Why Financial Literacy Fails (and What to Do About It)
Published on - December 7th, 2011 (by J.D. Roth) One of my resolutions since returning from Peru is that I’m going to be more responsive to requests from reporters. I’ve generally tried to weasel out of interviews in the past because they always made me uncomfortable. I’ve done enough of them now, though, that I’m able to answer questions without having a panic attack. Most interviews are pretty formulaic, really. And my message doesn’t change, so it’s easy to say things like “spend less than you earn”, “pay yourself first”, and “do what works for you”.
Sometimes, though, an interviewer will surprise me. That happened today. The discussion was pretty typical until the fellow said, “Americans are deep in debt and don’t save. We’re trapped in a consumerist culture. Financial literacy in the U.S. is awful, and always has been. How do you think we can fix that?”
Now, I’ve written a lot about financial literacy in the past. Often, Get Rich Slowly devotes the entire month of April to financial literacy topics. I feel passionate that people ought to be financially literate, that they ought to know the basics of saving and investing. But lately, I’ve come to the realization that financial literacy isn’t enough. In fact, you can be financially successful without being financially literate. And, what’s more, there are plenty of people who are financially literate yet find themselves struggling to stay afloat. I should know. I used to be one of them.
And so, in a move that surprised me, this morning I launched into an off-the-cuff rant against financial literacy.
Why Financial Literacy Fails
“Actually,” I told the interviewer, “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.”
I gave an example from my own life. “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.”
I wasn’t the only one. From what I can tell, the kids from my high school grew up to be no different than the rest of Americans. We learned the basics of financial literacy, but it had no perceivable impact on the way we saved and spent and earned. We still made stupid mistakes. We still spent more than we earned? Why? Because financial literacy isn’t the answer!
If you’ve been following Get Rich Slowly for any length of time, you can probably guess what I believe is a better solution. It’s not to feed people more facts and figures. It’s not to teach them how bonds work or to explain the sheer awesomeness of a Roth IRA. I believe what we really need in this country is some sort of behavioral education.
I’m just not sure how to do it.
Behavioral Finance
Personal finance is simple. Fundamentally, you only need to one thing: To build wealth, you must spend less than you earn. The end. That’s it. We can all go home now. Everything else simply builds on this. Why, then, is it so hard for everyone to get ahead?
For some people, it’s systemic. There’s no doubt that some people are trapped in a cycle of poverty, and they truly need outside help to overcome the obstacles they face. But for most of us, the issue is internal: The problem is us. In other words, I am the reason that I can’t get ahead. And you are the reason that you can’t get ahead. It’s not a lack of financial literacy that holds us back, but a chain of bad behavior.
One of the key tenets of this site is that money is more about mind than it is about math. That is, our financial success isn’t determined by how smart we are with numbers, but how well we’re able to control our emotions — our wants and desires.
There’s actually a branch of economics called behavioral finance devoted exclusively to this phenomenon, exploring the interplay between economic theory and psychological reality. And in August, I wrote about a new wave of folks who are exploring the gamification of personal finance; they’re trying to turn money management into a game. More and more, experts are seeing that our economic decisions aren’t based on logic, but on emotion and desire.
“For years, I struggled with money,” I told my interviewer today. “I knew the math, but I still couldn’t seem to defeat debt. It wasn’t until I started applying psychology to the situation that I was able to make changes. For instance, I used the debt snowball to pay down my debt in an illogical yet psychologically satisfying way. It worked. And I’ve learned that by having financial goals — such as travel — I’m much more inclined to save than if I have no goals at all.”
Behavioral Literacy?
To me, the answer to our country’s crazed consumerism has nothing to do with financial literacy. (Okay, maybe it has a little to do with financial literacy.) Instead, I see two fundamental problems that need to be addressed.
- First, we constantly soak in a bath of the mass media. Radio and television and the internet are all around us. As a result, we’re exposed to a barrage of programming in which we’re given subtle messages about what people do (or should) consume. More explicitly, advertising and marketing messages are all around. We cannot help but be influenced by the power of marketing. (I’ve talked to many people who think they’re immune to marketing. I just shake my head and think, “You, my friend, are the most influenced of all.”)
