Under Section 1013(d) of the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) is mandated to develop and implement a strategy to “educate and empower consumers to make better informed financial decisions” and to “improve the financial literacy of consumers.”
To achieve this goal, the CFPB conducted a study on consumers’ perceptions of financial well-being.
“Our overarching objective is to determine how to define and measure the success of different financial literacy strategies so that we have a basis for measuring different strategies’ effectiveness. And for this, we need to define the end goal of financial education. A growing consensus is emerging that the ultimate measure of success for financial literacy efforts should be improvement in individual financial well-being. But financial well-being has never been explicitly defined, nor is there a standard way to measure it,” the CFPB said in a report released on Jan. 27.
Using input from consumers and financial professionals, the CFPB developed a definition of financial well-being that incorporated four elements: Present and future security, and present and future freedom of choice.
More specifically these four elements included:
- Control over one’s day-to-day, month-to-month finances (present security);
- A capacity to absorb financial shock (future security);
- Financial freedom to make choices to enjoy life (present freedom of choice); and
- Being on track to meet financial goals (future freedom of choice).
“In summary, financial well-being can be defined as a state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and is able to make choices that allow enjoyment of life,” the report concluded. The subjective nature of what it means to enjoy life is part of the reason traditional measures of financial well-being such as income or net worth do not fully capture the concept of financial well-being.
The report suggested a few ways in which practitioners can help consumers improve their financial well-being, including:
- Helping consumers develop sound spending habits and make conscious adjustments in their day-to-day money management, such as cutting down mindless spending and using credit when it’s needed;
- Helping consumers figure out the questions they need to be asking when making financial decisions by identifying situations when they need financial information, exploring ways that they can get trustworthy information and helping consumers decide what choices make the most sense for them;
- Helping consumers develop concrete plans to meet their goals for the future by identifying realistic goals and helping consumers make step-by-step plans to reach those goals
Despite these general suggestions, the report does not offer quantitative data or specific guidance on how to implement new strategies or financial literacy programs. Instead, the CFPB makes a request for feedback, reiterating the fact that this study is just one step in tackling its financial literacy mandate.
Following the release of the study, CFPB Director Richard Cordray attended a Financial Services Roundtable (Roundtable) event in which he announced a joint CFPB-Roundtable initiative to further promote financial education, highlighting three areas in which the groups will focus their efforts.
“The first is working with our schools and teachers to help young people increase their financial capability so that they are better equipped with both knowledge and skills for a financially successful adulthood. The second is providing workplace financial education for ourselves and encouraging others to do the same. The third is helping to educate older Americans and those who care for them to avoid financial scams and abuse. I have no doubt that we can forge a powerful alliance to advance these three important causes,” Cordray said.
According to its February 2015 strategic plan, budget and performance plan and report, the CFPB’s consumer education and engagement program had a budget of more than $28.4 million for fiscal year 2014 and is projected to have a budget of more than $37.1 million and $41.8 million in fiscal years 2015 and 2016, respectively.
Under Section 1017 of the Dodd-Frank Act, money from the Civil Penalties Fund that is not allocated to eligible victims of enforcement action can be used for consumer education and financial literacy programs.
The CFPB collected $159 million in actual deposits to the Civil Penalty Fund by the end of fiscal year 2014 and expects to collect additional amounts during fiscal year 2015. According to the February 2015 report, approximately $144 million has been allocated to compensate harmed consumers, and $13.4 million was allocated for consumer education and financial literacy programs. Of the $13.4 million allocated for consumer education and financial literacy programs, $0.8 million was obligated in FY 2014, $4.2 million is planned to be obligated in FY 2015, and $4.2 million is planned to be obligated in FY 2016.