Financial Education Could Be a Bad Idea

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« Are 401(k) Plans Really That Bad? | Main | Got a Bad Attitude? These Ten Actions Will Help You Snap Out of it! »

Financial Education Could Be a Bad Idea

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

Topics: Financial Planning |

Comments to “Financial Education Could Be a Bad Idea”

James Says:
August 27th, 2008 at 12:03 pm

You’re right, we can’t expect people to be as knowledgeable as we are, but people should learn at least a few basics about finances. PF can get pretty complicated but there are just a few basic principles that you don’t have to be a rocket scientist to learn. Budgeting, spend less than you earn, etc. These don’t really change over time.

What’s frustrating is that companies think WE’RE COMPLETE IDIOTS! I regularly see a commercial where someone is buying a car and getting a rebate and her one line is “I’m going to pay off my student loan!” She’d use the money to pay down a low interest debt rather than the higher interest vehicle loan.

You don’t have to be able to pick stocks, but you need to know the basics.

JimmyDaGeek Says:
August 27th, 2008 at 12:44 pm

Wow,
I am wordless.

I have some of these issues in my own family.

I salute you for your efforts.

Apparently, things you and I take for granted, in terms of comprehension, are way over the head of some people. True financial education has to start way at the bottom with earning money, paying taxes, writing checks, balancing check books, basic household bookkeeping and paperwork, etc.

I hate to admit it, but it seems that part of the subprime mess was truly caused by people too eager/stupid/ignorant/embarrassed/unaware/trusting to sign a mortgage. They believed the thief who told them they could afford to buy a home even though you and I could look at their finances and see the opposite with our eyes closed.

"Mo" Money Says:
August 27th, 2008 at 1:11 pm

I totaly disagree with Associate Prof Willis, if only one person is helped, that would be worth the training. We can’t expect everyone to become an expert, but if they learn the basics, it is better than not knowing.

Rex Says:
August 27th, 2008 at 1:57 pm

I wrote an article to Money magazine regarding the article about Lauren Willis. What irks me is that there are things mentioned in that article that have no source. For example:

Question: What’s so bad about financial education?
Answer: It doesn’t work…

Well I have seen a litany of studies that argue otherwise. Not only that but I too teach a personal finance class as a volunteer and refuse payment for my service. I am not involved in financial services and just get a kick out of helping others get out of debt. Meet people around town that tell me they have paid off credit cards, cars and in 2 years my wife and I plan on buying a house with cash, I just turned 30. My wife and I killed 3 credit cards, 2 cars & $50k in student loans all because we took a personal finance class & learned to sacrifice. Before the class I had little interest in personal finance and knew little about it. If the classes and education do not work then Lauren Willis needs to come up with an explanation of how my life and the lives of many others I know have changed after taking some classes.

pw Says:
August 27th, 2008 at 2:10 pm

I totally disagree with Assoc. Prof.Willis.

As a woman teacher back in the 70’s I was asked to attend classes in the automotive dept. to see if we could get any women in the class. I did! I earned a mechanic degree as I pursued that on my own because it was so good and fun.

I worked on my car frequently on things I could work on (strength & expensive equipment issues). I tought my husband and he helped with strength. When I no longer wanted to spend the time and could afford to pay someone to do repairs, I knew exactly what was wrong with my car at all times, what needed immediate care and what could wait, and learned quickly to choose a good mechanic who told me exactly what was wrong with the car and what could wait. I got from mechanics list of thousands of dollars of unnecessary repairs needed and also those lists that were honest.

It helped me choose a good mechanic. Whenever I had work done on my car, I knew exactly what entailed repairs, how much it should cost, degree of difficulty etc. And called the mechanic on it each time things went out of line and won!!
(Didn’t pay)

I only wish I had taken classes in finance back in the 70’s, I have had to learn that on my own. And I have paid for not knowing, just as others have paid huge auto repair bills when unnecessary.

Now, not everyone is going to get out of classes what I got out of them, but I taught many people how to fix their cars or advised if they were getting a fair estimate. Including last winter in a snow storm at work when 1 of our corp owners car wouldn’t start and no one knew how to jump it–I did!! And got HIM on his way to the dealer for repair. Safely.