- Secondly, we don’t think about our spending. We spend on reflex. Or we spend to subconsciously keep up with our family, our friends, and our neighbors. We spend to make ourselves feel better when we’re down and blue. We spend to show off. We spend on things we think we want instead of the things we actually use and do. We spend because spending is a habit.
Instead of teaching Americans about credit cards and rates of return, we need to be teaching them about behavioral finance. We need to be showing them how to break free from the marketing messages that are all around. (My top tip? Kill your TV. Watch your shows some other way.) We need to be showing them how to set (and achieve) personal goals, especially financial goals.
Sometimes people wonder why we don’t spend more time on the nitty gritty of money around here. Why we don’t cover more topics like where to find the best credit cards or how to create a budget? It’s because deep inside, I believe these things are secondary. I believe behavior is more important. Building a better budget isn’t going to change your attitude toward saving and spending; but changing you attitude toward saving and spending could very well lead you to building a better budget.
The Bottom Line
Ultimately, if we want Americans to be smarter with their money, we need to encourage them to consume less media — to avoid advertising — and we need to teach them to master the emotional side of personal finance. We need to show them how to change their behavior. We need to appeal to their self-interest. We need to help them find intrinsic motivation to save. That is, each of us needs to dig deep inside to find what it is that’s important to us, what it is that brings us joy, and we need to prioritize that instead of all the other garbage. (Yes, this is yet again a thinly-veiled pitch for conscious spending. So sue me. I truly believe conscious spending is the key to getting rich slowly.)
I’m not suggesting that we abandon financial literacy completely. But I think a constant push for more financial education is a waste of time if it’s only going to focus on mechanics, to stick to facts and figures. To truly be successful, financial education has to address the behavioral side of money because that is absolutely the biggest piece of the puzzle.
I don’t have any solutions right now. All I have is this epiphany. I’m not sure yet what to do with the insight. I’m about to begin my next book project, and I’m sure to incorporate lots of behavioral concepts into the text. And, of course, I’ll continue to emphasize behavioral finance here at Get Rich Slowly. But what can be done to help Americans at large? How can we engineer societal change with regards to personal finance? I don’t know. But I’d like to think it’s possible.
This article is about Odds and Ends
SEARCH FOR RECENT ARTICLES
This is a fantastic posting! Not the least because the diet situation is quite the same!
It’s not that people need more information on losing weight.
The rules pretty much are: eat less than you burn; eat enough in volume of low-caloric food to not feel hungry; do what works for you (in terms of kinds of food, when-eating-what etc.).
And yet, it’s the behavior that’s so hard to change. So it’s really quite the same situation – and frankly, I not only need to lose weight, I also need to save more money, so tackling both these subjects is my current agenda
loading....
Do you guys remember sex education in school? Not really, but I remember those painful, unsightly images of sexually transmitted diseases on people.
Maybe financial education can be like that. Show the seemingly happy family with toys, stuff and their McMansion. Then show their bank accounts and the downward spiral of finances.
Eeeek. It’s all about prevention!
loading....
JD’s spot on! Literacy is not applicable knowledge – in Finance or any field. Good financial habits require discipline which can only be possible through behavioral change.
These are things people hear over and over and unless they put it into practice it does not make real sense.
1. Live below your means – budget and track your spending
2. Automate your savings – I have come to realize over time that this one thing done right has a much more lasting impact than time spent investing in volatile securities
3. Advantages on not owning an Idiot box (television) -
. Wife and I get to spend quality time without distractions
. No money spent on cable, Netflix (we do the occasional DVD from the public library or Redbox)
. Not influenced by advertising or media coverage on Black Friday or Cyber Monday or Sale Everyday
. Find creative ways to use extra time – investing in skills through education
4. Buying for value rather than price, spending money on experiences rather than stuff
loading....
Regarding the emotional side of personal finance, I think this has ALWAYS been a problem throughout human history; the difference is that there were more external constraints prior to the 20th century. It’s true that 19th century aristocrats could gamble their fortunes away, or poor people owe money on their accounts at the local country store, but credit cards seriously upped the ante. In most cases, if you didn’t have the money, you couldn’t do more than drool at the window display; now you charge it. In the past, you didn’t have to be disciplined; circumstances did it for you. If you did have money, you could be (and usually were) flagrant about your spending. At the same time, clothes used to cost so much that women made their own, stores carried fewer goods than today, t.v.’s were pricey and cell phones, iPads, etc. didn’t exist, so there was simply less to buy.
The rise of the Consumerist Society in the 20th century and the removal of those limits has IMHO led to the current explosion of debt and overconsumption. IMHO this is encouraged by Wall Street and Big Business because they discovered that in so doing, they could remove money from people’s wallets and add it to their own.
I have often thought that if “the 99%” REALLY want to stick it to “the 1%”, the way to go is to dump all big-box-bank credit cards, stop shopping at big-box stores, stop buying trendy goods, and basically refuse to buy into the Consumerism mindset. But as J.D. and others note, behaviors and mindsets are hard to change. Plus, our entire society is structured around large businesses pushing goods; it would be hard for 300 million Americans to suddenly refuse to buy anything from a large business. But it would be very interesting to see.
loading....
I work in an organization that is part of the Colorado Department of Higher Education. My title is “Financial Education Program Associate.” The “Financial Education Program” that I help manage is a set of free, online financial literacy courses called Education Cents (www.educationcents.org).
The first course in our repetoire is “Psychology of Money,” and most of our courses have two parts, a “Head” section, which deals with the nitty gritty, and a “Heart” section, which deals with the psychological, and behavioral, side of personal finance. (We’re working on putting together a Heart section of the rest of the courses.)
I love my job, and one of the reasons I do is because I agree with you, J.D. I think we have to know more about why we spend and how we think about money in order to affect real change. I am thrilled to be part of an organization that’s trying to do that, in some small way.
Thanks for sharing your epiphany.
loading....
What a cool job, Megan!
loading....
YES.
I made the mistake of geeking out about PF to someone recently. Said person had their education paid for by parents and I would wager has never struggled for money nor had a partner with opposing financial habits. Explaining to him the “personaL” or behavioural side of finance? Right over the head. Finances should be logical, but they are also emotional.
loading....
This article is AMAZING. I’m so heartened when I see articles and books that start to address the psychological underpinnings of our culture.
We know what we’re supposed to be– an all-A student, surrounded by nice things, a perfect performance, a smiling face– but we don’t know how to get “there” in a way that’s healthy.
Some commenters suggested that it’s the school of hard knocks that teaches us what’s important and what’s not, and pushes us to do the right thing… “or else”. There’s a book called “The Price of Privilege” by Madeline Levine that might show why it takes hardship to learn, but points out a better way for this to happen.
She discusses how to teach children autonomy and accountability by letting them have small but real failures as children. Parenting in a culture of affluence means that it’s easy and culturally acceptable to bribe for a result or pay to smooth over the pain of your child’s mistakes. It isn’t so easy to let people you care about fail and learn, especially your own children.
By first 1) honoring that failure exists, 2) removing it’s social stigma (i.e. “If I fail, I am [insert negative belief here]“) and 3) supporting the person in seeking THEIR OWN better solution, we can teach children and one other what it feels like to fall and get back up again. Just as others have voiced, I believe this character-building work needs to be taught by educators in addition to their primary subject matter, and it needs to be infused into family relationships and the larger culture as well. Maybe once this happens we will see a change in our bad habits such as poor money management, obesity, drug abuse, depression, etc.
“The Price of Privilege” by Madeline Levine
… and just for fun,
http://siobhancurious.wordpress.com/2011/09/26/fail-better/
http://www.nytimes.com/2011/09/18/magazine/what-if-the-secret-to-success-is-failure.html
loading....
While reading your blog today I was reminded of an expierment my sister in law and I did when our children were in high school. We had very little money during those days and we wanted to each have beautiful Christmas tree that year.
We purposely left all money and credit cards at home and went to the mall to look (only). That was during the time “The Origional Christmas Stores” came to our area. Of course we had to go there too. There must have been at least 50 or more trees that had been decorated – each in a beautiful manner.
We took hundreds of mental notes and left with out heads spinning with ideas for our own tree and home decorations. The most important thing is that we didn’t buy anything when we made second and even third trips there.
We saved the money we might have spent on a whim and shopped our previous years bounty of decorations and used them in a different way. We both had beautiful trees that year and for several years afterward.
The thing that we learned from this is that we can shop and not spend. That’s hard but we did it. It got easier as time went by. My takaway from that expierment was that I can use what I have in a different way, save money and still have the shopping expience.
The money I saved the first year went a long way in paying for my son’s wedding that year. The money I saved over the next year helped pay for my daughter’s wedding. After that, saving came a lot easier for me.
The expierment taught me to control not only my money but my shopping attitude. I am now able to have cash, check books and credit / debit cards with me and not spend when I see something I like or think I need. It’s more of a personal learning curve that should be taught by parents from an early age rather than a class in high school just for a grade.
loading....
Great comment, Texaslady! I learned a long time ago how to shop without spending a dime. I window shop all the time for clothing, household items, decor, etc. I then go home either fix up my home with what I have, make a garnet or put an outfit together with what I have in my closet. Being able to sew doesn’t hurt either.
loading....
Basically you said it, you have to practice saving and practice self-control.
I think once you have the basics of everyday life such as “enough” furniture, appliances, clothes, electronics and toys, it’s easy to control your spending and window shop because you already have enough things.
At least that’s how it is for me. The allure of shopping isn’t so strong. I don’t own too much, but I own enough. I think it’s great how you and your family got creative about Xmas. There’s no need to go into debt for one day.
I like Xmas trees as well but I’ve decided to buy an artificial decorated 4 foot Xmas tree. Yep I’m lazy, lol.
loading....
We see the effects of consumerism most with our kids. In addition to all the media hype, they’re also trying to find themselves and deal with peer pressure. Yeah, people laugh at my Treo 650 all the time, but it’s much harder for the kids to face ridicule from their peers. But that’s what builds character, right?
Like good eating habits, we hope our lessons on financial behavior keep them from having to learn the hard lessons we did.
loading....
perhaps it’s not that financial education doesn’t work, but that there’s not enough financial education.
imagine you never took a reading class for the first 17 years of your life, and then took a hooked on phonics your senior year of high school. despite the reading class, you found yourself still having a terrible aversion to trying to read. would you say that literacy classes don’t work?
perhaps if they started teaching financial literacy early, and taught it every year, it would be easier to think logically when making financial decisions.
warren buffet has stated one of the best indicators as to how successful someone will be in business is how young the person was when he started a business.
just some food for thought.
loading....
I don’t want to sound like a paranoid conspiracy theorist – but I can’t imagine public high schools getting on the “live below your means” bandwagon. Urging all those future spenders to save instead of spend? Teaching them to ignore the siren song of easy credit? Suggesting they TURN OFF THEIR TV’s? Isn’t that kind of behavior practically un-American at this point? I’m not saying public schools are in league with credit card companies and advertising agencies – but then again, many public schools in this country sell soda and McDonalds in their cafeterias, so it’s not too hard to imagine.
As a mom of 4, however, I absolutely love the idea of teaching “behavioral finance” in school. Maybe then my kids wouldn’t be as embarrassed by their “radical Mom” who likes us to – gasp – live within our means!
loading....
Brilliant article J.D!
It’s good to see the acknowledgement that financial literacy needs to be about more than just maths.
Here in Australia we actually have a TV show dedicated to deconstructing advertising that’s been very successful. It’s called the Gruen Transfer, there’s a few full episodes up on Youtube. Here’s one if you want a good example: http://www.youtube.com/watch?v=Pijmw2xNt6M
The show is a good balancing act of humour and education. You may not get some of the jokes but it’s still a really good example of how to push behavourial finance into mainstream view.
I even did my first finance blog post on how finance can learn how advertising’s success: http://www.creditcardcompare.com.au/blog/what-finance-can-learn-from-advertising.php
loading....
Good financial habits need to be encourage, practiced and rewarded. Does financial literacy change people’s habits? Only if the person wants to change. Practicing the skills and finding a reason(s) to use the skills is equally important.
loading....
