Why Opening a Bank Account Should Be Part of Cashing a First Paycheck
By Barbara Kiviat
November 10, 2016
A first paycheck is a teachable moment, which is why Congress included a financial education requirement when it last re-authorized summer youth employment programs around the country. But what type of workplace financial education suits high-school and college-aged youth?
A working paper from the Federal Reserve Bank of San Francisco offers some thoughts. The conclusion: in teaching youth about good financial habits, online tools are a useful support mechanism but in-person instruction gets the best results–especially with youth from low-income households.
The San Francisco Fed and researchers from Eastern Washington University examined financial education programs designed by MyPath, a financial literacy non-profit. Ten organizations that run youth employment programs offered the financial education component. In all, 375 young people ages 16 to 21 took part. For many it was their first job.
One group received a one-hour workshop on fringe financial products, like payday lenders. Another group received the one-hour workshop plus hands-on help opening a bank account with direct deposit and help setting a savings goal. This group also got three interactive online lessons. A third group got all that–plus two hours of peer-led financial coaching.
Those in the latter two groups saved more money and demonstarted greater confidence about saving, budgeting, and sensible spending. The booster shot of peer-led counseling helped youths in that group save the most. These findings are not all that surprising in that those who saved the most were those who had the most support. Yet that in itself is a useful finding and argues for a bigger financial literacy effort across the country.
The study’s main take-aways:
Opening a bank account should be integrated into a young workers first job. Ideally, youth would be encouraged to sign up for bank accounts and direct deposit when they are filling out paperwork as part of the employee onboarding process.
Youth are best served by specially tailored financial products. To make sure that youth could enroll in savings accounts, MyPath worked with a local financial institution to offer accounts with a low minimum balance (just $5) and to accept high-school IDs as acceptable forms of identification.
Defaults are effective even for youngsters. A key part of the MyPath program leveraged a lesson from behavioral finance: if you make saving automatic, people will do more of it. When youth signed up, they specified how much of each paycheck they wanted to go into an account for longer-term savings.
Online tools help. The key, though, is for apps and other online programs to focus on a youth’s own money and spending patterns—not abstract concepts. MyPath’s “expense tracker” proved especially popular.
Higher touch programs work best. Youth who received the additional group counseling saw additional improvements. They were most likely to engage in an advanced behavior like comparison shopping.