Financial Literacy Will Keep People Out of Debt

I prefer facts over myths and assumptions. One of the consistent myths in the personal debt arena is that more financial literacy classes will keep consumers out of debt.

I get it. It sounds logical but it’s like a great scam, based on some small bit of truth.

The reality is that since the early 2000s I’ve been talking about the poor strategy of relying on financial literacy or financial education as a tool to help people stay out of financial hot water.

If we go back to 2009 you can read Financial Education For High School Students Does Not Work and Could be a Waste of Time and Money.

Or how about back to 2007 with Is Financial Education for Students Alone An Effective Solution?

As you can see, this is a topic that has held my interest for a long time. Actually, at least as far back as 2003 when I was quoted as saying, “Simply going through financial education doesn’t necessarily make you smarter and better able to handle money — it makes you more confident that you know what you’re doing.” Confidence does not equal good decision making.

So as I read through yet another scholarly paper released, Pathway to Personal Financial Success by Ph.D. candidates Jeffrey Tyler and Jim Servi at Oklahoma State University I was intrigued by their statements. You can read the paper at the bottom of this post.

They said, “The current thinking amongst academics and policy makers is that improving financial literacy will lead to financial wellness. However, there are several problems with that solution. First, and foremost, is the lack of evidence that financial literacy leads to behaviors that will create wellness (Fernandes, Lynch and Netemeyer 2014). Part of this is due to a lack of a clear definition of what financial literacy is.

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Leading scholars, such as Lusardi (2007) and Mandell (2006) equate financial literacy with financial knowledge. Quoting Richard Thaler in the New York Times (10/2013), “In some ways, the finding that financial education doesn’t provide long-term payoffs is hardly surprising. After all, how much do you remember from your high school chemistry class? Unless you use chemistry at work, you probably don’t recall much about ionic bonding.” Consequently, knowledge acquisition, while useful, will have a limited long-term impact on wellness.”

See also Money Personality Quiz

A better tool to raise awareness about credit, spending, saving, and investing is for people to understand their individual inherent money personality. You can even take this online test to discover yours.

And that’s what the authors concluded as well. They said, “It is our contention that the behavioral side of the equation is the more tangible aspect of the search for financial literacy.”

“In their meta-analysis of financial literacy and the relationship to financial behaviors, they showed that the linkage was not only small, but also fleeting in its effectiveness. Indeed, while not a direct focus on our study, we find that Financial Literacy is a flawed concept, not well understood or defined by academics.”

So more and more time, effort, and budgets get poured into financial literacy training in a flawed exercise to somehow force people to make better financial choices.

I don’t think anyone has figured out what the secret sauce is to make everyone excessively great at managing their money and saving for retirement. It’s complicated.

But what I absolutely know for certain is the misguided reliance on financial literacy education alone might make people feel like they’ve done something positive, but have they? Really?

Prove it.