This is a great article and it starts to bring up an issue that I have been thinking about for awhile. The link between mental health and spending. If we could impliment behavioral ed … yes that would be nice. But people are going to get depressed during lows in their lives and hurt themselves financially by not caring. Or a personal example… I love shopping because of the stimulation of it.. I am very visual, and have a bit of ADHD. I love all the colors, stuff to ponder, etc.. I just try to go to the Goodwill as well. But I know this about myself, and even though I have had to rescue myself from debt a couple times, I learned (ADHD has an impulsive component as well). It has to be lived it can’t be taught. Like other commenters I too hope my children dont have to learn the hard way like I did. But after all “know thyself” is carved over the oracle at delphi, and how many years does it take to get to the point that you know yourself enough to have self control??? For some quicker then others I am sure. However, isn’t it a that you don’t know how bad your habits were until you are looking back at them…arrggh!!
loading....
Im a 23 yr old black male…most people my age in my community have no.clue what an IRA or an Index Fund is…and there are very few attempts at changing this.
Financial Literacy is still needed
loading....
Hi JD,
One thing that I think you overlook in an otherwise compelling post is that financial literacy classes provide kids an opportunity to think objectively about money while they are not thinking of it in terms of being their own money. Having been raised by parents whose financial worries I learned about through the wall but not through any more direct contact with (or discussions of) our finances or financial situation, I can tell you that you direct experience leads you to feel that money leads and controls you rather than the other way around. Even if a person doesn’t remember much of the details from a financial literacy class, the objectives of a good financial literacy class should be to teach students how to think about money in objective terms. Teaching them how to feel control over money rather than the converse may be the most important skill they can take forward with them.
I enjoy your blog, and appreciate your willingness to take controversial points of view that make me consider my own perspectives. Well done!
Anne
loading....
I liked this article. I haven’t taken the time to read all the comments, but I think J.D. has a good point. The amount of education needed to master the math of finances is small. But mastering the mental part is hard. There are so many people telling you to be irresponsible with your money and how great it will be that a small math lesson really doesn’t stand up to that.
loading....
It’s really not an either/or, it’s both. As an abundance coach and as someone who conducts financial assessments, I cover both financial literacy as well as financial behavior and mindset. Smart people who I respect have no idea what compound interest or the Rule of 72 is (at least not before I meet with them), let alone the right things to do with their money other than some vague “save more!” idea.
So I strongly believe it’s both: educate and implement, both on a concrete level as well as an emotional/behavioral level.
loading....
Living in Central America for the past 2 years has been a wonderful eye opening experience for us. We didn’t have American television, no mass media marketing campaigns, we were immune to the propaganda nightly news and certainly didn’t have the choice of things to buy that you do in the states.
Not only did we save a TON of money because the availability of stuff just wasn’t there, but we were able to reprogram our brains and notice that we actually need very little, but still want a few comforts..just not to the extent of the average American. Lots of people confuse wants and needs.
loading....
I think you’ve hit the nail on the head on this one. It explains why some people who make a 6 figure salary can’t make ends meet and other people at the poverty line are not in debt. Live within your means, whatever that amount may be. I think a lot of people start having problems with money when they experience life style inflation. All of a sudden things they were fine living without when they were younger are now a requirement. I can afford an iPhone, tablet, fill in the blank, but if I don’t really have a need for it, or if it is something I can do myself, why buy it? Save your money for the things that matter to you.
loading....
I think our choice of politicians in the US shows how many people just don’t get the simple fact that if you spend more than you earn (or spend more than incoming tax revenue) you will eventually pay the piper.
The one benefit of the bad economy is that the unexpected hardship has now taught a few people this lesson.
loading....
I think the solution is a more pragmatic, hands-on approach to financial literacy. When I was in elementary school, my class did a project that simulated running a small business. We had a certain product or project that we were responsible for, and we had to calculate our overhead (how much it would cost to built the product, rent store space, hire employees, and so on), how much we would sell it for, etc. It also taught us how to write a check, balance a checkbook, build a budget, estimate taxes, and about a zillion other skills we had NO IDEA we’d ever need, but we did it because it was fun. (Plus we got to build models of our products out of toothpicks and glue, which is really all your average fifth-grader wants anyway, haha.)
Seriously, I’m 27 years old with a master’s degree and that is one of the best educational experiences I ever had, and I remember it in crazy amounts of detail. I think it absolutely was a major factor in becoming a financially responsible adult.
loading....
JD is back!
loading....
J.D.
Extraordinary post… Coincidentally, I’m reading a lot about behavioral economics and I totally agree with you…
Congrats
From Caracas, Venezuela
loading....
