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Secure families are better able to contribute to vital, thriving communities, further fostering community economic development.

Over the last several years, the issue of financial literacy seems to have risen on the agendas of educators, community groups, businesses, government agencies, organizations, and policy makers-- everyone is talking about it. And it's not just happening in the United States-the United Kingdom and Japan both have substantial initiatives targeted toward financial literacy (see, for example, Adult Financial Literacy Advisory Group, 2000).

Professionals in the field of family and consumer sciences, many of whom have been dealing with financial education for the past decades, may be wondering why so many people have suddenly "discovered" that financial competencies are important to families and households. The goal of this paper is to shed some light on the financial literacy issues that are being discussed, both within and outside of the field: How are people defining "financial literacy?" Why is it "suddenly" so important? What evidence is there that lack of financial literacy is a problem? What financial literacy initiatives are underway? Are they working-and how do we know? Finally, what roles can family and consumer sciences professionals play?

WHAT IS FINANCIAL LITERACY?

Financial literacy means different things to different people. For some it is quite broad, encompassing an understanding of economics and how household decisions are affected by economic conditions and circumstances. For others, it focuses quite narrowly on basic money management-budgeting, saving, investing, and insuring. Still others include a set of consumer and "buy-- manship" skills within a financial literacy framework. In reality, financial literacy probably can and does include all of these topics.

In 1992, Britain's National Foundation for Educational Research defined financial literacy as "the ability to make informed judgements and to take effective decisions regarding the use and management of money" (NFCL, 2001). Garman and Forgue use the term financial literacy to refer to knowing the facts and vocabulary necessary to manage one's personal finances successfully (Garman & Forgue, 2000, p. 2). Vitt et al. defined personal financial literacy as "the ability to read, analyze, manage, and communicate about the personal financial conditions that affect material well being. It includes the ability to discern financial choices, discuss money and financial issues without (or despite) discomfort, plan for the future, and respond competently to life events that affect everyday financial decisions, including events in the general economy." (Vitt et al, 2000, p. xii). Cutler and Devlin (1996) include both cognitive (knowledge) and psychological (confidence) concepts in their definition of financial literacy.

The consistent themes running through these various definitions include 1) being knowledgeable, educated, and informed on the issues of managing money and assets, banking, investments, credit, insurance, and taxes; 2) understanding the basic concepts underlying the management of money and assets (e.g. the time value of money in investments and the pooling of risks in insurance); and 3) using that knowledge and understanding to plan and implement financial decisions.

WHY IS FINANCIAL LITERACY IMPORTANT?

Well-informed, well-educated consumers should make better decisions for their families, increasing their economic security and well-- being. Secure families are better able to contribute to vital, thriving communities, further fostering community economic development. Thus, financial literacy is not only important to the individual household and family, it is also important to communities.

An effective and efficient marketplace requires knowledgeable consumers, able to make informed choices. In classical Adam Smith economics, informed consumers provide the checks and balances that keep unscrupulous sellers out of the market. For example, if all consumers had "complete information" about mortgages, predatory lenders would not be able to gain a.foothold in the marketplace.

Beyond economic efficiencies, a demographic shift is taking place. Aging baby boomers who will be more responsible for their own retirement income security, youth who are coming to financial independence with limited role models and experiences, and immigrants who need to learn to manage in the U.S. marketplace-all are trends that need to be addressed via financial literacy efforts.

Furthermore, over the past 15 to 20 years there has been a shifting of responsibility for long-term well-being away from institutions (employers, the government) to individuals. For example, in 1980, 70% of pension plans were defined contribution (DC, as opposed to defined benefit plans; DC plans shift more of the responsibility for the growth of retirement funds to the consumer); by 1997, 92 % of plans were defined contribution (Come, 1998). In 1980, one-third of workers were covered by DC plans; in 1997, over half (53%) were covered by such plans (Come, 1998).

In addition, the financial marketplace of the 21 st century has become more complex. And, as Alan Greenspan has said, "As market forces continue to expand the range of providers of financial services, consumers will have much more choice and flexibility in how they manage their financial matters. They will also need to accumulate the appropriate knowledge on how to use new technologies and on how to make financial decisions in an informed manner" (Greenspan, 2001).

Take the "simple" decision of opening a checking account. Thirty years ago, you could walk into your hometown bank; the tellers and the bank manager knew your name; the product choice was simple (consumers may have been able to choose the color of their checks, but that was about all they had to choose); and the bank was on the corner. Today, the bank may still be on the corner, but it's just as likely to be on the Internet; the product choice is much more diverse (most banks have several basic and interest checking accounts along with electronic transaction accounts); and with mergers and acquisitions, the staff may not know you at all. The same holds true for many other products and services-mortgages (which are no longer just 30-year fixed-- rate mortgages, but include all permutations of terms and interest rates), home equity loans and lines of credit (products that didn't exist 20 years ago), and a broad range of investment choices - the list could go on. Information and the ability to decipher and use that information in decision making becomes more necessary as financial products and services continue to expand and as new delivery channels for financial services develop.

WHAT EVIDENCE IS THERE THAT LACK OF FINANCIAL

LITERACY IS A PROBLEM?

Between 1989 and 1998 the median net worth of U.S. households rose from $59,700 to $71,600, measured in 1998 dollars (Kennickell et al., 2000). At first glance, this seems to indicate that U.S households must be doing some things right, since net worth grew by 20% over the 10 years. However, this is an average real growth rate of about 2% per year, which is fairly conservative. Furthermore, most of the growth (17 of the 20%) happened between 1995 (median net worth of $60,900) and 1998, years of tremendous growth in the financial markets. Given the decline in markets across 1999 to 2001, one wonders how household net worth has fared.

Another potential indicator of financial literacy is the home ownership rate. Homes are the major investment and asset in most households' portfolio and are symbolic not only of the American Dream but also of financial stability and some degree of financial literacy-to get a mortgage you need a good credit rating and to stay in your home, you need to keep up with your mortgage payments. In fact, home ownership rates are the highest they have been in 20 years (U.S. Bureau of the Census, 2001); about two-thirds (67.7%) of U.S. households are homeowners.

The picture of households' financial literacy that emerges from these two pieces of information is rather mixed-looking at home ownership, it seems that U.S. households are doing fairly well; looking at net worth, it seems that there may be room for improvements in financial literacy.

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It's easiest to turn to numbers to get evidence of problems. In the early 1990's, the Consumer Federation of America and American Express conducted a series of "consumer literacy" tests with high school and college students and adults (CFA, 1990, 1991, 1993). They found that high school students scored lower than college students and adults, as might be expected. Teens were only able to answer about 42 % of the questions correctly, compared with 51 % for college students and 54 % for adults.