The Routledge Handbook of Financial Literacy

Gianni Nicolini, Brenda J. Cude, Gianni Nicolini, Brenda J. Cude

• Publisher: Routledge
• Year: 2021
• Print ISBN: 9781032154381
• eBook ISBN: 9781000487848
• Edition: 1
• Topic: Education
• Subtopic: Finance

Financial literacy and financial education are not new topics, even though interest in these topics among policymakers, financial authorities, and academics continues to grow. The Routledge Handbook of Financial Literacy provides a comprehensive reference work that addresses both research perspectives and practical applications to financial education. This is the first volume to summarize the milestones of research in financial literacy from multiple perspectives to offer an overview.

The book is organized into six parts. The first three parts provide a conceptual framework, which discusses what financial literacy is, how it should be measured, and explains why it represents a relevant topic and effective tool in enhancing decision-making among consumers as well as consumer protection strategies. Part IV addresses the connection between financial education and financial literacy, with chapters about financial education in school settings as well as for adults. This part includes an analysis of the role of Fintech and the use of gamification in financial education. Part V is a collection of contributions that analyze financial literacy and financial education around the world, with a focus on geographical areas including the U.S., South America, Western Europe, Eastern Europe, Asia, and Africa. This part also considers how financial literacy should be addressed in the case of Islamic finance. The concluding part of the book examines how financial literacy is related to other possible approaches to consumer finance and consumer protection, addressing the relationships between financial literacy and behavioral economics, financial well-being, and financial inclusion.

This volume is an indispensable reference for scholars who are new to the topic, including undergraduate and graduate students, and for experienced researchers who wish to enrich their knowledge, policymakers seeking a broader understanding and an international perspective, and practitioners who seek knowledge of best practices as well as innovative approaches.

Part IWhat is financial literacy?

DOI: 10.4324/9781003025221-2

1Defining financial literacy

Brenda J. Cude

DOI: 10.4324/9781003025221-3

Introduction

The title of this book is Handbook of Financial Literacy. Thus, it is a fair question to ask what financial literacy means in this context, as it is a term frequently used but rarely defined.

In this book, we, the editors, define financial literacy as a component of human capital that includes knowledge, skills, attitudes, and confidence related to financial decision-making. Part IV of the book addresses financial education, so we offer a definition of that term as well – a diverse set of interventions designed to change one or more of the components of financial literacy.

Definitions of financial literacy

The term financial literacy seems to have first appeared in the U.S. popular press and academic literature in the late 1990s and early 2000s (Faulkner, 2015). The U.S. Great Recession amplified the importance of learning to manage one’s money. The term gained popularity in the U.S. in the 2000s as a number of “firsts” called attention to financial literacy – for example, a nationwide financial education campaign (Money Smart) and the creation of the U.S. Financial Literacy and Education Commission (FLEC) (Faulkner, 2015), which was preceded by the President’s Advisory Council on Financial Literacy (PACFL). The PACFL built upon a definition from a coalition created to advance young adults’ financial literacy (the Jump$tart Coalition for Personal Financial Literacy) and defined financial literacy as “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.” The PACFL distinguished financial literacy and financial education by defining financial education as

the process by which people improve their understanding of financial products, services and concepts, so they are empowered to make informed choices, avoid pitfalls, know where to go for help and take other actions to improve their present and long-term financial well-being.

(PACFL, 2008)

At the international level, discussions about and definitions of financial literacy began to appear in the 2000s. The Organisation for Economic Co-operation and Development (OECD) offered a definition of financial literacy in 2005:

the process by which financial consumers/investors improve their understanding of financial products and concepts and, through information, instruction and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being.

(p. 26)

Today, the OECD’s (2020c) definition of financial literacy is “A combination of financial awareness, knowledge, skills, attitudes and behaviors necessary to make sound financial decisions and ultimately achieve individual financial well-being” (p. 1).

Nicolini (2019, Chapter 1) traced the development of the term “financial literacy” in the academic literature, citing Noctor et al.’s (1992) definition – “the ability to make informed judgements and to make effective decisions regarding the use and management of money” – as among the first. Nicolini offered his own definition of financial literacy as “knowledge of financial issues and the ability to apply it in a decision-making process concerning finance, including awareness of the available sources of information, the functioning of financial products and services, financial intermediaries, and financial markets” (p. 12). He distinguished it from a related term, financial capability, which he defined as “the ability to apply financial literacy in a specific scenario where people have to face financial issues in real terms” (p. 12).

Almost from the first appearance of the term financial literacy, a healthy debate emerged about what the term means. This is in contrast to other fields, which have adopted similar terms. For example, the field of economics created a test to measure “economic literacy” as early as 1977 (Soper & Brenneke, 1981). There is no evidence in the literature of controversy about the term.

