Personal Financial Education is a Good Thing

One of the recurring themes of this blog, possibly the central theme, is that we Americans do not know what we need to know about personal finance. For this I blame everybody, the financial advice gurus, the media, the government, a cultural bias against things monetary, and, perhaps most of all, our own lazy Blackboard Lecturing Crop and childish selves.

If the problem is ignorance, then the obvious cure is education. Why not mandate a high school or college course on personal finance? This is a question I have discussed in passing a few times (e.g. here and here) mostly to point out that things are so bad I doubt we could find enough teachers.

Just to be clear, my only objections to teaching personal finance in schools are ones of practical implementation. In principle, more exposure to the issues of personal finance can only be a good thing. Even a disorganized course taught by a confused teacher could not make the situation worse. Or could it?

There is an outfit called the Jump$tart Coalition for Personal Financial Literacy which did a survey of college students in 2008. They found that students who had taken a personal finance course in high school scored lower on a test of financial literacy than those that hadn’t. Oops.

This discovery has been well analyzed in what turns out to be a rich academic literature on the efficacy of personal finance classes. There are even, if you look hard enough, blogs that discuss it. I found this stuff at The Psy-Fi Blog. (I like that blog a lot. A recent post about bank regulation was entitled Basel, Faulty? If you, like me, think that’s clever, you’ll like the blog.)

As amusing as I would find it that what high school courses that do exist are actually counter-productive, that sitting through them actually makes you dumber, I don’t think that is what is going on.

Firstly, it has to be acknowledged that "financial literacy" encompasses a vast and vaguely defined body of material. It is very possible that what Jump$tart quizzed the college students on was not covered in their high school classes. In particular, Jump$tart seems to use checkbook balancing as a litmus test skill. You might as well ask college students if they know how to use the Yellow Pages and properly clean a phonograph record.

Secondly, and more importantly, most of those high school classes were not required courses but were electives. That introduces a significant bias. It could be that those who took the classes tended to do so because they were particularly challenged when it came to personal finance. Or it might be the case that these were relatively easy electives in high school and that weaker pupils tended to take them instead of, say, AP Chemistry.

The Jump$tart study did find a consistent correlation between financial literacy scores and being a good student in general. Students with higher SAT scores, more years of college, and more planned years of college, did better on the quiz. Apparently, better students do better on quizzes. Fascinating.

They also found a correlation with undergraduate major. Science and engineering types did best, with nursing and arts bringing up the rear. Business/economics was, interestingly, in the middle of the pack. I take this as a useful demonstration that a) the academic field of finance is only distantly related to personal finance and b) personal finance is ultimately about numbers. It is not really financial illiteracy we are talking about but financial innumeracy.

There are those who conclude from the apparent fact that high school personal finance courses have no effect that the situation with regard to educating the masses is hopeless. Psy-Fi called the post that started me on this Freedom of Financial Choice is a Myth, arguing that expecting people to understand our modern financial landscape is unrealistic. The blog quotes from a paper by a law school professor who argues, and I am paraphrasing a bit, that efforts to educate the masses are misplaced. Instead we need more government regulation to protect these simple people from the sophisticated profit-maximizing bankers.

I do not think that personal financial education is inherently hopeless. I just think that right now we are bad at it. We can get better, but it will take much effort and some time. In a way I actually think the problem is worse than those that are ready to give up on financial literacy classes. We cannot expect a high school course to be a magic bullet if we do not know what to teach the students.

Moreover, conceding that 90% of people will never understand personal finance and should therefore be kept on the straight and narrow by benevolent regulation is no longer a practical option. Let us not forget that, at least with regard to investing, this was essentially the regulatory regime we had fifty years ago. Revisionist history has it that those regulations were abolished by a cabal of greedy businessmen and other Republicans. But that is not what happened. Mostly those rules, like the limits on what interest banks could pay on deposits and the separation between commercial and investment banking, were overtaken by events. By the time they were formally rescinded they had been practically irrelevant for some time.

Obviating the need for widespread financial literacy through regulation would be getting the genie back in the bottle. It is is one thing to complain that the financial lives of ordinary consumers are now inappropriately complex, but quite another to reverse the trend by banning some of the complicating newish inventions, such as IRAs, ARMs, credit cards, and on-line stock trading.

But the biggest problem with conceding that the masses will never understand our modern money world is that we live in a republic. Most inconveniently, the government that would keep the 90% from harming themselves and others is selected by that same 90%. And they generally don’t vote for politicians from the other 10%. Assuming they even exist.

Since the very start of this blog I have written about how much of the Great Recession was due to millions of ordinary people acting foolishly by, for example, buying more house than they could afford. But they also act foolishly by electing representatives who have even less common money sense than they do.

