Not long ago, I wrote about the sad state of financial literacy in the U.S., and how some people, like Annamaria Lusardi of Dartmouth, are proposing widespread education to fix the problem.
But in a brief Money magazine Q&A, Lauren Willis, who teaches financial-products regulation at Loyola Law School, says that’s a waste of time. Excerpts:
Q: What’s so bad about financial education?
A: It doesn’t work. Sellers of financial products spend billions drowning out well-meaning messages to consumers from nonprofits or government agencies. Also, financial products are always changing — credit and insurance products have changed dramatically in the past 20 years — making it hard for educators to keep up. It’s not like sex education. As far as I know, people get pregnant the same way they did when I was in high school.
I couldn’t agree more with her first point. But I’m not sure about her second point: while financial literacy is perhaps more complicated than sexual literacy (or maybe not?), there are probably 10 basic concepts that fuel an understanding of nearly everything else to come.
Q: Then what should we do?
A: Stop trying to turn everyone into a financial planner. Instead, try to get everyone to understand that the people selling you financial products often don’t have your best interests at heart.
Well, okay: it’s true that turning everyone into a financial planner is absurd. And yes, her point about the financial-products sellers is, once again, well taken. But that doesn’t go quite far enough, does it?
Q: What type of regulation do you think would work?
A: Sellers could be required to offer you a default product that is safe. Whenever you applied for a mortgage, for example, you would have to be offered a 30-year fixed amortizing loan.
Well, that’s a fine nudge (a k a Nudge), as far as it goes. But it doesn’t go very far.
On the other hand, I share Willis’s belief that having the federal government teach financial literacy is not a great idea. That is the kind of thing the government tends to do very poorly.
As for teaching children about money, she says “that’s something families can do a much better job of teaching than government can.” Again, I agree. But we’re also looking at a vicious circle here: when parents are financially illiterate — which is the problem here — they’re not going to teach their kids very well, are they? Which means that the minority of people who are smart about money will (potentially) raise kids who are also smart, while the rest … well, you do the math.
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Isn’t this true of MANY types of education? As a teacher, I constantly try to educate parents on why we feel the approach we use is best practice and what we value about it. We have peer-reviewed journal articles and scientific studies to back us up. But then Time or Newsweek or whoever does an expose on the educational system and suddenly everyone thinks they are an expert when they are really just misinformed or underinformed. This problem is not limited to financial literacy, but any area where people think they can benefit from peddling wrong or incomplete information.
“well, you do the math.”
Math is difficult to teach too, that doesn’t mean it shouldn’t be taught.
I agree with Willis on some points. The point was brought up by Barbara Kiviat on Time Magazine’s curious capitalist blog, that just because you teach people about money doesn’t mean they won’t go plowing all of their money into the next tech/housing/etc bubble.
However many of the concepts above aren’t ‘bread and butter’ financial literacy. Bread and butter concepts such as saving for retirement, living within your means, how to use credit cards and maybe mortgages are good things for everyone to learn imo.
In addition to those bread and butter concepts, teaching people how to work with financial planners would be a good educational step as well. How to determine the cost of the planner, what information to ask for, and how to gauge how well your financial planner is doing (not just look at short term performance).
Send your kid a copy of Economics in One Lesson by Hazzlet and forget the propaganda from Wall street.
I’m telling all my clients to diversify as follows:
40% under matress
30% in a jar
30% in a shoebox
Financial education does not need to be that complicated!
1. Don’t spend more than you earn.
2. Compounding interest is your friend.
3. High fees are not your friends.
4. Diversify.
5. Question salespeople — their #1 interest is themselves, not you.
If everyone learned that much in high school, then they would be in much better shape. Heck, I didn’t really learn all that until I took a finance course as part of my masters.
I couldn’t disagree more with the statement “Attaining financial literacy seems a little like learning the Internal Revenue Code.” jwesmc overestimates what “financial literacy” means and underestimates the benefits that it could provide many, many people.
Here’s what I don’t understand. My guess is that people who are financially literate do better with their money than those who are not. Universities are institutions designed to make money. Universities get more money from people with more money. Why do universities not put more focus on financial literacy?
First as a complete sidenote i was privelaged enough to have Annamaria Lusardi as my econ senior seminar prof at Dartmouth… she was great.
Financial literacy should definitely be taught – focus on the word LITERACY. A lot of people in this world are literally financially *illiterate*. Teaching the concepts of interest rates, affording your own home through a mortgage, credit cards… we’re talking basics… not getting your PhD in literature literacy, just being able to read Dr Seuss.
Great example, a few years ago everyone and their brother down here in Miami was getting into arm mortgages for 0% down, mortgage brokers (who now all disappeared) were omnipresent and all making mega commissions… talk about not having the customers best interest in mind! People with great credit even got talked into these psychotic loans simply because of total illiteracty and the belief the mortgage broker was helping them or working in their best interest. That’s where literacy steps in: Step up and let people know, you’re playing with fire! This was serious stuff, all taken with an air of ignorant bliss, and guess what, everyone got burned.
This statement from #7 makes me angry:
4) only invest money you can afford to lose.
I work for a large corpration which does not provide a nice pension anymore. So I must save for retirement. And investing in a 401k is the wisest choice according to all the money sages. Well I cannot afford to lose that retirement money, but invested it is, because I have no other choice on how that money can be put aside for my retirement.
Really? We can’t teach financial literacy? I think you’re underestimating how bad financial illiteracy has become. We don’t need to teach everyone macroeconomics and turn them into day traders. We need to help people with the basics that come up long before they get involved in the stock market:
o Budgeting
o Saving for the future
o Compound interest
o Risk
o Setting financial goals
If you think you can’t explain useful fundamentals in a few days of a high school math class, you’re covering too much.
I used to think that more financial literacy education was the clear answer. This is an easy stance considering that I’m very interested and knowledgeable about my own personal finances (which I’m guessing most people on here are, or why would you spend time reading this blog?).
I now think that people will make uninformed and essentially ‘dumb’ decisions no matter how much you educate the. The real question in my mind is, “To what extent should the government protect people from themselves?”