I regret that people don’t have the opportunity to learn, some will, some won’t–as a former teacher this is usually true. But because 1 person doesn’t learn doesn’t mean that the other 25 should not.

I have a hard time working on cars now, they are hi tech and with computers and electronic ignitions need special equipment. But the basics stand. I learned enough to know what I do know, what I don’t know and when I need to consult a professional.

It is the old 80/20 rule.80% will get SOMETHING out of the class, 20% little if nothing. How sad a college prof would deny anyone a learning experience.

Miguel Says:
August 27th, 2008 at 4:43 pm

Years ago, I taught some volunteer classes for Junior Achievement in an inner-city high school (the kind where when people hear a loud bang they assume its gun-fire and duck under desks). While the JA program is mainly designed to introduce students to capitalism and business concepts, I made it a point to introduce some more practical personal finance issues into the discussions.

I’m not sure just how much I got thru to these kids, but I think I made an impact on some of them, if only by example. For instance… when asked what kind of car I drove, the kids were shocked (mortified might be more like it) when I said I drove a beat-up old Japanese economy car. This did not compute. Here I was, a model of success, a college-educated high-income professional, a ghetto kid who made it out. Wasn’t I supposed to be driving a tricked out Escalade (or whatever the 1990 equivalent was) to command the respect of my peers.

As we talked thru issues like the cost of being an adult, living on your own, and the concept of budgeting and planning for things like a home, a car, an apt, marriage, kids, retirement, etc, I think they slowly started to catch on, like a fog lifting, that things didn’t work out there in the real world quite the way they thought.

Whether or not they got any practical skills out of it, I don’t know, but if they were listening, some of them certainly got some of their assumptions turned upside down.

In one memorable session, we were doing mock job interviews, and I critiqued one of the interviewees by pointing out that using street slang in an interview could cost him the job oppty. Ohhh man… this kid piped up in angry indignation, that this “was simply not fair,” followed by an uproar of agreement from the class. THAT was a “lite bulb” moment for me. THIS is the baggage they will carry with them out into the world when they graduate from this place - not just the lack of skills, but the attitude of entitlement. These were hardly priviledged kids, quite the opposite, but in a way, their complete isolation from the main stream made them extremely myopic.

I think being able to have these kinds of frank and open discussions with teenagers in the right setting, is critically important. Even if they don’t get the specific PF skills, somebody has to show them that what they see on TV has little bearing on reality.

Honestly, I think that one of the major reasons so many people are screwed up PF-wise, is that they never reconciled the lifestyle they see on television and in magazines with reality.

mapgirl Says:
August 28th, 2008 at 11:45 am

There is a personal finance game called Reality Store for teaching kids how to budget. I’ve played it with adults for a training class and I found it really does reflect the world of budgeting and the kinds of decisions people need to make when faced with limited resources or some sort of crisis requiring money to be thrown at the problem.

As a volunteer I’ve taught basic budgeting and gone over basic elementary school math concepts with my students. I don’t get tired of it. If it’s what my students need to know, I provide it to them. You can’t get exasperated or become too jaded at people’s ignorance. I think of it as coaching and teaching them how to think about their money because a lot of times, folks come to the class not ever having someone sit down and actually bring it all together in a cohesive way.

Savings Toolbox Says:
August 28th, 2008 at 12:05 pm

There are so many valid aspects to this post, it’s hard to sum up the comments. I think it all boils down to an individuals WANT to learn how to effectively deal with money. I think what people are taught as children or what they have learned from observations of their own family are what make the most impact. There are all different levels of understanding money management and those who want to expand their knowledge need to do it on their own terms, through their own efforts, in order for it to be effective.

Brent Says:
September 9th, 2008 at 7:56 pm

I read the article in Money and find Professor Willis’s comments and approach condescending and elitist. Her argument essentially negates a person bettering him/herself through the pursuit of education and experience. The logic escapes me coming from a university professor. There is nothing in a basic personal finance course that comes close to the complexity of a public school curriculum. In short, pretty simple stuff, you just need to apply it and have it take hold of you.

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Financial Education Could Be a Bad Idea