It might be possible to use government regulation to protect the simple people from the sophisticated profit-maximizing bankers. But then how do we protect the sophisticated profit-maximizing bankers from the simple people?

20 Comments

  • By Susan Tiner, January 27, 2010 @ 7:49 pm

    I think the problem isn’t just ignorance, but a complex set of factors influencing our money values. The most financially competent people I know started learning at a young age, like 3 years old, from financially competent family members who instilled the notion that personal finance is a core value and a life-long pursuit. Personal finance was discussed at the dinner table and was a theme in family games; prospective friends and romantic interests were judged on the basis of financial competence. If you grow up in that kind of culture it’s hard to have some basic money skills by the time you grow up.

  • By Susan Tiner, January 27, 2010 @ 7:50 pm

    Oops. I meant “hard not to have” some basic money skills by the time you grow up.

  • By mwarden, January 27, 2010 @ 7:57 pm

    No, the answer is not to mandate the teaching of personal finance in schools. The answer is to remove mandates altogether. If the schools that do teach personal finance are preparing successful adults, then it will catch on. While I do value your personal opinion, Frank, and on this one I agree with you, I don’t think you should be telling every kid in America what he/she “should” learn. I’m a little surprised to hear undertones of central economic planning coming from you.

  • By Jim, January 27, 2010 @ 8:11 pm

    I think we need a little of column A and a little of column B. The public definitely needs to understand finances better and that isn’t a hopeless cause. But you do also need some level of regulation to protect us from those evil bankers.

  • By Jim, January 27, 2010 @ 8:17 pm

    “I don’t think you should be telling every kid in America what he/she “should” learn.”

    I don’t think anyone is talking about indoctrination or propaganda. We’re talking about understanding basic maths and processes related to finances, e.g. balancing your checkbook (circa 1983). I really don’t see any real difference between this and requiring high school sophomores to take biology except they’d get more real world benefit from finances than cutting up dead frogs.

  • By TJR, January 27, 2010 @ 10:58 pm

    Because personal finance is a more about emotions than working knowledge, proper personal finance education would have to be closer to therapy than to education.

  • By Perry, January 27, 2010 @ 11:30 pm

    My son is a High School senior, and he’s taking a Personal Finance course. In his text book there’s a chapter on “Understanding Taxes” complete with sample tax forms. The 1040EZ example has a math error.
    Line 1: Wages……………………42000
    Line 2: Interest………………… 400
    Line 3: 0
    Line 4: Taxable income sum (1-3) 42000

    I’m too scared to read the rest of the book.

  • By Tyler, January 28, 2010 @ 1:45 am

    What worries me is that there is anyone (college students no less) who had trouble with a test centered on balancing a checkbook.

    The problem is we live in a country where adding and subtracting are too complicated. How are these people going to understand stocks, bonds, and tax rules? I’m just not sure if there is a way to solve that.

  • By Holly, January 28, 2010 @ 10:19 am

    If Kindergarteners in private schools can learn about government, and fourth graders can learn about scientific notation (yes, I have first-hand knowledge of this through my own children), then why should it be inconceivable that we can teach the masses the most basic tenets of personal finance?

    Kids love dealing with money…it makes them feel grown-up. Why not use ‘Monopoly’ money and engage their natural curiosity? Why not set up games with rules and procedures to teach kids about the services that our banks and businesses provide? How about teaching kids about the benefits and setbacks of the consumer experience? Why is our education system lacking the tools (incentives?) to teach kids this very important information? Conspiracy theories, anyone?

  • By Al E. S., January 28, 2010 @ 11:48 am

    Funny about the selection bias of the kids taking the personal finance elective.

    When I was in high school a little over a decade ago, I can assure you that the kids taking the “business” classes and joining “Future Business Leaders of America” were in no way going to be the future business leaders of America.

  • By Kosmo @ The Casual Observer, January 28, 2010 @ 2:44 pm

    “When I was in high school a little over a decade ago, I can assure you that the kids taking the “business” classes and joining “Future Business Leaders of America” were in no way going to be the future business leaders of America.”

    This must vary quite a bit from school to school. In my school, the future leaders were indeed involved in the business classes and FBLA.

    Then again, it was a small school, so those students were the same ones taking AP Chemistry :)

  • By RetirementInvestingToday, January 28, 2010 @ 4:42 pm

    An understanding of personal finance is essential if people want to maximise their savings for retirement.

    Simple things like:
    - finding the bank account that pays the best interest rate
    - constructing investment portfolios to pay the least tax possible
    - finding the investment type with the least fees

    Or in my example going all out and doing away with any paid financial advice and taking responsibility for my own invesing for retirement.

