Why Financial Literacy Fails (and What to Do About It)

Author: J.D. Roth / Source: Get Rich Slowly

April is Financial Literacy Month in the United States. This is a pure and noble thing. I think it’s great that there’s one month each year devoted to promoting smart money habits. That said, it has become increasingly apparent over the years that most financial literacy programs fail.

They don’t work. And this isn’t just me speaking anecdotally.

In a 2014 paper from Management Science, three researchers conducted a “meta-analysis” of 201 prior studies regarding the efficacy of financial literacy. Their conclusion?

Interventions to improve financial literacy explain only 0.1% of the variance in financial behaviors studied, with weaker effects in low-income samples. Like other education, financial education decays over time; even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention.

To put it in plain English, financial literacy education makes no discernible difference in behavior. People who take personal-finance classes manage their money no better (and no worse) than the general population.

We’re pumping tons of money and time into a fruitless endeavor. All of this push to promote financial literacy accomplishes nothing. Zero. Nada.

Why is that?

It probably won’t surprise you to learn that I have some strong opinions on this subject. Today, let’s talk about why financial literacy fails (and what to do about it).

Note: This afternoon (April 24th) at 4 p.

m. Pacific (7 p.m. Eastern), I’ll be part of a Facebook Live interview about this very subject. If you’re free at that time, you should join us!

Why Financial Literacy Fails

Financial literacy fails because it almost universally addresses only one part of the problem: math and mechanics. FinLit (as it’s sometimes called) focuses on facts and figures while largely ignoring behavior.

This is insane.

This is like promoting sex education that talks about penises and vaginas while never discussing what it’s like to be madly in love with somebody, so in love that your brain stops working. For sex education to be effective, it has to deal with real-world circumstances and behavior. It has to teach about psychology and emotions, not just body parts.

The same is true with financial literacy.

In fact, the same is true with actual literacy. The National Assessment of Adult Literacy says that working literacy has two components.

• The operational piece of literacy focuses solely on knowledge. It involves word-level reading skills such as recognizing words.
• The conceptual piece of literacy focuses on everyday tasks: “Literacy is the ability to use printed and written information to function in society, to achieve one’s goals, and to develop one’s knowledge and potential.”

The first part of literacy is about mechanics. The second part is about practical application.

Modern financial literacy efforts spend nearly all of their time on the knowledge piece. I’ve reviewed maybe a dozen FinLit programs over the years. Most pay no more than lip service to behavior, to the conceptual piece of financial literacy.

Let me give you an example from my own life.

When I was in high school (w-a-y back in the mid-1980s), every senior in our district was required to pass a class in personal finance. 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’d mastered the knowledge but not he behavior. The behavior was never taught.

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 facts and figurs are only one-half of financial literacy. (And I’d argue they aren’t even the most important half.)

The solution to financial literacy isn’t to feed people more facts and figures. It isn’t to teach them how bonds…

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