From Financial Literacy to Financial Action

The academic research in this area is relatively new, and we draw on recent social science studies to describe a vision for maximizing the effectiveness of financial education by coupling it with steps that turn financial knowledge into effective actions. Some of these additional steps can be taken by individuals, while others require the collaboration of government, businesses, and non-profits. The idea that we need to expand beyond financial literacy and take into account a broader range of factors that go into decision-making was given an important boost last year when the White House relaunched the President’s Advisory Council on Financial Literacy as the President’s Advisory Council on Financial Capability. Capability—the term of choice for a growing number of practitioners—is defined by the Obama administration as “the capacity, based on knowledge, skills, and access, to manage financial resources effectively.” But having the capacity to do something is not the same as actually doing it. We ask: How can people turn financial aspirations into meaningful actions? What is needed to help people develop and stick to concrete financial plans? The critical starting point is awareness of one’s own limits. Perhaps more than we like to admit, we procrastinate, get distracted, get overwhelmed by technical details, or give in to temptations to spend rather than save. We’re human after all. Studies show that these traits are both common and consequential. Economists describe people who are self-aware as “sophisticated” and those who are not as “naïve.” The wording is imperfect, but it captures the basic reality that important possibilities open up once we recognize our limits and start to correct for them. Rather than using the “naïve” vs. “sophisticated” distinction as a way to put different kinds of people in boxes, we instead see the distinction as a starting point for education aimed at building selfawareness and the tools to make better choices. We argue that the necessary vision has two main elements: (1) Building capacity and (2) Turning ideas into actions. Each of these main elements has multiple elements.