Is Money Education is a Waste of Time?

We've talked about the value of money education in many different situations. For example, there's an obvious value in teaching kids about managing money. Furthermore, we've discussed the potential for teaching those on government assistance about handling money.

Well, here's a law professor who "specializes in financial products regulation" that says teaching people about money is the wrong thing to do. Her thoughts:

Teaching them 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.

It may do the opposite. 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.

So, what does she suggest we do instead? Here's her advice:

Stop trying to turn everyone into a financial planner. Instead, 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.

Ok, I agree that teaching people to be smart consumers (and realize that many financial planners are simply salespeople) could have some benefit. But I can't agree with the "more regulation" argument (though what suggestion would you expect from a law professor specializing in regulation). I'm in favor of calling in the government in the case of safety issues and the like, but when we enter the area of "helping people make smarter decisions" or "protecting them from themselves", I start to draw the line. After all, when does the bad decision-making protection end? It seems like it could be a very slippery slope and I for one prefer making mistakes and having my freedom over having Big Brother tell me what I can and can't do all the time.

Besides, we're not talking rocket science here. Learning just the basics (maybe 10 principles in all) of money management can make a HUGE difference in a person's life. In fact, if the average person would simply take THREE simple steps, they'd become rich.

And finally, I'm not willing to concede that we've had a great attempt at financial education. I got nothing at all in school related to personal finances and I've had many others comment that they've had similar experiences. Have we really given financial education a chance in this country?

What's your take? Is financial education a waste of time? Is government intervention the right solution?

Comments

[Scott]

Wow! So much could be said here. But let's cut to the chase. We'll keep you ignorant so that you need someone to protect and take care of you. Then we'll create more bureaucracy to regulate those who might take advantage of you because of your ignorance. We wouldn't want people to take ownership and responsibility of their own futures, or a whole bunch of people would be out of government and political jobs. Sounds strangely similar to the underlying approach and thinking of one of our major political parties, doesn't it?

[Bad_Brad]

Absolutely not, money education is not a waste of time. I believe it should be taught in high school. For the 90% of high school students who are not going to be engineers, scientific researchers, or actuaries, I would say this class would be more valuable than algebra or geometry. At a minimum the class should cover the basics of:
1. Banking
2. Credit cards
3. Interest computation and compounding
4. Investments
5. Income tax
6. Personal budgeting
7. Insurance
8. Tax-advantaged accounts such as 529 and Coverdell for college and 401(k) and IRA for retirement

[samstrickland@comcast.net]

Wow, I've been waiting for those in support of more government regulation to just come out and say it, and this professor finally did: "people are just too stupid to be given the liberty to make their own choices" (O.k., maybe I paraphrased). It's a shame there are so many folks that give her a good basis for the "people are just too stupid" belief.

Remember the good 'ol days when the government's expected role was to protect us from actual fraud (e.g. mortgage holder using a little white-out on the interest rate after closing).

[Todd]

The odd thing is that it is adults now, who are interested in their financial well being and have taken the time to learn about finances who wish we had a class in basic consumer economics and hence believe it should be taught now.

I don't know what type of classes people have been advocating in that she cites "the gulf between current consumer skills and those needed to understand today's complex non-standardized financial products..." (All quotes are taken from her abstract of a law review article she submitted which can be found at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1105384.) I am curious what she believes is taught in those classes vs. what is taught in those classes (if they exist) vs. what those of us who had a financial awakening believe needs to be taught.

I am pretty sure they are not teaching hedge funds, selling short, etc. What I would hope would be taught is, first and foremost, the math of compounding interest. I am pretty sure that the laws of exponents does not change frequently. Yes interst rates change, so you show the students two different numbers to plug in. Teach them to be smart consumers which can be defined any number of ways but again, $1 foolishly spent in 1950 is still foolishly spent in 2008 (though not as detrimental). I am curious as to what she thinks a class in high school would cover? In chemistry, we didn't get to handle plutonium...we didn't even get to play with sodium. It was kept safe and basic.

One scary line from her abstract is "[t]he search for effective financial literacy education should be replaced by a search for policies more conducive to good consumer financial outcomes." Ah good, more government stewardship. Has not really worked in the past so lets give it another try! I know the quick analogy is to the so called predatory loans and how there should have been government involvement all along. It seems that for something to be truly predatory, a fraudulent statement would have had to have been made at some point or undue pressure/unfair business practice and guess what? These are already covered by laws. Though she clearly does not see thing this way, "[w]hen consumers find themselves in dire financial straits, the regulation through education model blames them for their plight, shaming them and deflecting calls for effective market regulation."

Wow.

And an analogy she uses is quite silly. "Consumers generally do not serve as their own doctors and lawyers and for reasons of efficient division of labor alone, generally should not serve as their own financial experts." True, but they know enough that if they have a cut to wash it out and put a band-aid on it. Kind of like first aid in junior high. Does she believe we learned heart surgery in first class? No, we learned the basics and that is what a financial literacy course should do.

I am saddened by this article. She notes that there is empirical data supporting her thesis that financial education = harm and I am dying to see this. (Please FMF, follow up on this when her article is published!) It seems she is using financial education as an excuse to push for greater government involvement in our everyday finances. I guess I am not a socialist. Really, you should read her abstract...it spins quite a tale.

