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


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