Personal Finance Education Can’t Solve All Problems
I’m a believer in life-long learning. We’re better off when we take the time to learn what we can about personal finance. However, some people seem to believe that if we just taught personal finance well enough in schools, we’d prevent so many people from handling their money poorly. Education is valuable but will never be a complete solution.
The first reason why personal finance education isn’t enough is human nature. We know we should eat well and exercise, but many of us are fat and out of shape anyway. When I eat a donut, it’s not because I lack education; it’s because I had a lapse in willpower and the donut was available. Similarly, personal finance education will help to a point, but even those who know better will often lack the impulse control to make consistently good money decisions.
Another reason why personal finance education isn’t enough is that businesses that make money from our poor choices will adapt. Financial institutions have been remarkably successful at marketing debt to the masses. If their current marketing methods stopped working due to better education, they’d change their methods. Many successful businesses are made up of nine parts providing valuable goods and services and one part exploiting human weaknesses. Maybe their adaptation wouldn’t be fully effective, but it would work to partially undermine any widespread personal finance education.
People are not well suited to making good long-term financial decisions. Better education would help, but we’re still likely to keep buying ridiculously expensive vehicles on credit and keep giving away half our savings to mutual fund salespeople.
To improve the finances of the average person, we need a two-pronged approach. One prong is improved personal finance education. The other prong is better government policies and regulation. We need to make it easier for people to make good choices. Workers should have the option of a simple low cost retirement savings plan. A more difficult challenge is to help people avoid building foolish debt.
Financial institutions are unlikely to worry about personal finance education efforts because they can confidently count on their ability to market their products in different ways. However, any government effort to steer Canadians away from debt and poor investment choices is likely to be met with fierce resistance. But the potential rewards for the average person are enormous.
The first reason why personal finance education isn’t enough is human nature. We know we should eat well and exercise, but many of us are fat and out of shape anyway. When I eat a donut, it’s not because I lack education; it’s because I had a lapse in willpower and the donut was available. Similarly, personal finance education will help to a point, but even those who know better will often lack the impulse control to make consistently good money decisions.
Another reason why personal finance education isn’t enough is that businesses that make money from our poor choices will adapt. Financial institutions have been remarkably successful at marketing debt to the masses. If their current marketing methods stopped working due to better education, they’d change their methods. Many successful businesses are made up of nine parts providing valuable goods and services and one part exploiting human weaknesses. Maybe their adaptation wouldn’t be fully effective, but it would work to partially undermine any widespread personal finance education.
People are not well suited to making good long-term financial decisions. Better education would help, but we’re still likely to keep buying ridiculously expensive vehicles on credit and keep giving away half our savings to mutual fund salespeople.
To improve the finances of the average person, we need a two-pronged approach. One prong is improved personal finance education. The other prong is better government policies and regulation. We need to make it easier for people to make good choices. Workers should have the option of a simple low cost retirement savings plan. A more difficult challenge is to help people avoid building foolish debt.
Financial institutions are unlikely to worry about personal finance education efforts because they can confidently count on their ability to market their products in different ways. However, any government effort to steer Canadians away from debt and poor investment choices is likely to be met with fierce resistance. But the potential rewards for the average person are enormous.
Among good policies may I suggest a change of bankruptcy laws to effectively keep irresponsible consumers with their debts till paid back? Why do I have to pay for other people through fees, prices and taxes?!
ReplyDelete@AnatoliN: I don't think this is practical. Perhaps the problem is credit companies giving credit to people who they know likely can't pay the money back.
Delete"Financial institutions have been remarkably successful at marketing debt to the masses."
ReplyDeleteA very good point.
[Warning: Star Trek reference]: It kind of reminds me of the Ferengi who travels back to 20th Century Earth and discovers that people "pay money to poison themselves" (tobacco). He sees what the banks see: an opportunity for endless profit.
I love to own the banks, but otherwise try to have very little to do with them.
@Loonie Lover: I've heard many people joke that the only way to get your bank fees back is to own bank stocks.
DeleteThe successful marketing of debt is key. People don't know how to save money anymore (as the statistics bear out, with a negative savings rate here in BC -- ouch).
ReplyDeleteI hear many of my own friends talk about hot stock tips, the latest investment guru they're following to beat the market, etc., etc., but very seldom is there any conversation about what percentage of their paycheque is going into a retirement/investment fund, or steps they might be taking to cut expenses. Worse still, some are foolish enough to take a cash advance from a credit card or LOC to use as funds for a speculative investment.
Investing advice is important but I think it often puts the cart before the horse. Becoming a saver is the obvious but often overlooked first step in my humble view. Open a boring high-interest savings account. Set up a direct deposit to that account. Get used to regularly saving money. Foster a saving mentality. Accumulate some cash. THEN worry about deploying it to appropriate investments. That order of operations might forsake a little investment return, but, for myself at least, it was crucial in transforming from spender to saver, and in turn from saver to investor.
Good insight, Juan. A lot of friends/acquaintances know I'm a successful investor (I walk around dressed like the guy from the Monopoly board game (just kidding)), and ask for tips, but I get the impression that they don't have any surplus to invest anyway. What's the point in me giving investing tips? It comes down to reducing spending, paying off debt, etc. Boring, but simple!
Delete@Juan and @Gene: Very true. I've taken the approach of emphasizing saving and no debt with my sons. Investing is secondary.
DeleteWish I could find a primary source, but I heard that Jack Bogle figures people would rather pay $1000 in invisible MERs than say $50 out of pocket (the numbers aren't right in this example).
ReplyDeleteI think a reasonable solution is to have mutual fund salesmen show up unannounced at an investor's house wearing a balaclava, carrying a bag with a huge dollar sign on it, and have the investor peel off copious twenty dollar bills to pay their MERs every year while being poked in the ribs.
@Gene: I seem to remember a comment from Bogle along those lines, but I can't remember where.
DeleteThe "while being poked in the ribs" is a nice touch that rounds out the mental image beautifully.
The new Financial Literacy Leader has a tall task ahead of her to try and coordinate efforts between the private sector, public education, and not-for-profit groups who all want to promote financial literacy in their own way.
ReplyDelete@Robb: The biggest challenge I see is fending off those who wish to undermine the process to protect or even increase their income streams.
DeleteA good starting point would be for people to leave school with a cursory knowledge of the language of personal finance. As far as I can tell, this simply isn't the case today, generally speaking. Most late-teenagers can't even begin to adequately define taxable income, tax deduction, dividends, etc.
ReplyDeleteThis is borne out by the oft-cited anecdote that most people believe an RRSP is an investment-product, as opposed to an investment-container.
As I remarked on Twitter, personal finance education is necessary rather than sufficient. It would at least slightly reduce the extreme information-asymmetry between retail-investors and investment-salespeople.
@Dave: Agreed. I'd like to combine this education with some government innovation to help people avoid some of the worst choices.
DeleteI feel some common sense financial knowledge should be taught. I think there is simply nothing now. Some kids parents might be in their 2nd or 3rd generation of living in debt and thinking this is just how life is. Somehow the "value" of money has to be shown to kids. As simple as that sentence sounds it sums up a culture of people who really don't have a concept of money and how it affects their life.
ReplyDeleteAlso good credit habits vs. bad. We here look at money differently. We have an interest to come to a website like MJ on J. I have 55 co-workers around me. If there was more then 5 here that weren't in trouble financially or have "hope the government pays me X..." as their retirement plan I would be really surprised. Maybe if when they were young basic home budgets, and investing, and credit use were taught in school more people would have a better chance at having a more stable financial life? I get so frustrated talking to people and hearing their sad stories that they could have avoided easily but they just don't get it.
@Paul: I see a lot of people create tough circumstances for themselves as well. Education is a good thing, but as I argued, I think it can only go so far.
DeleteI always read with interest folks who chat about financial literacy. It reminds me of my time teaching financial literacy to teenagers as part of a basic math course they had to take (and pass). Seldom did I feel I was taken seriously. We looked at all the financial literacy topics so many people talk about. Debt management, credit ratings, budgeting, living within your means, you name it.
ReplyDeleteNow that these people I taught are in their mid 20's, maybe they'll look back at my class and say "OMG! The old guy [me] was right!" You are right, it can only go so far. We all know that experience is the best teacher, but I felt it was worth my time with them.