Household Financial Management

The Federal Reserve Board has published an excellent lead article in the July Federal Reserve Bulletin: "Household Financial Management: The Connection Between Knowledge and Behavior." The article was prepared by Marriane A. Hilgertand, Jeanne M. Hogarath of the Board's Division of Consumer and Community Affairs, and Sandra G. Beverly of the University of Kansas. You may obtain the full article from the web by going to: www.federalreserve.gov/pubs/bulletin. Select 2003 from the archives link and scroll down to the July article listing. It should interest educators at all levels, as well as members of credit industry associations, such as AFSA, that support financial education programs for consumers. This brief review provides but a small fraction of this important research. Senators Paul Sarbans (D-MD) and Jon Corzine (D-NJ) have introduced a bill "to provide better financial decision making among consumers."

At the outset, the authors state the need for financial education: "Knowledgeable consumers who make informed choices are essential to an efficient and effective marketplace . . .. the connection between knowledge and behavior-what consumers know and what they do-focusing on four financial-management activities: cash management, credit management, saving and investment." The authors drew their data from the monthly surveys of consumers by the University of Michigan and from the tri-annual Surveys of Consumer Finances sponsored by the Federal Reserve.

The article is divided into seven sections:

Household financial management practices
Cash flow management
Credit management
Savings
Investment
Sources of financial knowledge
Knowledge and behavior. What is the link?

We focus on credit management and how consumers can learn about good credit management. The first question is: How efficient are consumers in managing their credit? The most recent survey (2001) showed that 11 percent of all families in the U.S. had a debt-payment-to-income ratio greater than 30 percent. Seven percent of all families had had payments past due 60 days or more. Three out of five consumers with credit cards reported that they paid their balances in full each month. Low scores on credit management knowledge matched the low scores on credit management performance.

But, where do consumers gain knowledge of credit card management, or of other forms of credit? At this point, the analysis becomes very difficult, and the analytical problems apply to all forms of consumer credit. Households in the Surveys of Consumer Finances "reported learning from a variety of sources, but personal experience, friends and family, and the media were among the top sources for all households." The Internet is an increasingly important source of knowledge. A family discussion of which bills should be paid first can provide a lasting educational experience. (And maybe your teen-age son might curb his pleas for a car.)

Finally, and very important, it is necessary to present the material at a "teaching moment." Thus, "consumers who are provided information when it is immediately relevant and applicable, such as fist-time homebuyers receiving pre-purchase counseling, may have a greater chance of recognizing the value of information and making a behavioral change."

Federal Reserve Bulletin, July 2003.