Starting Early Matters." They assert that the health of the household financial position is a meaningful measure of the financial capability of American households. Comparing balance sheets before the Great Recession with balance sheets after it, they call attention to the relatively weak financial positions of Americans in their 20s and 30s. They propose efforts to build healthy, diversified balance sheets, contending that such efforts should begin early in life and that they will benefit children, their families, and the economy. They agree with other contributors in the special issue that savings accounts for all young children hold special promise and merit consideration.

Overall, the contributions demonstrate that programs and policies can have a positive effect on financial capability. Each of the building blocks of financial capability--education, guidance, inclusion, and protection--contributes to people's ability and opportunity to act in their best financial interests. Moreover, the building blocks may interact to further reinforce the effects of each if they are offered together (Sherraden 2013). For example, several studies in this issue add to growing evidence that combining financial education and a financial account may enhance effects on financial capability (Batty, Collins, and Odders-White 2015; Friedline 2015; Huang et al. 2015; Foke, Choi, and Fibby 2015).

Finally, the FFEC (2015) draws together disparate elements of the discussion in a policy perspective and recommendations. The Commission calls for programs, product development, regulation, and policies to help Americans achieve their financial goals.

CONCLUSION

In emphasizing "starting early" and taking advantage of key life transitions to build financial capability, the research in this special issue provides direction for policy and programs. Given the trend toward an increasingly complex financial marketplace, key decisions young people have to make, and financial fragility among many American families, applied knowledge of financial capability could not be timelier. Although more evidence is needed, especially from experimental and other longitudinal studies, the articles in this special issue contribute to our understanding of how starting early can contribute to financial success. Most importantly, the authors suggest how to translate capability into action, with the aim of nurturing a more financially capable next generation.

DOI: 10.1111/joca.12067

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(1.) The Earned Income Tax Credit, the Child Tax Credit, and the Child Care and Dependent Care Tax Credit policies help low-income families make ends meet (Center on Budget and Policy Priorities 2013). Although they are not designed to help families accumulate assets, some programs aim to use them for this goal.

(2.) http://www.consumerfinance.gov/askcfpb/.

(3.) http://www.consumerfinance.gov/paying-for-college/.

(4.) http://www.consumerfinance.gov/owning-a-home/.

(5.) http://www.consumerfinance.gov/your-money-your-goals/.

(6.) http://www.cfefund.org/.

(7.) https://www.moneyadviceservice.org.uk.

(8.) http://www.financial-ombudsman.org.uk.

(9.) http://joinbankon.org/about/.

(10.) http://www.cfsinnovation.com/About-Us/Mission-and-Vision.aspx.

(11.) See, e.g., the provisions of the College Bound Fund, which is sponsored by the Office of the Rhode Island General Treasurer and the Rhode Island Higher Education Assistance Authority: http://www.alliancebemstein.com/ri/7nid = 9799.

(12.) Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 11-203, 124 Stat. 1376; codified at 12 U.S.C. [section] 5301-5641 (2013).

* Invited editorial. Margaret S. Sherraden (sherraden@umsl.edu) is Founders Professor at University of Missouri-St. Louis, and Research Professor at Washington University in St. Louis. Michal Grinstein-Weiss (michalgw@wustl.edu) is Associate Professor in the Brown School of Social Work and the Associate Director of the Center for Social Development at Washington University in St. Louis.
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Title Annotation:INTRODUCTION
Author:Sherraden, Margaret S.; Grinstein-Weiss, Michal
Publication:Journal of Consumer Affairs
Date:Mar 22, 2015
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