1 The Problem With Financial Literacy Is That It Doesn't Work | The Billfold

The Problem With Financial Literacy Is That It Doesn’t Work

Second to health, money is probably the second most popular thing Americans think about this time of year while everyone is making resolutions. This is the year I’m going to be better with my money, we say to ourselves. It’s a wonderful goal: We all want to be the kind of people who are good with money. And I used to believe that financial literacy was one of the keys to that—that if we had only taken some kind of class about money and budgeting while we were young and impressionable in school, we would have been in a better position to avoid so many of the financial mistakes we make today. I’ve since changed my mind about the effectiveness of financial literacy classes.

For one thing, financial literacy classes—at least the ones that exist today—haven’t really done much. In a recent story in Pacific Standard, Helaine Olen went over some of the data that proves this:

Financial literary promotion may sound perfectly sensible—who wouldn’t want to teach children and adults the secrets of managing money?—but in the face of recent research it looks increasingly like a faith-based initiative. Consider one recent paper, scheduled for publication in a forthcoming issue of the journal Management Science. In a meta-analysis, Lynch and the marketing experts Daniel Fernandes and Richard Netemeyer compiled the results of more than 200 studies of financial literacy programs, adjusting for subjects’ family background and personality traits that had been ignored in the previous research. The result? Financial education has a “negligible” impact on subsequent financial decisions and behavior. Within 20 months, almost everyone who has taken a financial literacy class has forgotten what they learned.

These findings echo the results of another recent working paper, by the economists Shawn Cole at the Harvard Business School, Anna Paulson at the Federal Reserve Bank of Chicago, and Gauri Kartini Shastry at Wellesley College, on the efficacy of state laws requiring financial literacy to be taught in schools. Their conclusion: “State mandates requiring high school students to take personal finance courses have no effect on savings or investment behavior.”

Another study, from 2009, tested the financial literacy of recent high school graduates who had taken a highly regarded personal finance class. They did no better than graduates who had not taken the class. One of the study’s authors, the economist Lewis Mandell, was a founder of the modern financial literacy movement, but the evidence has prompted him to turn his back on the mainstream financial literacy paradigm. “Financial education doesn’t work when it’s given in advance of when the consumer needs it,” he says flatly.

Why does financial literacy in high school—which would presumably be helpful for teenagers graduating school and entering the workforce, or heading off to college with a critical need of understanding how their student loans will eventually affect them—not work? Well, for one thing, remember when you were in high school? Did you retain everything you learned? Can you say (without Googling!) what the War of 1812 was, and why it was so significant? If high school students can get bored in a history class, they certainly can get bored in a financial literacy class.

Another thing—and possibly the most crucial—is passing a financial literacy class with flying colors does not make you a person who is good with money.

J.D. Roth, the founder of the popular finance site Get Rich Slowly, and a regular contributor to TIME and Entrepreneur, wrote a piece a few years ago about the time he told a reporter:

“I don’t think this country needs more financial literacy education. Time and again, financial literacy efforts have failed. They don’t make any noticeable difference in the way we spend and save. When I was in high school, all seniors were required to take a financial literacy class. It covered topics like compound interest, the Federal Reserve, how to write a check, and the dangers of credit cards. I took that class. I aced every test. And five years later, I had the beginnings of a debt habit.”

That last word there, habit, is an important one, because one major reason why so many of us are so bad with money is not because we are financially illiterate, but because of the way we behave. So much about getting better with our money is about changing our behavior.

Logan is an example of this. One of the reasons Logan became a part of this site is that her story is relatable: She, admittedly, isn’t great with money, and at one point racked up $20,000 in credit card debt, but decided things needed to change and that she needed to get a better handle on her money. So many people are in her position and want to be better with their money.

Her journey so far, as documented on this site, wasn’t to become more literate about money. She came into this knowing how credit cards worked, why saving for retirement early is important, and what compound interest is. In order to get a better handle on her finances, she had to come to understand the role depression played in her financial life and that her spending was often a way to make herself feel better. So: She cut up her credit cards, found a therapist she liked, and is gradually paying down her debt.

She also came to the understanding that she wasn’t earning enough money to live the life she wanted to live, so she got a second job as a hostess, which allowed her to continue paying down her debt, while also giving her the option to go out to dinner every now and then (it’s all about balance).

So part of our problem with money is the way we behave, and another part of our problem with money is that we’re not earning enough of it while the costs of things like housing, education, and health care are increasing significantly. As Olen writes in her piece:

The United States is an increasingly class-stratified country, where the engines of mobility appear to have stalled. Minimum wage jobs lead to other minimum wage jobs. Salaries are stagnant. College tuition has soared at rates well beyond that of inflation, forcing students to turn to loans to get by, which in turn leaves them servicing massive amounts of debt in their 20s, a time when financial literacy classes—citing the power of compound interest—say they should save. The leading cause of bankruptcy is not overspending, nor lack of adequate financial planning, but the financial free fall caused by a health crisis.

