Why Financial Education Fails Today

M
September 27, 2021

It’s today’s world, many people are quick to judge that financial education doesn’t work.  From venture capitalists to research thought leaders, many are questioning the effectiveness of current financial education programs. Some may say that the average person doesn’t want to learn personal finance, while others assert it’s the educational programs that are deficient because they focus too much on math and mechanics, as opposed to tangible and practical value. And then others claim that financial education fails, no matter who the teacher is because it’s really your personality that controls your financial behavior and decisions. So who’s right? 

For many US young adults, personal finance education is nothing short of confusing, haphazard and complicated—in part because it’s not taught in schools. The average college grad, carrying $29K of student and $6K of credit card debt, enters the workforce without a clear roadmap for tackling their debt and negative net worth. What ensues next is the start of a random and roundabout financial education journey that involves google searches, reading blog posts, and watching YouTube or TikTok, until exhaustion.  It’s a journey full of jargon, occasional misconceptions and affiliate marketing deals:  a 23-year-old looking to repay (government-backed) student loans will soon come across a debt consolidation offer via a private student loan with low monthly payments.  

At this point, some form of financial education could actually be helpful, and in particular:  

  • Having a frame of reference for how to think about financial issues.
  • Understanding the types of student loans, the pros and cons of each type, and how personal loans work—all basic stuff that most Americans don’t get to learn about before they actually encounter it in real life.
  • The fundamentals of loans: interest rates, monthly payments, the financial impact of missed payments, payback time, and total interest paid.  

What’s adding fuel to the fire are attitudes and beliefs surrounding the young borrower, which may manifest like this:

  • Everyone’s got some debt, and yeah, they’re fine. So, I’ll be fine too. 
  • What is money worth, if not for experiences? Wanna go to the Bahamas?
  • I’m just starting my career. In the next couple of years, I’ll be doubling my current pay.

In other words, unrealistic expectations, social pressure, and lifestyle creep all add to a young person’s financial stress. It’s no wonder that half of Americans live paycheck to paycheck, can’t save $400 for emergencies, and trade on margin as they’re learning about stocks. 

Let’s break things down. Financial wellbeing—the opposite of financial stress—is driven by two things: financial education and financial behavior.  Both are necessary to manage and contain financial stress. It’s easy to blame poor money habits for poor financial health, but what about education?

The current state of formal financial education is as follows: 

  • Only 1 in 6 US high school students is required to take a personal finance class.  That figure is even worse among low-income students—only 3.9% of them were required to take personal finance in high school. 
  • Financial literacy curriculum is by and large focused on concepts and vocabulary building.  It’s heavy on math and mechanics, and light on practical applications of personal finance to real life.  
  • Occasionally, it comes across as rigid and clashes with social values and norms.  How many times are you going to hear that you should never buy a latte in a coffee shop because it’s a waste of money? And that bitcoin is a big gamble, not an investment?
  • Financial education often ignores behavioral finance. Instead of teaching our kids about emotions in investing, we lecture them on asset classes and discounted cash flows.  
  • Perhaps the most critical piece: we don’t teach personal finance when people need it the most, in young adulthood. Teaching it in high school is fine as an introductory class, but most of us need it when the rubber hits the road—the first time we’re on our own and earning that first paycheck. 

In lieu of formal financial education, what many young adults wind up resorting to is less formal, predominantly internet-based education, aided by Google searches, bloggers, YouTubers, Instagram, and TikTok influencers. This type of “instant” education has low barriers to entry, and the content that people consume will vary from helpful and informative to sometimes misleading, and could be very entertaining!

In particular, here are some challenges with informal financial education: 

  • Lacks a common framework for acquiring new finance skills.  Have you heard a story about a teenager wondering how to start investing, only to find themselves trading commodity options? The education on the internet feels like ripped-out pages of a college textbook, with no particular order whatsoever, so good luck telling apart the first chapter from the last! 
  • Long-form content. It’s a well-known thing that search engines prefer long articles as opposed to short ones when it comes to search results ranking. Some bloggers will go as far as saying that your article should be at least 1,800 words long if you want it to be ranked as a top search result on Google. Unfortunately, longer is not always better for the user.  Oftentimes, the extra content not related to a user’s search can confuse them, leading to more questions than answers.  
  • Use of jargon. Some authors like using jargon because they sound more professional and expert-like. In fact, authors are the only ones to blame—the whole financial services industry is full of jargon. Is a mortgage the same thing as a property loan? And bond coupon the same thing as interest paid? The financial terms are nuanced, and certainly, some words deserve to exist, but for consumers, they are sometimes an unnecessary source of confusion.        
  • Facts vs. marketing: Almost every blog on the internet covering personal finance contains affiliate marketing offers. Bloggers are not to blame though—they, like other people, need a source of income to simply get by. What’s problematic though is when affiliate offers are inserted in such a way that the user has no idea whether they’re getting “straight scoop” or an ad—and this happens way too often. 
  • Education vs. entertainment.  When you consume financial content, you always have to ask: is this education or entertainment?  I made this very mistake in year 2,000 when I watched CNBC and took Jim Kramer’s stock picks as gospel.  I bought a bunch of stocks he touted at the peak of the market, only to sell them at the bottom in 2002.  I simply had no idea that Kramer’s show contains no financial advice--and its primary objective is to entertain.  And new generations are repeating the same mistake—who bought meme stocks at their peak?

So why does financial education fail today? I believe that:   

  • People are right to say it focuses too much on concepts, vocabulary and math, and too little on financial behavior. What’s also lacking is the practical application of financial concepts and frameworks that people can relate to.
  • Media outlets (think blogs, financial sites, subreddits, YouTube, and TikTok channels) may prioritize marketing, monetization, and entertainment over providing education—and many consumers are simply not aware of this.
  • There is simply too little of it.  Only 18% of schools teach the subject that almost everyone uses in life, and it’s even worse for people of low-income backgrounds, who need it the most.   
  • You don’t get financial education when you need it the most.  Financial education has a similar life path to adulting.  As a kid, you don’t need it as much, because your parents take care of your basic (financial) needs, but as a young adult, when you’re on your own, you’re scrambling to figure things out.

Finally, many don’t realize the relationship between financial education and wealth building. Unlike other types of education (e.g., college, professional certifications or even Coursera courses) that are directly correlated to one’s earnings potential, financial education doesn’t have the same reputation—who on Earth takes a personal finance class to make more money?  

I’ll leave you with this: There are two important, but subtle ways that personal finance education enhances your wealth.  First, it teaches you that your salary, or wage, is not the only source of your income. In fact, for the top one-percenters, that is a minority source.  Wealth is built through investments, that compound with time, and by taking calculated risks—a lesson many people learn too late in life. Second, financial education teaches you to manage to the bottom line: it’s not what you make, but what you wind up saving that enhances your wealth. Just like a company, you should care about your profit (i.e., what you keep), and not just about your revenue before all expenses (i.e., your gross income).

That said, there are ways to make personal finance education interesting for most—but I’ll save that for my next post, How to Fix Financial Illiteracy.

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