Key Principles for Measuring Financial Literacy

Financial literacy professionals have focused for decades on the best ways in which to measure the effectiveness of financial education programs.  The fundamentals underlying effective polling and survey strategies have been instructive.  For exampe, the core principles behind polling one thousand Americans to give meaningful insight for the entire population for Presidential elections is that a large, properly drawn sample will resemble the population from which it is drawn. There is variation between samples, but the probability that any sample will deviate massively from the underlying population is often relatively low.

Assuming there exists a sample large and random enough to represent a population’s financial literacy status, the following are some initial key areas of focus for creating an effective measurement framework:

<> Using a precise and consistent definition of Financial Literacy

-- Financial literacy can be conceptualized to having two dimensions: (i) understanding (personal finance knowledge); and (ii) use (personal finance application). Thus, financial literacy can be measured by how well a person can understand and use the concepts of personal finance for financial well-being.

-- Many studies use financial knowledge and financial literacy interchangeably and from the above definition we can make a clear distinction between the two as one is only knowledge in the mind while the other also focuses on real-life application.

<> Assessing Financial Literacy by four distinct content areas

-- Money basics, including time value of money, purchasing power, and personal financial accounting concepts

-- Borrowing (i.e., bringing future resources into the present through the use of credit cards, consumer loans or mortgages)

-- Investing (i.e., saving present resources for future use through the use of saving accounts, stocks, bonds or mutual funds)

-- Protecting resources (either through insurance products or other risk management techniques)

While many frameworks are being employed to measure the impact and success of financial literacy initiatives on the local, federal and global levels, the above concepts often are considered and utilized in evaluating outcomes that can continue to shape best practices in the financial education industry in the months and years ahead.

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