Financial literacy isn’t going to help fix stagnating wages or get the federal minimum wage, which has remained unchanged for nearly five years now, to keep up with inflation. And this is why the attempt by McDonald’s to help their minimum wage-earning workers create a budget last summer failed so miserably and was so laughably crazy.

None of this is to say that financial literacy is a bad thing—there are certainly people out there who don’t know the basics of saving and investing, and they should. But they don’t need a formal class to pick up these basics.

Here is the one big open secret to getting a hold on your finances: Live within your means.

Want some more tips? Tess Vigeland, who spent 11 years working at Marketplace says this is all you need to know:

• Don’t spend more than you earn.
• Contribute to your 401(k) at LEAST to the match.
• Don’t carry a balance on your credit card.
• Save for retirement before you save for the kids’ college.
• Don’t listen to the clowns on CNBC.
• And mamas, don’t let your babies grow up to be cowboys… unless they can find a good health plan.

She’s especially right about those clowns.


Photo: audiolucistore


23 Comments / Post A Comment

tuntastic (#2,769)

Really, Logan is your example of why financial literacy classes “don’t work”? Think again.

Mike Dang (#2)

@tuntastic No, there’s plenty of data that shows that financial literacy classes don’t work (see: the Olen excerpt, or the J.D. Roth example). Logan is the example of why it’s not about financial literacy, it’s about changing your behavior.

j a y (#3,935)

I’ll agree. The most critical parts aren’t complicated, it’s just habit: no balances on CCs, save some money, earn some money. Everything else is just tweaking.

How do these habits become ingrained?

coastalelite (#2,528)

This is so true and so well said! My high school required everyone to take a financial literacy workshop, and I remember very little of it besides thinking “Why do I need to know this now?” when we discussed CDs and stocks and savings bonds. Not many people are thinking about how to manage their investments while they’re still in high school.
Also, maybe because I went to a private high school that used college placement results as a major selling point, there was never any talk about student loans. If I had gone to a state school, I wouldn’t have so much debt right now, but that wouldn’t have looked as good in the “college placement” section of their marketing materials.

CubeRootOfPi (#1,098)

The problem lies in the expectation that the classes are going to be a cure-all for people’s financial problems. I think the classes are a good thing, though, because there are a lot of people out there who don’t have a clue how a credit card works, etc.; knowledge is always a good thing. Also, should we not teach history, calculus and other subjects because people will likely forget what they learned in the future? That being said, I agree with Olen et al.’s analysis.

CubeRootOfPi (#1,098)

@CubeRootOfPi To clarify: I agree with Olen’s analysis that higher housing costs and that of other essential items, as well as stagnating salaries, are the root of many people’s financial difficulties. With that, part of the problem with the expectations around the financial literacy classes is that it shifts the blame for people’s financial problems back to the people themselves, not the policies. Which is not to say that people shouldn’t take responsibility for their finances, but it ignores the impact of the increased costs, stagnant salaries and the policies that caused them.

sony_b (#225)

@CubeRootOfPi Yeah, I agree. It’s also true that the class of people with the most means have a vested interest (literally) in the failure of the lower classes and the massive amounts of debt we are in as a country. The money has to go somewhere, and better to them than the poor people who deserve what they’re stuck with.

sea ermine (#122)

@CubeRootOfPi Yeah I think these classes are good if you are clear about your goals. If you want to put your retirement savings somewhere but don’t know what to do, a class about roth IRAs and 401ks and whatnot is great (I know the billfold articles on roth IRAs helped me!). If you don’t save for retirement, a class about mutual funds isn’t going to convince you to.

Eric18 (#4,486)

I definitely think financial literacy classes should be offered in HS because some people go through their adult lives never learning this stuff. It’s true though that it shouldn’t be seen as a cure-all for the financial illiteracy of alot of people.

Ultimately, it’s up to the individual to seek out the information and live within his/her means.

now_boarding (#2,753)

I also hate the term financial literacy because it implies that either someone is “literate” in their finances or “illiterate” which is not at all accurate. None of us are financially illiterate, we all are the drivers of our financial lives and have money knowledge, habits, and attitudes. I also strongly dislike how judgey financial literacy language tends to be and how tonedeaf it can be toward the lived experience and emotional worlds of people.

I think a big part of the issue is the lack of addressing how emotional money is and how our financial behavior and feelings about money have huge impacts. I think that’s why Logan and her story are so compelling and genuine and this site in general because of the emphasis on the feelings, family ish, and emotional part of money and money management.

viewfinder (#5,201)

For me, it was behavior more than knowledge.

I did not begin to save until my mid-30’s. It wasn’t for lack of information. My undergrad major was economics and I had taken a personal finance class with a brilliant, funny, and dynamic professor and to this day remember some of his class presentations. I did not capitalize on this knowledge for a long, long time.

It took me almost 15 years after graduating before I began to save in any meaningful way. What changed was my behavior rather than my knowledge base. It was a sort of a gradual awakening and I stopped rationalizing my financial behavior and stopped counting on magical solutions regarding finances.

It’s the classic two marshmallow problem. I’m lucky that I somehow went from a one marshmallow young man to a two marshmallow middle aged one.