    Small savings everywhere really add up when you compound them over 20 or 30 years.

  • By mwarden, January 28, 2010 @ 9:47 pm

    @Jim:

    “I really don’t see any real difference between this and requiring high school sophomores to take biology”

    You seem to have missed my point. Your example is just as bad. Mandated curricula are bad. It gets justified by the fact that education is subsidized by public dollars, therefore the public should get to dictate what is taught. Bad logic, because it assumes that the public has any friggin clue what should be taught.

    The standards in higher ed curricula are much looser, and somehow the sky doesn’t fall and somehow the quality is often considered much better than lower ed.

  • By Rob Bennett, January 29, 2010 @ 11:28 am

    It would be better if we taught people how to think critically.

    If you can think critically, you can figure out how to save or how to invest in a few weekends.

    If you take a course taught by someone who does not know how to think critically, you will learn just enough to hurt yourself really bad.

    If you take a course taught by someone who does know how to think critically but you do not, there’s at least a significant chance that you will implement what you have been told improperly.

    The problem is not that we are not doing enough teaching and learning. It is that most of what is being taught and learned is the product of gravely flawed logic.

    Rob

  • By Financial Tales, January 29, 2010 @ 12:02 pm

    This is the first time I’ve been to this blog, and I love it. @ Susan, you’re comment is right on. I will be returning to this blog regularly. “Financial Innumeracy,” I like it.

  • By Mt, January 31, 2010 @ 1:13 pm

    Whoa – I don’t think we should overlook the “test of financial literacy”. I doubt that they’re testing the right things the right way.

    There is a major potential problem if the testing is based on mathematics and done without a computer.

    The best assessment of a person’s ability to navigate personal finance as an adult would be to give them the use of adult tools (that means all calculators, downloaded excel spreadsheets, and even google).

    For example, I’ve never reconciled any of my accounts with pencil and paper – yet I know the goal of reconciliation and could get the job done. Meanwhile, if you were giving a test, the right answer would be a perfect form, and others would have points off. I’d undoubtedly have points off.

    Furthermore, most who have taken Economics have had the experience of mostly verbal lectures “to prep for” mostly mathematical tests. In my experience, there was a lot of discussion about interesting concepts and public policy, but the A students were the ones who got A’s in math.

    Interestingly enough, the minute you leave the classroom, it’s the computer that does the math for you.

  • By getagrip, April 16, 2010 @ 9:23 am

    I’ve stated before that this call to teach personal finance in schools is mostly BS for show, so people can feel like they are doing “something” and politicians can mouth off how they’ve helped with teaching financial literacy. The basics needed for personal finance have been (or are supposed to be) provided by the schools (math, reading, critical thinking). Claiming we need a half semester or longer class (as some proponents elsewhere have claimed) to teach a week or less (our community college has such a short course) of basics is slapping a snooze fest on kids.

    Given the years of study, how many kids graduate with limited understanding of math, science, english literature, social systems, etc. It’s not that they weren’t “taught” all this. Do you really remember the structure for a sonnet, what lead to the fall of the Roman Empire, or the formula for the quadratic equation and why you would use it? If you had to take an SAT today, with no preparation, how well do you think you’d really do? The false assumption is that throwing a half baked required “class” at mostly unmotivated kids who’s idea of personal finance is generally how to manipulate money out of Mom or Dad is somehow going to prep them to make better financial choices in the real world is akin to expecting most of us to score as high as we did back in high school on SATs without preparing. Those kids already predisposed to making the choices or having an interest might do well, but the bulk of kids will learn enough to pass, and then promptly forget it all. People don’t really care about personal finance until they have to start living off their own money (e.g. my daughter in college exclaimed, “I didn’t know how expensive food was.” Yeah, because when living at home it “magically appears” without any real impact to her wallet).

    If anything, I’d recommend a short one to two week section, senior year, as part of a required social studies class. Keep it to the basics of living on your own, at college, or just out of college. Give it to them when they really have to get ready to face it and they may retain enough to look farther on their own. At least then it has more relavance than having to learn it to get to the next class in the progression.

  • By Elisabeth Donati, December 26, 2010 @ 5:58 pm

    Financial education entails so many things: basic principles like pay yourself first, put money to work for you, and stuff like that. It also includes learning how to invest in assets that produce passive income so we can eventually work because we WANT to and not always because we HAVE to. Finally, it has to do with the cultural beliefs we grew up with about money and wealth. It really takes a lot to grow into a financially savvy adult but it’s certainly possible and it absolutely starts with a great financial education.

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  1. Personal Financial Education is a Good Thing | Bad Money Advice — June 9, 2011 @ 7:41 am

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