I came across an article recently by Dr. Uptal M. Dholakia, Ph.D. at Rice University which should be profoundly important to the financial literacy movement. In it he and his colleagues describe the massive disconnect between extensive financial literacy training (and the dollars thrown at it) and evidence of any real positive downstream outcomes directly correlated to those efforts. They point to a well-cited meta-analysis of 201 studies examining the relationship between financial literacy and downstream financial behaviors. These studies concluded that interventions to improve financial literacy explained just 0.1 percent of the variance in financial behaviors…that’s .001 or 1/1000th. Almost no impact whatsoever.
A large Standard & Poors study concluded that the U.S ranks 14th in the world when measuring the proportion of adults in the country who are financially literate. To put that further into perspective: the U.S. adult financial literacy level, at 57%, is only slightly higher than that of Botswana, whose economy is roughly half the size of Vermont’s.
Other conclusions by Dr. Dholakia include that while financial literacy training is of course important, it will likely never significantly “move the needle” without the presence of another often missing element of financial knowledge, that being a clear sense of financial self-awareness (FSA).
What is financial self-awareness?
FSA is a specific type of knowledge about personal finances that differs from financial literacy. It concerns how well the person knows and understands their financial situation. In Dr. Dholakia’s research (conducted with doctoral candidate Nivriti Chowdhry), they formally define FSA as the “personal knowledge about one’s current financial assets, liabilities, and spending patterns.”
In a nutshell, they found that having a higher FSA (and raising it) is a good thing. They concluded that financial self-awareness is associated with higher financial self-efficacy. This can be defined as a belief by the individual in their ability to handle an important task with greater confidence, and to learn from their prior experiences related to the area they seek to address.
The study reports that a higher degree of self-awareness about one’s finances translates into more certainty about their current strengths and weaknesses, and clarity about what to do next as they move forward to more positive downstream financial outcomes.
Dr. Dholakia’s study goes on to say that improved financial self-awareness is associated with:
- Paying off more debt faster
- Greater financial satisfaction
- Better spending and investing decisions
- Leveraging the effectiveness of financial literacy training to impact financial outcomes
In conclusion, their research points out that “once one knows their [financial] situation, they will feel confident in how to maintain and improve it.” Hence the relevance of the quote above by Aristotle: “Knowing yourself is the beginning of all wisdom.”