Personal finance: The bedrock of a community's financial health

Buying a car or that first home, comparing insurance rates, paying personal bills and balancing the checkbook are all matters of personal finance. The vast majority of consumers, however, learn these financial skills "on the job." While many succeed in managing their personal finances, others experience financial failure. Unfortunately, these failures can have harmful effects on local communities and the economy, as well as individuals and families.

Increasingly, community leaders are recognizing the need for personal financial education to promote sound money management skills. In this article, we discuss the importance of teaching these skills and look at some examples of personal financial education. Finally, we offer you a story about one effort of this Reserve Bank to foster personal financial education on Indian reservations.

Instructor Bryan Jon Maciewski teaches personal finance at Fond du Lac Tribal and Community College in Cloquet, Minn. “We want to teach a foundation of good money management skills that will stay with them for many years,” Maciewski says.

Why are personal financial skills important?

If an individual is or is not very good at managing his or her finances, does it matter to others outside of that family? Does it matter to the larger community? Does it matter to the economy as a whole?

In fact, it does matter. The personal financial decisions that each individual makes can have an impact on that person's family and the community. For example, only if an individual has properly managed his or her family's finances will that family be able to get a loan to purchase a home. Most, if not all, communities encourage homeownership. Community leaders appreciate the investment and commitment that comes with owning a home and view these as strengthening the community.

Homeownership matters to the larger economy as well. According to the U.S. Census Bureau, 44 percent of the nation's household wealth in 1993 was held in the form of home equity. In many cases, that equity becomes seed capital for small businesses, college tuition for children, or a retirement nest egg.

Also of great importance to a healthy economy is a steady rate of new business formations. According to the Small Business Administration (SBA), of the net new jobs created in the whole U.S. economy in 1995, new establishments accounted for 69 percent of new jobs, compared with 31 percent for existing establishments. These new firms are created by entrepreneurs using their own savings, investments or home equity. Without good personal financial skills, these funding sources are not available. In addition, many lenders find that personal financial habits carry over into business finance practices and use the owner's personal financial history as the basis for decisions about lending to the business.

Poor credit history may even affect an individual's ability to find employment. Some companies use consumer credit reports in making hiring decisions. Therefore, an individual's ability to get a good job may also rest on having a good credit history. Since high employment rates are important to both communities and the economy as a whole, an individual's personal financial skills have wide repercussions.

For all individuals to participate fully in the economy, opportunities to own a home or start a business should be accessible to everyone. For people of limited means or those with past credit problems, strong money management skills are critical to take advantage of these opportunities. Personal financial education teaches individuals with limited incomes how to save to meet future goals and helps those with blemished credit records re-establish a strong financial foundation. By improving their personal finances, these individuals are able to contribute to the economic vitality of their communities.

The link between personal financial education and community development is recognized in the Community Reinvestment Act (CRA). According to the recent Interagency Questions and Answers on CRA, dated May 3, 1999, "Establishing school savings programs and developing or teaching financial education curricula for low-or-moderate-income individuals" constitutes an example of a community development service under the CRA. (See §§_____.12(j) and 563e.12(i), Q&A 3.)

What is personal financial education?

Paul Strassels, author of Credit When Credit Is Due,defines personal finance as "the total treatment of income and expenses, managing the checkbook, making normal everyday purchases, and debt repayment on a timely basis." So it follows that personal financial education teaches the skills necessary to perform these tasks. Financial planning and methods of saving and investing are also included in any personal financial course to help students think about and realize future plans.

Personal financial education comes in many forms. For example, some Federal Reserve Banks produce and distribute consumer personal finance publications and other Reserve Banks offer training programs for teachers, students or adult audiences.

Another form of personal financial education is homebuyer education provided by community-based nonprofits specializing in various types of pre- and post-purchase education and credit counseling aimed at first-time homebuyers. These programs, which help provide access to homeownership and, after the purchase, help preserve home equity and avoid the perils of foreclosure, contribute to the increase in homeownership across America. An example of these educational efforts is the "Full-Cycle Lending" program offered by Neighborhood Housing Services organizations across the country.

Other specialized programs include those offered by nonprofit credit counseling firms. While such programs are often targeted to individuals experiencing financial difficulties, one program developed by the Consumer Credit Counseling Service (CCCS) in Rapid City, S.D., aims at a wider audience.