This is a great article. It has been researched that financial capability is 20% technical and 80% behavioral.
My good friend has spent 10 years working on peoples deep values, preferences and biases with money. And due to the demand has built a psychometric quiz based on the work of Carl Jung – with a monetary focus.
It is important that we engage with something that is deep yet light at the same time and is memorable – this is why he uses the animals, which are intuitive.
I think people want to learn about themselves, their behaviors and how they can advance their awareness.
Feel free to have a look at http://www.moneypersonality.com.au, there is a sample report which can be downloaded. It looks at things like wealth creation preferences, goal setting preferences, strengths, opportunities for growth, stressors, communication.
Keep up the good work. Rob
loading....
This is one of the best and most inspired things I’ve read here at GRS in a while. Which isn’t to say that other posts haven’t been good, but you really hit it out of the park with this one.
And I agree with your point about being people who claim not to be affected by marketing. I worked in marketing, and that above average exposure to advertising really gets to you. The slogans get stuck in your head, you’re exposed to a lifestyle that’s above and beyond your own, and you think that maybe you should have a piece of it. Lot’s of money goes into studying the psychology here, so people that say they’re not affected are fooling themselves. Did I ever buy anything from any of the millions of ads I was probably exposed to at work? Not that I recall. But being able to resist doesn’t mean that you’re not affected. I definitely was.
loading....
There is a big disconnect between knowing what you should do, and actually changing your behavior. This is a big issue in health promotion. People know they should lose weight, but our environment makes it hard to lose weight unless you really work at it. People tend to do what is easiest to do in the moment. You have to give people a reason to change their behavior, and they have to DECIDE to change their behavior, and they have to stick to it, which is hard.
loading....
I love this topic, and have given it a lot of thought. I’ve been meaning to blog about money and emotions for a long time on my blog about life and therapy, and this post inspired me to finally do so, just now!
I’m a psychotherapist, and I often help people look at their emotional relationship with money. I feel like money is one of those things that has a lot of shadow and unconsciousness around it beyond retail therapy. Just like you say that most people don’t realize that advertising is affecting them, they also don’t realize that their emotions are driving their bank accounts. I think a little bit of emotional literacy connected to financial literacy is a great idea.
loading....
I work with a lot of lower income students and preparing them for college. I would agree that most of them don’t really understand the financial decisions that they are making until, they have to pay the bill or student loans. Recently, I have found a free tool that I use, which breaks down what they may have to pay back at different colleges of their choice and I have witnessed them making more realistic decisions. Interest rates and savings are not going to make much sense to a student who’s parents may not even have a bank account. However, colleges that have a great basketball team, give them a cool sweatshirt and promise them a 5,000 dollar scholarship (tuition 20,000) make sense. So exposure at the right moments can make a difference.
loading....
This is an interesting post, particularly for this time of year. I am normally very frugal, but this is probably the last year that my daughter will “believe” in Santa. Yesterday, I just ordered an American Girl doll that came to close to $200 for her. I couldn’t believe that I did this. It is the first year I have spent big at Christmas. Although, we can afford it, I do think that this sets a poor example for my daughter. I am thinking that many kids receive a lot of mixed messages from their parents about being frugal vs getting what you want.
loading....
You are correct, J.D., people have to discover what is really important to them, what brings joy into their lives, then it is easy to not only know what to do but to do it.
I know that was the case with me. Once I discovered what was really important, and it had nothing to do with consumption of stuff, my behavior changed because I cared. I quit being irresponsible with money because that behavior negatively affected that which was most important to me.
Unfortunately, too many people do not know where to look for true happiness in their lives. It’s right under their noses, but they continue to believe they can find it through consumption. If only they could consume enough of the right stuff, then they would be happy. For years, I was one of them. I had to lose everything before I understood, then it was easy. Still is.
loading....
I think you do an outstanding job of providing readers with tools, and knowledge, and modeling the attitude and mind set needed. I’m in education and deal with similar dilemmas. It’s not that people don’t know what to do, it’s that you have to provide them the stuff and context so that they’ll wanna do it. Even then, some or many won’t, because what brings someone to wanna is an individual process. Places to gather more insight, if you haven’t considered them already are in the areas of public health and performance support. You actually do provide performance support already.
loading....