If you asked people to suggest how to tackle food insecurity, financial literacy might not be something they would mention. However, the findings of research conducted in part by Daniel Millimet, an economics professor at Southern Methodist University, indicates that financial literacy is a key tool in the fight against food insecurity.
In 2014, Millimet and the study’s co-authors surveyed clients at the North Texas Food Bank about the challenges of finding a secure food supply. The result was a study, published in the American Journal of Agricultural Economics in 2018, that found the tools of financial literacy — knowing how to balance a budget and plan for the future, for example — had a significant impact on whether clients were considered food secure or food insecure, no matter their income level. He explained these findings and the importance of financial literacy in this interview with STREETZine, a street newspaper in Dallas, Texas.
Bill McKenzie: How do you define financial literacy?
Daniel Millimet: There are a standard set of five big questions that researchers use, and we used them, too. They are considered financial knowledge questions. For example, do people understand inflation and interest rates, and how those work?
We also borrowed from other surveys and asked whether households had a budget, planned ahead, and had access to credit cards and bank accounts. We asked more about actions than theoretical issues.
McKenzie: In your paper on food insecurity, you wrote that “Household economic resources are far from the whole story when it comes to food security.” What did you mean by that?
Millimet: At the most basic level — which households are food insecure versus which are not — does not line up perfectly with who is in poverty and who is not. If households’ economic resources were the full story, you would expect a nearly perfect correlation between food insecurity and poverty status. That is not what we see in the data. We see a lot of households living below the poverty line that somehow manage to be food secure and plenty of households well above the poverty line that report being food insecure.
McKenzie: What did you find in the relationship between financial literacy and food insecurity?
Millimet: The punch line of the paper is that an individual’s financial capabilities, including their knowledge of how finances work, how credit cards work and how interest rates work had a surprisingly large impact on their food security. The more they knew, the more they could most effectively use whatever household resources they had to minimize their food insecurity.
Poorer households that possessed this financial knowledge could remain food secure despite their resources. The same was true for richer households. You could be above the poverty line and yet be more food insecure if you lacked this financial knowledge. We found these were the people who tended to be more food insecure.
McKenzie: That’s interesting. So people could be at risk even if they are above the poverty line?
Millimet: Exactly. We compared our findings to other studies that looked at the effect of food stamps on food security. A previous study found that having access to food stamps over six months had a smaller effect on reducing food insecurity than what we found about raising a household’s financial literacy. So, there is a relatively large effect — equal to or perhaps even greater than — the effect of participating in the food stamp program.
McKenzie: Did these findings surprise you? And do they hold true as well today?
Millimet: It wasn’t surprising that we found an effect, but the extent of the impact was surprising.
The literature on financial literacy had not looked specifically at the effect on food insecurity. It had looked at the effect of financial literacy on other economic well-being measures and found a consistent effect. So, some researchers are pushing for greater financial literacy and education, even down into middle school and high school.
If anything, this finding is even more important today. Given what people can find on the internet, it’s much more important that people have financial skills to navigate life today. And that’s not just because of the internet. It’s also because of such things as identify theft and predatory scams. Having adequate knowledge of what’s real and what’s not is even more important as we move forward.
McKenzie: What needs to happen for financial literacy to become more common?
Millimet: Two things need to happen. Long-term change can come about through incorporating it into school curricula. Most states now have some financial literacy requirement as part of their curriculum. My kids in middle school in public school in Texas have had at least a little financial literacy. Maybe you could make it a requirement for high school students, like a course on life skills or financial skills.
As far as adults who have already finished high school, nonprofits and service providers can incorporate financial courses and skills into the services they already provide. Organizations like food banks that have clients coming in for food could make this part of their work. A couple of big nonprofits already have curricula they can use.
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McKenzie: What are some common mistakes with financial literacy? That is, are there people who think they are financially literate, but perhaps are not?
Millimet: Take payday loans. They could help smooth things out for people in a short-term situation. But you can get yourself into a lot of trouble if you don’t understand the interest rates and the costs of such a loan. Avoiding getting yourself into trouble because you don’t understand the consequences of a certain decision is important.
But the budgeting and planning aspect can help you be more forward-looking. It can help you get ready for a rainy day.
McKenzie: Is being able to avoid the downfalls of a worst-case scenario the greatest benefit of financial literacy?
Millimet: Yes, definitely. Outside of avoiding predatory loans, planning ahead can allow you to weather at least some of the storm.