In an effort to stem the tide of bankruptcies in South Dakota, CCCS, through its American Center for Credit Education (ACCE) division, developed a standardized personal finance course for adults called "Credit When Credit Is Due." The premise of this program is that individuals who successfully complete the course should be better prepared to manage their finances and creditors should recognize this enhanced financial competency through more favorable loan terms or other incentives.

The program, which began in Rapid City in 1998, is already used throughout South Dakota and in 10 other states. The program is in various stages of implementation in another eight states. Many of the close to 1,000 individuals who have successfully completed the course now have statements on their credit reports attesting to their participation in the course and, according to ACCE, more than 40 creditors in South Dakota, North Dakota and Minnesota will grant concessions or incentives to these participants.

Another type of specialized training is education for start-up business owners offered by the SBA or by business incubators and incubation programs. For example, as part of its entrepreneurship certificate and two-year degree program, Si Tanka College, located in Eagle Butte, S.D., on the Cheyenne River Indian Reservation, offers a course that combines personal financial education with information geared to tribal members who want to start a business. According to Tanya Ward, former president of the college, "The personal finance part of the course came into being when we discovered that most potential small business owners were not able to manage their own finances."

How the Minneapolis Fed got involved

As a result of discussions with community leaders, Community Affairs staff at the Federal Reserve Bank of Minneapolis became interested in reaching a wider, and younger, audience about the importance of personal financial education.

The specialized programs that attract first-time homebuyers or would-be business owners often come too late to have an impact. By the time many young people are of an age to think about buying a home or starting a business, they already have severe credit problems.

In particular, as part of our ongoing work in Indian Country, we heard from tribal leaders that educating young tribal people about personal finances would be an important step to advance economic development in Indian Country.

The Federal Reserve and Fond du Lac Tribal and Community College

In response to these concerns, we began working with Fond du Lac Tribal and Community College (FdLTCC) in Cloquet, Minn., and Cloquet-area bankers to develop a "turn-key" course that could be used by other tribal colleges. As we envisioned the program, each tribal college would need to secure an instructor, but the syllabus and text would be ready to use. We envisioned a course that would be attuned to the particular Indian culture of the students, be it Ojibwa, Lakota, Cheyenne, Crow or another culture. Finally, we wanted the course to involve local bankers as guest lecturers. Guest lecturers almost always enliven a course, and we wanted the students to hear about banking directly from those who work in the field every day. In addition, we thought that students at the tribal colleges and officials from the local banks would benefit from meeting face-to-face.

The result of our collaboration was a four-credit, 10-week course offered by FdLTCC beginning in 1998. Bryan Jon Maciewski, an enrolled tribal member, teaches the course and focuses on items he believes engage college-level students.

"I want to bring the subject matter closer to the things my students are dealing with in everyday life, such as changing their personal spending habits, making a personal monthly budget, shopping for an insurance agent, purchasing a car, checkbook management and the importance of a savings account," he said.

"I also deal with technical matters like personal debt ratio and how to determine if an auto lease is more suitable than an outright purchase. I want to make the course enjoyable and worthwhile at the same time."

As for the "cultural relevance" of the course, Maciewski noted that "since it is being taught by an Indian, it has cultural relevance. Students will believe it applies to them."

To Maciewski, a personal finance course is important for college students. "Young people are constantly bombarded with credit card solicitations from financial institutions," he said. "They assume that because a financial institution sent a pre-approved credit card, it is their right to use it. Unfortunately, it does not stop with just one credit solicitation, and before they can blink, they have received two to three others, and they begin living off the credit cards."

"We want to teach a foundation of good money management skills that will stay with them for many years," he said.

Upon completion of the class, students receive a general foundation in money and banking (including the Federal Reserve System), investment and retirement, stocks and bonds, insurance, real estate, checking and savings accounts, and basic money management.

According to Maciewski, drawing guest speakers from community institutions, including banks, insurance companies, mortgage lending institutions and realty companies has worked well and kept the students interested in the course material.

This course has now become one of the core requirements for students pursuing FdLTCC's new associate of science degree in business and financial services, which was approved recently by the Minnesota State Colleges and Universities' Board of Directors.

Because the personal finance course is offered at the beginning of the degree program, Maciewski believes that it will be much easier for students to associate all business finance situations to the personal finance model.

Bryan Jon Maciewski is an enrolled member of the Fond du Lac Band of Lake Superior Chippewa. In addition to his position as instructor of the personal finance course at FdLTCC, he also serves as the director of training and career development for tribal employees.