Financial Literacy — A Skeptic’s Perspective

  It’s an odd thing to admit in Financial Literacy Month — but I’ve been a financial literacy skeptic. 

Not always, of course. Once upon a time I was one of those industry voices decrying the burden placed on employment-based retirement plans. Employers (and advisors) who — in the course of a 25-minute workshop — had to convey the range of concepts required to make knowledgeable investment decisions to an audience of adults who had never been exposed to any of that prior to that session. Considering all the (relatively) useless things that ARE mandated in school curriculums, some basic finance concepts seemed like a pretty reasonable “ask.”

State Steps

And though it’s been a long time coming, a number of states[i] now do require students to take a financial literacy course for high school graduation — and that number continues to climb. That said, what constitutes complying with that requirement — varies. And, if it’s like a lot of the classes I was required to take in high school, that knowledge may not last — at least according to research.[ii]

While the findings in those studies have some limitations — not the least of which is their determination of the outcomes measured, and the aggregation of a wide variety of scholarly work (and assumptions) — as someone who has long been one of those voices advocating for greater financial literacy — this has been a bit of an eye-opener. With this broadening exposure to personal finance in school, why aren’t these programs — why isn’t financial literacy — taking root in a meaningful way?

As I mentioned earlier, there are a number of classes I took in high school (and college) that I quickly dismissed as soon as the final exam was concluded — because I didn’t much like the subject (or the teacher), but often because I just didn’t get the point. Might that be the case with these personal finance offerings?

Literacy Lessons

But what IS financial literacy? At its core, financial literacy is supposed to be about understanding money — how to manage it, how to grow it, and how not to let it slip through your fingers by the 15th of the month. But in practice,[iii] it often gets reduced to a pop quiz on acronyms (IRA vs. 401(k), anyone?) and the occasional reminder to “live within your means,” as if that’s some kind of revelation.

True financial literacy isn’t about memorizing definitions or passing a multiple-choice test. It’s about giving people the tools and confidence to make informed financial decisions at every stage of life. It’s not just knowing what a mutual fund is — it’s understanding when and why you might want to invest in one. It’s not just grasping compound interest — it’s appreciating that there is a huge impact of starting to save in your 20s versus your 40s.  Math, while surely helpful, shouldn’t be required, certainly not at the outset (though I may get some pushback on that).

‘Know’ Hows

Over the years employers — aided by plan design — have done a lot to help those who lack the knowledge (or courage) to make savings decisions on their own. And, courtesy of developments like auto-enrollment, target-date funds, and more recently managed accounts, we’ve managed to help workers make better decisions, without their action, but often (always?) without their knowledge or understanding. 

But true financial literacy — or what these days gets labeled financial “wellness” — connects knowledge to action. Because here’s the uncomfortable truth: most people already know the basics. They know they shouldn’t be spending more than they earn. They know they should be saving for retirement. At some level they know high-interest debt is a trap, even if they can’t do the math. 

Look, we’ve spent decades pushing retirement savings, but if someone’s living paycheck to paycheck, telling them to max out their 401(k) may feel like a cruel joke. Financial literacy has to start with the foundation: how to manage daily cash flow, how to build an emergency cushion, how to understand a pay stub or a credit report. The “long-term” can wait until the basics are covered — and the basics DO need to be covered, and with any luck before they find themselves sitting in a 401(k)-enrollment meeting (which, of course, is rarer by the day).

At the end of the day, it’s not about what people know — it’s about what they do with what they know. And financial literacy, when it’s done right, turns hesitation into action. 

And “skeptics” into believers.

  • Nevin E. Adams, JD

 

[i]  See Which States Require Financial Literacy for High School Stud - Ramsey:  Alabama, California, Connecticut, Florida, Georgia, Indiana, Iowa, Kansas, Kentucky, Louisiana,  Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Utah, Virginia, West Virginia, Wisconsin

[ii] Indeed, the research on the subject of financial literacy in schools — at least pre-college — is not encouraging. According to a 2016 paper titled “High School Curriculum and Financial Outcomes: The Impact of Mandated Personal Finance and Mathematics Courses” “there is little evidence that education intended to improve financial decision-making is successful.” These authors pose the question “Can good financial behavior be taught in high school?,” only to conclude that, “It can, though not via traditional personal finance courses, which we find have no effect on financial outcomes.” Similarly, a 2014 paper by three professors reviewed 168 different papers covering some 200 studies on the topic of financial literacy and financial education — and found that what they termed “interventions to improve financial literacy” accounted for “only about 0.1 percent of the variance in the financial behaviors studied.” 

[iii] Noted academics have boiled that complicated concept down to three fairly fundamental questions —though personally I don’t see how knowing the answers to those particular questions would help anybody make a financial decision in the real world, much less a decision about saving or investing in a 401(k) plan. Which brings to mind questions not only what the personal finance curriculum covers, but what kind of contribution it is making to financial “literacy.”

Comments

Post a Comment

Popular posts from this blog

Do Roth and 401(k) Pre-Tax Holders Really Spend Differently?

Image
An interesting—and somewhat counterintuitive—report came out last week, one that cast doubt on the “common wisdom” regarding Roth versus traditional pre-tax savings. The assumption underlying the research [i] was that those who had not yet paid taxes on their savings (the traditional pre-tax savings) would be hesitant to tap into those savings and trigger taxes, certainly more so that individuals that had already paid those taxes. Instead, the research suggested that the opposite occurred; that individuals who had saved on a pre-tax basis actually withdrew more/sooner—but with a twist.  This they hailed as good news. They noted that the research suggests investing in a CT (current-taxed, or Roth) plan could help ease concerns about outliving funds—because they spend at a lower rate (though they saw this as a negative for those who saved on a deferred tax (DT) basis).  They even managed to find a silver lining in the “cloud” of faster spending by the pre-tax c...
Read more

The Biggest 401(k) Rollover Mistake

Image
  Readers of these columns know that for years I held off rolling over my old 401(k) balances. Oh, I had rational reasons for (not) doing so; the institutional pricing of a particular fund in one, the low fees in another, the managed account option in a third—but the reality was that the process of rolling over your accumulated savings has been—and in many cases remains—painful. Rollovers are a big deal. Vanguard reports that annual contributions to IRAs ($701 billion as of 2020) far exceed all DC plan contributions, largely due to rollovers ($618 billion in 2020), while the Investment Company Institute claims that investors now hold an estimated $13.5 trillion in IRAs—“approximately $3 trillion more than in DC plans, despite the fact that 45 million fewer Americans own IRAs than participate in DC plans,” according to the report Two things, in particular, stayed my hand over the years—trying to time the liquidation of funds (I know, but I’m human), and worrying about the timing I’d...
Read more

Facts Versus Factoids

Image
“What if the entire retirement-crisis narrative playing out in opinion polls, the government, and the media was a massive case of confirmation bias?” That’s the provocative position of an intriguing new white paper titled “ America’s ‘Retirement Crisis’: The Emperor Has No Clothes ” by  Andrew Biggs . [i]   Readers of my work will note that with frightening regularity there are any number of assertions, “studies” and surveys all painting a dismal picture of the state of the nation’s retirement—each and every one embraced and promoted with attention-grabbing headlines without so much as a question as to the veracity of the underlying data, the logic of the conclusions drawn, or the motivations of the proponents that have drawn them. Consequently, I was delighted to come across this paper that provides a detailed, thoughtful, and data-driven analysis that focuses on a number of points that have been made (and uncritically trumpeted by the media) by none other than Teresa Ghilard...
Read more