By JLP | August 27, 2008
We hear a lot of people calling for increased consumer education when it comes to financial matters in this day and age. Not everyone agrees, though.
Lauren Willis, for instance, an associate professor at Loyola Law School in Los Angeles says that financial education for the masses is not only a waste of time and resources, but it may be dangerous.
At first I was shocked at such a statement. How can education ever be a bad thing? A few ways, apparently:
- Sellers of financial products would (and do) spend billions drowning out well-meaning messages to consumers from nonprofits or government agencies.
- Also, financial products and regulations are always changing making it hard for educators to keep up.
- Teaching the basics is a waste of money. Studies show that sending people to either high school personal-finance classes or adult retirement seminars does not result in better financial behavior.
- Financial literacy classes give people the illusion that they can successfully manage their finances. So rather than seek help, they end up making worse decisions.
This is very thought-provoking to me. I can understand the argument that financial companies would just try to sell consumers under the guise of a financial education seminar; financial planners and insurance salesmen and stockbrokers do it all the time – and that’s when dealing with relatively savvy and educated consumers.
Also, I can see how it might be a waste of resources in certain circumstances, especially when dealing with older people who already have bad habits ingrained. And then there are some who just can’t or won’t make responsible financial decisions no matter how many times you tell them about how great compound interest is or how important it is to pay your bills on time. Also, many people who need the most help and make the worst decisions are so under-educated and/or have so few resources that financial literacy classes are way over their heads or flat out inapplicable.
For instance, I volunteer for a non-profit and regularly lead personal finance seminars for women who are trying to enter/re-enter the workforce. Last week one middle-aged woman interrupted my speech on how to track spending to ask what she should do since she gets the numbers mixed up. She keeps getting called by the bank because someone is trying to cash a $75,000 check when she meant to write a $750 one, for instance. I was speechless, unprepared to deal with such a basic comprehension problem. If she can’t even keep her digits straight, all this other information is totally and completely useless!
Another lady wanted me to go into my “how to make a budget” example in more detail. She’d just gotten a job in fast food making $6.15 an hour and she works 30 hours a week and she wanted to know how much that meant she’d be making per month; and she wanted to know how to save up the $500 she needed to get off the Salvation Army program. I hardly knew where to start (though I did use her numbers as an example, and it turns out she can afford to save at least $100 a month, if not more).
In any event, sometimes the best financial advice you can give someone is to GET HELP – not to try to turn them into a financial planner. Lauren Willis’ advice is to try to get everyone to understand that the people selling you financial products often don’t have your best interests at heart. “What’s more, politicians need to regulate financial products and make them into things that will benefit consumers, rather than expect education to be the cure-all it is not. Sellers could be required to offer you a default product that is safe. Whenever you applied for a mortgage, for example, you would have to be offered a 30-year fixed amortizing loan.”
In general I’m an advocate of people being responsible for their own decisions rather than turning the government into a giant babysitter. But at the same time I do agree that we can’t expect everybody to be as knowledgeable and diligent about personal finance as those of us reading this blog right now.
More from Meg at The World of Wealth