By Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond; CEE Board Member.
What’s the first thing you think of when you read the words “financial literacy”? How to write a check? There’s sure to be a website to help you with that. In fact, if you Google it, you’ll get about 1.4 billion results. How to create a budget? You’ll find more than 2.8 billion results. In other words, there are plenty of resources to guide you through these and other financial decisions.
So it may surprise you to hear that the Federal Reserve Bank of Richmond has added to these options by creating a new financial education and resource website. One of the first things that you’ll notice, however, is that our site is not about every financial decision. It’s about big ones. And it reflects our belief that financial literacy efforts should focus on key financial decisions – ones that have major and long-term impacts for individuals and their families.
Don’t sweat the small stuff
The decisions on this site – how to finance college, whether to buy or rent a home, and how to plan for retirement – differ from others because they are:
- Infrequent: We make these decisions only a few times in our lives. After all, it’s not every day that we retire or sign a new mortgage. This means we don’t have many opportunities to practice and learn from our mistakes
- Complex: Major decisions are often complex, as anyone who has read a mortgage contract will attest.
- Long-term: Major decisions have long-term consequences – retirement funds may need to last for decades, and a college degree not only takes several years to attain, but pays off fully only over a lifetime.
Know what’s best for you
What makes financial education challenging is that it’s almost impossible for an educator, or anyone else for that matter, to determine what’s best for an individual or family since needs can vary dramatically from person to person.
Major financial decisions aren’t as simple as other consumer product purchases. It’s far easier to give advice about buying a refrigerator, for instance, than choosing the right mortgage. We can all agree that a refrigerator that doesn’t cool your food properly is not a good purchase.
Unfortunately, “one-size-fits- all” statements cannot be made about financial products. A fixed-rate mortgage might be the best choice for an individual who does not want to take on interest rate risk, whereas an adjustable rate mortgage (ARM) might work better for someone who is willing to bear the risk in exchange for a lower rate. This makes it hard to indisputably label any particular financial product or service as “bad.” For example, a short-term loan that would be expensive if rolled over may still be the best option for someone whose car is in the shop and whose employer offers little flexibility in work schedules or paid vacation. Conversely, a low-interest rate checking account may yield less than an investment in a home, but might allow a person access to their funds in ways that avoid the need for high-interest loans in a pinch.
All of this suggests two key roles for a thoughtful financial literacy effort – to enable people to make informed choices about major personal financial decisions, and to help them comprehend and utilize products and services best tailored to their needs. At the Richmond Fed, our goal is to provide reliable information and tools to help people do just that. In other words, we aim to equip, not advise.