The Challenges of Financial Literacy

Open, honest, non-judgmental question: What do you know about finance? Perhaps more importantly, how do you know what you know? Did your parents sit you down when you were young and teach you everything you know today? Did you take a class in High School or maybe college? Sit through a “Financial Peace University” series at your church or sign up for a financial coach or educator’s online course?

How we learn about finance has been studied almost as much as the subjects of finance itself. Quite curiously, then, the research literature shows that how people learn about money is almost as diverse as the people learning themselves. While there are a variety of academic theories about how people learn about money and seek help with their financial problems, the challenge is that most of them aren’t really applicable at the individual level. As the observation goes: “With statistics I can tell you what a proportion of people in a group are likely to do, but I cannot use it to tell you what any individual will do.” The same is somewhat the issue with theory; theory tells us that people learn a certain way, except when they don’t.

So today, we’re having a broad discussion about the layers and means by which people gain and absorb financial knowledge: what typically works well and also where some challenges or issues can arise in our journey to know more about money.

Early Life Learning

Speaking broadly of the time before you become an adult, most financial education comes from both family and peers. While you might think that one is deliberate and one is observational, that’s not quite the case. While some families take deliberate action to educate their children, either with general ideas (“a penny saved is a penny earned” or “pay yourself first”), many families also inadvertently teach their children about money. These inadvertent lessons often make up the bulk of financial education, both from family and peers.

Observational learning about finance is often heavily impacted by both practical limitations and peer group behaviors. For example, if you were raised in a family where money was a regular challenge, you may have been regularly and repeatedly given messages both verbal and non-verbal, such as: “We can’t afford that” or variations on that theme. Conversely, if you grew up in a household of financial abundance, you may have only a loose notion about the value of money; after all, if money is never a limiting factor to your choices, how important can it be?

Peer financial socialization, then, is also observational, but contrasts become more important. Were you a kid who had a lot of toys, or did you have a friend who was your envy for how they always had “the good stuff” or “the new thing”? Did you have money of your own, or did your parents spend money on your behalf? What did your friend’s families do? When you hosted a sleepover, were your friends appalled at your living situation or jealous of how good you had it? All of these send conscious and unconscious class signals about our affluence and relationship with money, nurturing what can later develop into “money scripts,” subconscious beliefs described with labels such as “money avoidance” or “money worship.”

The Challenges of a K-12 Education

Through no fault of their own, many schools lack formal personal financial education programming. State by state, this can be a consequence of funding limitations or department of education guidance, but many students do not receive a formal education in personal finance. Worse, even those that do may not be getting it from a very reliable source.

A study conducted at Ohio State University a few years ago evaluated the financial literacy of college students by their chosen major. Unsurprisingly, financial literacy was very high among finance, accounting, and business students. It wasn’t doing too badly under many of the STEM students either. However, and quite unfortunately, financial literacy was found to be lowest amongst students pursuing a degree in educational fields. Now, let’s be reminded of the statement about statistics above: As much as statistics can tell us about how to predict the qualities or behaviors of groups, they say nothing about individuals. So, if you are an education major or teacher today and you’re feeling a bit ruffled, please be certain I’m not talking about you, we’re just talking about education majors “in general,” and there are always members of the right tail of the distribution who will do far better than their peers. Certainly, if you’re reading this, you must be one of those!

But with that caveat in mind, let’s consider the potential ramifications of that statistic. Assuming that research is valid (I’m not aware of any replication studies since its publication), it suggests there is a potential vicious cycle in formal financial education. First, that the population of educators teaching personal finance to students may themselves have a larger proportion of less financially literate people within it. Second, that many educators who studied education (or related sub-subjects such as math, biology, etc.) would not have taken formal personal finance courses in college to instruct and validate their knowledge and skillset. Finally, then, because those who are teaching personal finance are statistically less likely to be financially literate, they may in fact perpetuate a cycle of financial illiteracy despite their genuine best efforts!