Although there is no evidence in the literature that alternatives to the term “health literacy” were proposed, there were discussions of the term’s meaning. For example, Baker (2006) noted that the meaning of the term expanded in scope and depth with time and suggested that one’s health literacy is a relative concept that may vary depending on the medical problem being treated, the health care provider, and the system providing the care.

Kutner et al. (2006) suggested distinctions in health literacy that might be useful to further refine the term financial literacy, delineating health literacy as composed of prose literacy (knowledge and skill needed to search, comprehend, and use information from text in sentences or paragraphs), document literacy (knowledge and skill needed to search, comprehend, and use information in noncontinuous paragraphs), and quantitative literacy (knowledge and skill needed to identify and make computations). Nye and Hillyard (2013) used the term “quantitative literacy” relative to financial literacy, noting “Confidence in working with numbers could help consumers think through the implications of their financing choices” (Abstract, part 2).

Huston (2010) and Remund (2010), in a special issue of the Journal of Consumer Affairs, independently concluded that while scholars and others often used the term financial literacy, they rarely defined it. In 2010, Huston found only eight definitions of the term – six in academic literature and one each from the U.S. Jump$tart Coalition for Personal Financial Literacy and the U.S. FLEC. Huston described financial literacy as a human capital investment. She offered her definition of financial literacy – “how well an individual can understand and use personal finance related information” (p. 306, emphasis added). In the same issue of the Journal of Consumer Affairs, Lusardi et al.’s (2010) article about financial literacy among the young offered no definition of the term. In later work, Lusardi and Mitchell (2014) gave this definition of financial literacy: the “ability to process economic information and make informed decisions about financial planning, wealth accumulation, debt, and pensions” (p. 2).

Remund (2010) lamented the lack of consensus about either a conceptual or operational definition of financial literacy. He noted that the definitions he found in previous literature fell into five categories: knowledge, ability to communicate, aptitude to manage, skill to make appropriate decisions, and confidence to plan effectively for future financial needs. He recommended the following conceptual definition:

Financial literacy is a measure of the degree to which one understands key financial concepts and possesses the ability and confidence to manage personal finances through appropriate, short-term decision-making and sound, long-range financial planning, while mindful of life events and changing economic conditions.

(p. 284)

Based on his review of the literature, he also indicated that the four most common operational variables of financial literacy were budgeting, saving, borrowing, and investing.

Hung et al. (2009) also noted the diversity of approaches to defining financial literacy. Authors had defined it as knowledge (Hilgert et al., 2003; Lusardi, 2008), understanding (Council for Economic Education [CEE], 2005; FINRA Investor Education Foundation, 2003; Remund, 2010) or familiarity (Lusardi & Mitchell, 2007), and application of knowledge (ANZ Bank, 2008; Lusardi & Mitchell, 2014; Lusardi & Tufano, 2014; Mandell, 2007; Moore, 2003). Hung et al. offered their own definition of financial literacy: “knowledge of basic economic and financial concepts, as well as the ability to use that knowledge and other financial skills to manage financial resources effectively for a lifetime of financial well-being” (p. 14).

In 2019, Bedi et al. documented 14 definitions of financial literacy, including Huston’s (2010) and Remund’s (2010). They used the Scopus database (which includes peer-reviewed journals in management, organization, and social science) to search for the keyword financial literacy in the title, abstract, or keywords of documents about financial literacy published between 1964 and 2017. The results showed a dramatic increase in the number of documents published around 2003, when the number of publications doubled from the previous year (from 14 to 29). The authors described the growth in publications after 2003 as “exponential,” finding 330 documents published in 2017. They reported that U.S. authors prepared the majority of publications (842) about financial literacy; authors from the United Kingdom, Australia, and India also made important contributions.

However, there continues to be little consensus across definitions of financial literacy when they are offered. The OECD/INFE (International Network for Financial Education) has defined financial literacy as “A combination of awareness, knowledge, skill, attitude, and behavior necessary to make sound financial decisions and ultimately achieve independent financial wellbeing” (2011, p. 3). The U.S. Consumer Financial Protection Bureau (CFPB, 2018a) appears to...

Table of contents

• Cover
• Half-Title Page
• Title Page
• Copyright Page
• Contents
• List of figures
• List of tables
• List of contributors
• Introduction
• Part I What is financial literacy?
• Part II Measuring financial literacy
• Part III Relevance and effectiveness of financial literacy
• Part IV Improving financial literacy: The role of financial education
• Part V Financial literacy and financial education around the world
• Part VI Beyond financial literacy
• Index