What is Financial Education?

April 02, 2020

Should I pay with cash or credit card? Should I buy this now, or wait until it goes on sale? How much should I tip?

Every day we make dozens of financial decisions. It’s not something any of us can avoid. But many of us never had formal exposure to financial matters in school. So what is financial education? And why is it important?

What Does Financial Education Include?

Financial education provides people with the basic knowledge and tools necessary to make informed financial decisions. It lays a foundation that provides people with a general understanding of the financial system and how to navigate it. Financial education topics should include:

• Saving and Spending
  • - An understanding of banks, credit unions, alternative financial institutions (check cashers, payday lenders), budgeting concepts, reasons for saving and spending, and how to manage saving and spending to meet personal goals
• Borrowing
  • - An understanding of consumer borrowing, loans, credit cards, credit history, comparing loan offers, credit scores, the motivations of lenders, and the impact of creditworthiness
• Earning
  • - An understanding of researching occupations and earning pathways, examining pay stubs, benefits, work-related issues, maximizing current income, and increasing future income
• Investing
  • - An understanding of interest rates, inflation, stocks, the stock market, bonds, mutual funds, diversification, brokers, investment firms, active versus passive investing, how investing can help save money or provide a person with additional income to meet personal goals in the future, and the role of risk in investing
• Managing Risk
  • - An understanding of types of risk, common types of insurance, components of insurance policies, insurance terminology, consumer options and rights, how to evaluate insurance plans, and how to comparison shop for insurance
• Financing Post-Secondary Education
  • - An understanding of post-secondary options, alternatives to college, the benefit of completing any degree, managing finances while in school, repaying student loans, options for financing, the benefits and costs of post-secondary training and education, and repaying student loans

Making It Personal

Armed with this better understanding of foundational financial education topics, students are bound to ask (as they always do, and rightly so), “When am I ever going to use this?” In response, the University of Chicago Financial Education Initiative acknowledges that the “solid foundation” part of financial education only makes sense if students also spend time learning about themselves. Students need to think about how and why this knowledge applies to their own unique situations. Therefore, necessary reflection includes asking questions such as:

• - What’s the process for making any decision?
• - What should I do before I make a decision?
• - How do I gather reliable information and sift through it to find what I need?

Without this personal connection to the internal and external factors that impact students’ lives, the accumulation of financial knowledge loses much of its power in the real world.

Making Financial Decisions

Finally, equipped with introspection and knowledge, students must learn how to make financial decisions. They begin by asking questions such as:

• - What’s the process for making any decision?
• - What should I do before I make a decision?
• - How do I gather reliable information and sift through it to find what I need?
• - And, lastly, how do I reflect on my decisions and use that information to inform future decisions?
Decision-making is unavoidable and all students can benefit from practicing how to make financial decisions based on their own internal and external factors. At times, those factors might be challenging, but knowledge of all possible options and a clear process for prioritizing goals and making decisions can help.

Why Is It Important?

Financial education is an important piece of helping people more successfully navigate a complex financial system. Providing financial education in high school is a way of giving everyone access to this critical subject area.

• - Everyone is faced with financial decisions and it is empowering for students to know exactly what they’re dealing with. The financial system has become much more complex in recent decades and individuals now have so much more responsibility for their own financial well-being—including retirement, insurance, and emergency savings—in the face of an increasing number of more severe risks.
• - Foundational knowledge can lead students to understand, engage with, and even change the system in the future. A base level of knowledge allows students to ask more questions and dig deeper throughout their lives.
• - Everyone has different values and goals, even within a family or friend group, and student-centered financial education can help students identify their own goals and vision for their financial future.
• - A lot of financial advice is either “one size fits all” or really haphazard—a person sees what they happen to see, either by chance or seeking it out, but the information is not necessarily aligned with that person’s life and financial well-being goals.

Together, foundational financial literacy concepts and a thoughtful student-centered financial decision-making process are crucial for students to take a big-picture view of all of the financial domains together, prioritize their own financial goals, and ultimately work toward achieving financial well-being.