Finding Valid Financial Knowledge

The challenge then, for those who didn’t study personal finance or a closely related field in school, is where you get a good, high-quality personal finance education. Herein, the problem is a typical one in the marketplace for information: Everyone is selling something. A keen-eyed reader might note that they’re reading this on a blog written by a professional financial planner on their financial planning firm’s website. Keen observation, keen-eyed reader! Yes, while writing about this serves as marketing content that supports search engine optimization and AI search algorithms, it is generally our intent here to invite people to learn, and the same goes for our Podcast, The Science of Wealth. But while that content is freely shared and never comes with an ask for people to buy a course or sign up for a class, it’s also not well-organized for someone to “master” financial subject matter in a structured, from beginning to end fashion.

So the question becomes, what are good sources of financial educational material? Rather than specifying specific archives or systems, I’ll suggest a few evergreen means of evaluating financial content and educational material for yourself.

• What is the core focus of the source? If the material is published a financial education non-profit or government organization, you can reasonably assume there’s a generally altruistic motive to sharing the information. If the information comes from a for-profit entity, then understanding their business model is important.
• Is it a financial education medium that makes most of its money on an advertising basis? Be careful to look out for native advertising, which is often used to trick people into buying financial products or services under the guise of education.
• Is it a financial education medium that makes most of its money from selling courses or coaching? Herein the price is often a signal. High quality paid financial education programs are often remarkably affordable and don’t come with “upper echelons.” That is to say, you pay $49.99 one time and get access to the whole library, and not a “teaser” course that then tells you that the real secrets of the rich lurk behind the next $999.99 course in the catalog.
• Is it from a financial services firm? Herein, understanding their business model is critical. Because regulation of financial services places the heaviest burden for public content on firms that are also the highest regulated, e.g., those fiduciary fee-only firms face the highest burdens for communications with the public, while firms in the business of financial product sales often face lesser limitations on their ability to share financial education. The hurdle here is twofold: The more regulated the entity and professionals therein, the less likely they are to publish educational content because of regulatory liability, and the less regulated the entity and the professionals therein, the more likely they are to publish educational content that is inaccurate or outright misleading because they’re not prohibited from doing so under the guise of “education.” The key to this item is understanding that if the firm makes all of its money from selling a specific financial product or type of product, i.e., life insurance, annuities, or investment products, then the education you’re receiving from them might just be a well-hidden sales pitch. In turn, if the firm offers services, but is never asking you to buy the services, but instead is simply educating about a plethora of financial topics, then you’ve got a higher probability that they’re simply educating as part of their general brand marketing.
• Liability: A core question is this. If the financial education you receive from a source is misleading or incorrect, how much responsibility does that platform bear for the harm it causes you? If the answer is, “it bears no liability for what it does for you,” then it may not be the best source of information, or you’ll have to forgive it in the case of government or non-profit sources.

Finally, a note on well-meaning amateurs: Studies of the Survey of Consumer Finances, a study conducted by the Federal Reserve every three years, have found repeatedly over the decades that a large number of people get their financial information from their friends, and increasingly online. While there is nothing wrong with asking friends and family about their thoughts on a financial topic, or for a referral to “what/who they use,” just be mindful that substituting your friend or family member’s judgment for your own is not a good replacement for cautious due diligence.

An Abundance of Caution and Skepticism Are Healthy

 At the end of the day, it’s a meaningful distinction to apply an abundance of caution and skepticism as you learn about personal finance. You gain nothing by immediately accepting the information you’re presented with in an online post or a YouTube video, but you can have everything to lose by accepting the information at face value. Learning about personal finance is both knowledge-based and application-based; most people will benefit from knowing more about personal finance than less, because money is a feature of everyday life. But be careful as you explore the world of personal finance. For every good and useful bit of information out there, there are plenty of bad actors trying to lure you into an expensive course or into buying a financial product as a “silver bullet” solution to all your financial problems. I can assure you that there is no simple solution for all financial planning problems, and there is no panacea for financial knowledge.

But if you don’t believe me, buy my upcoming book: “Secrets of the Rich: What the Wealthy Don’t Want You to Know About Money.”*

*It’s essentially blank.