What Critics Get Wrong About Financial Education

Doubters of financial education make four great points but reach the wrong conclusion every time.

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Is it really possible that dozens of nations, thousands of nonprofits and tens of thousands of educators are wrong to want to teach kids about money in school? That’s what critics would have us believe. Certainly there is room for skepticism, and consensus thinking isn’t always right after all. Yet crowd thinking usually has a solid foundation.

What started as a given less than two decades ago (if you teach it they will learn) has devolved into high-level handwringing (Where’s the proof that financial education works?). The list of doubters is growing; it includes prominent academics as well as the father of the financial literacy movement, Lewis Mandell, the noted behavioral psychologist Richard Thaler, and retirement and actuarial expert Alicia Munnell.

More recently, author and journalist Helaine Olen (Pound Foolish: Exposing the Dark Side of the Personal Finance Industry) has taken up the mantel. As her book title suggests, she finds conspiracy around every bend. Olen and I recently debated the value of financial education on a recent edition of the NPR Marketplace program Financial Feud. Then, and in a subsequent essay, she made many valid observations. Her essay, by the way, is a must read for anyone interested in this topic.

Olen and I agree on far more than we disagree on. Our difference, it seems to me, is that where she finds reason to throw in the towel on financial education I find reason to double down. In my view, giving up makes no sense when we’ve only begun to try to teach personal financial skills. I reject the premise that financial education will never matter. Here I will address four points:

Quick to forget Olen cites research from 200 studies of financial literacy programs showing that financial education has a negligible impact on subsequent financial decisions and behavior. Within 20 months, almost everyone who had taken a financial literacy class had forgot what they learned.

This is an important revelation. But is the correct response to not teach? My guess is that most kids who take just one French language class forget how to say “oui” in 20 months too. For some reason, personal finance is held to a higher standard. Maybe that’s because we implicitly understand its importance. The right response is to build graduated financial literacy lessons into the K-12 curriculum, as we do with English and math, and keep it going not just through college but at work too. Personal financial skills require lifetime learning, as recognized in New Zealand where programs target those aged 5 to 105.

Behavior doesn’t change Olen cites other research on the efficacy of state laws requiring financial literacy to be taught in schools. The conclusion: State mandates requiring high school students to take personal finance courses have no effect on savings or investment behavior.

This is another noteworthy point. Whatever we’re doing is not having a quick payoff. If young people aren’t going to start saving early and take advantage of compounding and their ability to absorb risk and outlast market cycles over four or five decades, why bother teaching it? Again, one class isn’t enough. But even if that’s all you get, the exposure may make you more receptive to saving and investing at some point. If you don’t start until age 35 or 40, you still have many years of an ever-expanding lifetime to benefit. It’s just that starting at 25 is so much better.

Just in time Given evidence that kids don’t recall financial lessons when they need them as adults, critics argue the correct response is to shift resources to provide some kind of system that provides just-in-time third-party advice—that is, impartial counsel at the point of sale or when any big money decision must be made.

Well, okay. But even if you can make sure the advice is pure—as opposed to from a sales person—what does just in time mean? How can we possibly know the moment a couple gets serious about buying a home? When they apply for a mortgage is much too late to reach them with information on what they can afford. The moment they start dreaming is the right time. Should we plug them into The Matrix and monitor their thoughts?

What does just in time mean in the context of retirement saving? That’s a 40-year process and involves much more than a single decision the day you start work or the day you retire. It requires thought with every pay raise and promotion; with every year that passes and every life change. It requires constant vigilance over poor spending decisions so that you have the money to save. We can’t put a little angel on everyone’s shoulder to give a just-in-time prodding to stick to their budget.

Changing standards Critics also note that standards of good advice have a way of shifting over time. It used to be that people saving for retirement were told to set aside 10% of their salary. Now, many experts suggest 15% or more. A corollary concern is that financial products and terms shift over time. Not much more than a decade ago, prepaid debit cards barely existed; today they are the fastest growing non-cash method of payment with a projected 29 million cards in circulation by 2016. So a 30-year-old with a fistful of these cards in her purse today would have learned nothing about them from a financial education class while she was in high school.

This is all true. Things change and we move on for good reason. When pensions and job security were solid, and interest rates were higher, saving 10% was the right model. With a diminished safety net, we now must save more. When technology advances and we can enjoy the convenience of going cashless, of course people will take advantage.

But shifting guidelines and products only mean we need to teach kids about the money world all the more. For one thing, saving 10% is better than saving nothing—even if it isn’t enough. Most experts will tell you that just getting started—doing something—is a big step toward retirement security.

And when it comes to confusing new financial products, terms and conditions, consider that the goal is not to fashion young people into little wolves of Wall Street. The goal is to arm them with a sense of awareness and enough understanding and confidence to ask the right questions. That’s less about, say, the intricacies of high-beta stock funds, and more about recognizing conflicts of interest and too-good-to-be-true sales pitches.

Regulation alone is not the answer. The financial world moves too fast. By the time government closes one loophole another has opened. Consumers will always be left on their own in one way or another. Financial education has not solved the problem yet. But it offers our best chance.