Trilby (#191)

There is a big difference between saying financial literacy doesn’t work and that it’s maybe taught badly. And of course, there will always be people who can’t be taught it at all. Let’s call them financial dyslexics.

My 21-YO son is very interested in learning about personal finances and I had already decided, and told him, that this year I’m going to sit him next to me and go over my final paystub and my income tax return with him. Maybe, like sex education, personal finance is something best taught in the home (kinda joking).

EDaily (#4,396)

@Trilby It’s not that people who drink and drive were taught Driver’s Ed poorly. It’s that they made a poor decision despite being told time and again that drinking and driving is bad. People also make poor decisions when it comes to the money, despite already knowing what they should be doing, which is why the behavior part is so important, and much of that cannot be taught because it’s so personal.

Caitlin with a C (#3,578)

@Trilby I think it’s best taught in as many places as possible! Good on you for doing that. We’ve seen some great examples on here of people who have always been great with their finances who learned from parents who showed them the value of that. Definitely a great thing to learn at home. My parents didn’t really teach me all that much about my finances through example (because they didn’t talk about their money much), but from when I was 5, my mom liked to repeat a few things to me: “ALWAYS balance your checkbook”, “as soon as you can start saving, save. The more money you save when you are younger, the more money you have when you are older.” “Whenever you get a raise, put as much as you can into savings and debt.” This was all starting around when I was 5, so it took a while for the concepts of checkbooks and raises to sink in, but… they stuck with me.

wrybrarian (#3,654)

There’s an analogy here to nutrition education. You can teach the mechanics of calories and carbohydrates, and emotional eating could still trump rational decision making.

lemonadefish (#3,296)

@wrybrarian Yes! I certainly know what a healthy balanced lunch consists of, but that didn’t stop me from eating half a box of chocolate-covered digestive biscuits for lunch yesterday.

But, you still have to have the knowledge of how things work in order to make good decisions, even if there are emotional or other things hampering your ability to do so some of the time…

EA_Mann (#5,000)

I agree that financial education as it’s taught now doesn’t work, but I don’t think that’s a reason to give up. You’re right that $$ behavior is a habit, and one class can’t change that. But what about starting earlier and integrating money issues into math classes starting in grade school and sustaining it through high school. There are ways to bring money knowledge into algebra, calculus, etc and it has the knock on effect of giving these subjects real world relevance. Of course not everyone is going to absorb/use all the information, but that’s true of everything about school.

I’d give this a parallel with smoking education. We pound a few simple points into people’s heads throughout their lives. By age 18, are people smoking? Of course they are. But there isn’t one person that doesn’t understand that smoking is bad for them. The same isn’t true about financial issues: there are lots of people that legitimately don’t know what compound interest is, or how credit cards work. I’m more okay with people making mistakes if I think that they all at least know how the game is being played.

Mike Dang (#2)

@EA_Mann Sure, but if we want financial education to be effective, we have to look at why it has been ineffective, and why the school programs that already exist aren’t doing anything. Sex education and driver’s ed works because the kids are already having sex or thinking about having sex, or are about to apply for their driver’s license, so they can take what they learn and apply it immediately. Trying to get kids to think about saving for retirement won’t work as well because they’re not actually doing that until a few more years down the line when they’re actually earning money and having to think about what to do with a 401(k). So the researchers who have been studying why financial education in schools isn’t working are moving on to thinking about what might be more effective, and they’re now looking at “point of sale” education, meaning educating people how to save for retirement right when they’re getting their first jobs and can immediately apply the information they have to their own lives. And there have been some anecdotal evidence that this may be a much better way of doing things. This is also why having parents be part of their kids’ financial education might be more effective than what they’d get out of a class in school—they’re directly applying what they’re learning at home via allowances, birthday money, etc. and have that direct personal guidance. As I mentioned, I used to believe that financial education in school was the answer, but it has not proven to be effective, so rather than continuing to push for something that hasn’t been working, or trying to push something that only sounds good in theory, we should be thinking about what we can be doing outside of school.

Regarding the War of 1812, if you can’t make a bunch of high schoolers forever remember the phrase “impressment of seamen” you’re doing teaching wrong.

SterlingCooper05 (#2,529)

Great analogies to other “life skills” type programs. Sex ed is another example. Kids are taught about the dangers of STD’s but still engage in dangerous behaviors. Financial education is similar and still important, even if people ignore it and fail to retain the basics.

Morbo (#1,236)

Do you get money every time you shill for Helaine Olen?

The problem with these studies is that financial literacy classes at the high school level, are available disproportionately in rich and middle class districts. These kids are more likely to have been taught these lessons already by parents.

Now, when you start teaching this in lower middle class districts, and lower strata, you might be making more of a difference.

Mike Dang (#2)

@Morbo Actually, those studies did look at programs specifically targeted at low-income students and have found them to be ineffective. But if you can point to any kind of data to show what is actually making a difference I’d be happy to read it!

@Morbo nnnnnope. I used to work in this field, with low-income students. There is virtually no evidence that these classes make a difference. No positive longitudinal effect has been captured at all.

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