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

One of my resolutions since returning from Peru is that I'm going to be more responsive to requests from reporters. I've generally tried to weasel out of interviews in the past because they always made me uncomfortable. I've done enough of them now, though, that I'm able to answer questions without having a panic attack. Most interviews are pretty formulaic, really. And my message doesn't change, so it's easy to say things like "spend less than you earn," "pay yourself first," and "do what works for you."

Sometimes, though, an interviewer will surprise me. That happened today. The discussion was pretty typical until the fellow said, "Americans are deep in debt and don't save. We're trapped in a consumerist culture. Financial literacy in the U.S. is awful, and always has been. How do you think we can fix that?"

Now, I've written a lot about financial literacy in the past. Often, Get Rich Slowly devotes the entire month of April to financial literacy topics. I feel passionate that people ought to be financially literate, that they ought to know the basics of saving and investing. But lately, I've come to the realization that financial literacy isn't enough. In fact, you can be financially successful without being financially literate. And, what's more, there are plenty of people who are financially literate yet find themselves struggling to stay afloat. I should know. I used to be one of them.

And so, in a move that surprised me, this morning I launched into an off-the-cuff rant against financial literacy.

Why Financial Literacy Fails

"Actually," I told the interviewer, "I don't think this country needs more financial literacy education. Time and again, financial literacy efforts have failed. They don't make any noticeable difference in the way we spend and save."

I gave an example from my own life. "When I was in high school, all seniors were required to take a financial literacy class. 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 wasn't the only one. 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 financial literacy isn't the answer!

If you've been following Get Rich Slowly for any length of time, you can probably guess what I believe is a better solution. It's not to feed people more facts and figures. It's not to teach them how bonds work or to explain the sheer awesomeness of a Roth IRA. I believe what we really need in this country is some sort of behavioral education.

I'm just not sure how to do it.

Behavioral Finance

Personal finance is simple. Fundamentally, you only need one thing: To build wealth, you must spend less than you earn. The end. That's it. We can all go home now. Everything else simply builds on this. Why, then, is it so hard for everyone to get ahead?

For some people, it's systemic. There's no doubt that some people are trapped in a cycle of poverty, and they truly need outside help to overcome the obstacles they face. But for most of us, the issue is internal: The problem is us. In other words, I am the reason that I can't get ahead. And you are the reason that you can't get ahead. It's not a lack of financial literacy that holds us back, but a chain of bad behavior.

One of the key tenets of this site is that money is more about mind than it is about math. That is, our financial success isn't determined by how smart we are with numbers, but how well we're able to control our emotions -- our wants and desires.

There's actually a branch of economics called behavioral finance devoted exclusively to this phenomenon, exploring the interplay between economic theory and psychological reality. And in August, I wrote about a new wave of folks who are exploring the gamification of personal finance; they're trying to turn money management into a game. More and more, experts are seeing that our economic decisions aren't based on logic, but on emotion and desire.

"For years, I struggled with money," I told my interviewer today. "I knew the math, but I still couldn't seem to defeat debt. It wasn't until I started applying psychology to the situation that I was able to make changes. For instance, I used the debt snowball to pay down my debt in an illogical yet psychologically satisfying way. It worked. And I've learned that by having financial goals -- such as travel -- I'm much more inclined to save than if I have no goals at all."

Behavioral Literacy?

To me, the answer to our country's crazed consumerism has nothing to do with financial literacy. (Okay, maybe it has a little to do with financial literacy.) Instead, I see two fundamental problems that need to be addressed.

  • First, we constantly soak in a bath of the mass media. Radio and television and the Internet are all around us. As a result, we're exposed to a barrage of programming in which we're given subtle messages about what people do (or should) consume. More explicitly, advertising and marketing messages are all around. We cannot help but be influenced by the power of marketing. (I've talked to many people who think they're immune to marketing. I just shake my head and think, "You, my friend, are the most influenced of all.")
  • Secondly, we don't think about our spending. We spend on reflex. Or we spend to subconsciously keep up with our family, our friends, and our neighbors. We spend to make ourselves feel better when we're down and blue. We spend to show off. We spend on things we think we want instead of the things we actually use and do. We spend because spending is a habit.

Instead of teaching Americans about credit cards and rates of return, we need to be teaching them about behavioral finance. We need to be showing them how to break free from the marketing messages that are all around. (My top tip? Kill your TV. Watch your shows some other way.) We need to be showing them how to set (and achieve) personal goals, especially financial goals.

Sometimes people wonder why we don't spend more time on the nitty gritty of money around here. Why we don't cover more topics like where to find the best credit cards or how to create a budget? It's because deep inside, I believe these things are secondary. I believe behavior is more important. Building a better budget isn't going to change your attitude toward saving and spending; but changing you attitude toward saving and spending could very well lead you to building a better budget.

The Bottom Line

Ultimately, if we want Americans to be smarter with their money, we need to encourage them to consume less media -- to avoid advertising -- and we need to teach them to master the emotional side of personal finance. We need to show them how to change their behavior. We need to appeal to their self-interest. We need to help them find intrinsic motivation to save. That is, each of us needs to dig deep inside to find what it is that's important to us, what it is that brings us joy, and we need to prioritize that instead of all the other garbage. (Yes, this is yet again a thinly-veiled pitch for conscious spending. So sue me. I truly believe conscious spending is the key to getting rich slowly.)

I'm not suggesting that we abandon financial literacy completely. But I think a constant push for more financial education is a waste of time if it's only going to focus on mechanics, to stick to facts and figures. To truly be successful, financial education has to address the behavioral side of money because that is absolutely the biggest piece of the puzzle.

I don't have any solutions right now. All I have is this epiphany. I'm not sure yet what to do with the insight. I'm about to begin my next book project, and I'm sure to incorporate lots of behavioral concepts into the text. And, of course, I'll continue to emphasize behavioral finance here at Get Rich Slowly. But what can be done to help Americans at large? How can we engineer societal change with regards to personal finance? I don't know. But I'd like to think it's possible.

The original article can be found at GetRichSlowly.org: