Money Worries

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A new UW center is exploring what Americans need to know about their finances.

Millions of American homes have gone through foreclosure since the start of the financial meltdown, and nearly a quarter of all mortgage borrowers are under water — owing more than their houses are worth.

As the dust settles, have we learned any lessons about money? And what do we still need to learn? Scholars with the UW–Madison Center for Financial Security are measuring our financial knowledge and pinpointing opportunities to educate people when they most need help.

“Financial literacy as a term really hasn’t even been around for more than a decade,” says J. Michael Collins, an assistant professor of consumer science who serves as the center’s faculty director. But when subprime mortgages reached a crisis point and banks across the country failed, the level of interest in financial literacy surged.

“Many choices we make early on play out over the life course, so it’s something that everyone’s worried about,” he says.

The UW’s center is one of three applied research centers nationally that receive funding from the Social Security Administration as part of the Financial Literacy Research Consortium. The consortium’s goal is to develop innovative programs to help Americans obtain a secure retirement. An interdisciplinary team of professors and graduate students in fields including economics and education largely focuses its research on vulnerable populations, including the elderly and people with disabilities. But that doesn’t mean that other groups aren’t at risk for money troubles.

“Vulnerable populations aren’t just defined by income and race, or by where you live,” Collins says. “You can be middle income and have a health crisis, and you’re left quite vulnerable. Or you could have a successful work career and a good pension, but you’re facing the choice of receiving a lump-sum payment versus an annuity or something else, and you could bungle it. There are lots of times in life when we’re financially vulnerable, and often we don’t know it.”

In recent years, states have pushed for consumers to start learning about money early. About thirty states, including Wisconsin, require financial education in schools. But a recent UW study by Karen Holden and Wendy Way in the School of Human Ecology found that relatively few teachers feel prepared to teach their students about money management, credit and debt, financial responsibility and decision-making, or saving and investing.

And, Collins says, knowledgeable teachers may not be enough when it comes to covering some financial subjects, including mortgages, because those financial products are constantly changing.

“We have to think broader than just what happens at schools,” he says. “We need to do a better job of integrating financial information and financial advice into decisions so consumers have an opportunity to find unbiased, good advice when they make big choices.”

Some of the center’s research focuses on financial milestones in life when there are “teachable moments” — such as the birth of a child or marriage — that are ripe for helping people make smarter decisions.

“When you’re seventeen, maybe it’s about having your first credit card or understanding that those student loans you’re about to sign are going to stay with you for a long time,” Collins says. “For home buyers, maybe that’s a great time to think about financial planning — are you going to put all of your money into the house, or are you going to start putting some money away for retirement at the same time?”

There are opportunities to promote financial literacy when times are tough, too, via public

programs such as unemployment assistance and food stamps, both of which have seen increased use due to the recession. “Those seem like opportunities to help people think about forming a budget once they come out of their financial hardship, and not getting into a lot of debt so they are better able to manage future financial shocks,” Collins says.

In one of its current projects, the center is looking into public libraries, where families that can’t afford Internet service at home can access bank, credit, and retirement accounts online. Librarians, especially those serving low-income communities, are now “on the front lines of financial education” during the economic downturn, fielding questions about subjects that are not part of their training, he says.

Catherine Arnott Smith and Kristin R. Eschenfelder, from the UW’s School of Library and Information Studies, plan to use the center’s research findings to develop education and training materials to help librarians become better resources for financial information. “You’ve got libraries in every community; it’s one of the delivery systems that’s out there and ready to go,” Collins says.

Other studies include measuring how a person’s capacity to make financial decisions declines with age and determining why women don’t save as much for retirement as men do. Within a few years, Collins expects, the center’s work will reveal more about the roles of education, peers, and technology in getting people to change behavior related to finances. To date there has been very little evidence of what actually works.

“We all make mistakes. The key is to avoid having those mistakes become lifelong penalties,” Collins says. “If you’re going to make mistakes, make them small and make them early, not big and late.”

Published in the Spring 2011 issue