[Curt]

It is very evident that people in America are not properly educated on Financial Matters and how to properly manage their money. Problems such as the Mortgage Crisis resulted from this. When gas prices went up and people started complaining that they couldn't get by it just shows how close to disaster their finances were. We need to start educating people to take ownership of their lives and quit relying on the Government for a handout. That should be their last resort not their first. Blogs such as this would be a great start.

[MasterPo]

Make "The Millionaire Next Door" required reading in High School.

[Kevin]

Honestly, I don't think most high school kids would give a crap about PF class. As long as Mom & Dad are paying their way they'll likely ignore it. I'm sure there are exceptions, but those kids will likely go out and learn on their own anyway. I think it's the parents' responsibility to teach this stuff.

[Chris]

Has there been any effort to really include money management into highschool? That quote takes it for granted that teaching doesn't work, but that sounds baseless.

[pink panther]

Such a conflict of interest: state-sponsored gambling and educating students about money. Guess which is winning.

[MBirchmeier]

I think her point is valid on some regards. Teach someone to use a knife and they're good to go, but what happens when they pick up a saw, a scalpel, or a machete. If they think all blades are the same they're liable to hurt themselves.

I think everyone here believes people should be able to master the basics of their own finances, checking and savings accounts, credit cards, and maybe even loans. But mastery of these basics is not the same as mastery of stocks, funds, bonds, mortgages, or other investment tools. However I feel that good education would place emphasis on the difference of these avenues, and the fact that it is a good idea to visit a planner or expert when you feel you need to make a decision out of your comfort zone.

Learning the principles of money is like learning the principles of math: you can't teach the unwilling, and it takes a lot of time, and mistakes will be made, but that doesn't mean it shouldn't be taught.

[Selfish Idiot]

No! Please don't teach this sacred info to just anybody! If we can keep control of this information, we can use it to our advantage! I want to grab a bigger piece of the pie, and keep it all to myself!

[a]

My high school economics teacher covered a bit of money management (mostly the stock market). It was good to learn but not particularly useful. High schoolers can't really use personal finance because they don't have much in the way of finances and making a financial mistake doesn't mean anything. So they can't go to a party or they'll have to beg their parents extra hard. Big deal. So I'll agree with her that perhaps personal finance education is lost on high schoolers.

However, I find it hard to believe that personal finance boot camps wouldn't benefit those in college or just starting in the work force. That's when many are faced for the first time with actually having to manage money. Budgets, credit cards, interest rates and all the like suddenly become real concrete issues rather than just abstract concepts.

We don't need to teach hard core investing practices (short selling, margin buying, etc) and we don't need to shove frugality down people's throats either. Budgets, basic concepts of saving money and not carrying credit card debt alone would make a huge difference for most people.

Basic everyman education should include:
1. Budgeting and tracking your money.
2. Credit cards.
3. Basic savings vehicles (bank accounts, CDs, anything short term).
4. Small loans.
5. Investment and retirement savings.
6. Taxes.
7. Mortgages.

[rdub98]

I would have to advocate for more regulation. If we were to actually educate people on finances and money management then FMF would be out of a blog and then where would we be?!?!? Huh?!?!? It would be ANARCHY!!!!!!

;-)

[Anitra]

The basics of financial education:

1) Spend less than you earn.
2) Until proven otherwise, assume everyone who tells you what to do with your money wants a piece of it.

[Hank]

How is any education a waste of time? Maybe you won't be able to quantify the payoff monetarily, but we are the sum of all our experiences and education whether formal or informal.

[sartainb]

As someone who has learned more in the last 12 months than I did in the whole of my other 36 yrs put together, I think education is a HUGE part of the answer. My background. Not college educated, Dad was very old school and would only say about money/credit, "if you cant pay cash, you dont need it.", mother of 3, currently work for a bankruptcy attny.

I see people from all economic/educational backgrounds and the biggest problem out there is that most consumers just assume that the people issuing the credit card, mortgage, car loan, would not be giving them the loan if they they, the consumer, couldn't afford it. When they get to the point that they are seeing me all they know is that they cant afford to pay everyone they owe and still eat and have a roof over their head.

Personally even before I started my current job I required my 2 oldest to take the personal finance class that their high school offers and make an A in that class before they were allowed to get so much as a drivers learning permit. One child is building up a savings acct. as we speak and the other has learned that if he doesn't deposit all of his check into the bank acct. w/the debit card that he doesn't spend as much.

As far as regulation goes, I am still amazed at work when I see someone that has 4 capital one accts. each with a balance of more then $1000.00 and they are still receiving offers from capital one to extend them more credit. So yes I think some regulations need to be put in place but I wouldn't want the job of deciding which ones.

[MasterPo]

In order to teach anything you need to have a real grasp of the material.

I wonder how many HS teachers themselves have their own financial house in order before they try to teach it to our kids?!

[LotharBot]

Finance CLASSES/SEMINARS might be a waste of time, but finance EDUCATION is not. There's a difference. If you actually successfully teach people some key principles of money management, it's worth a lot. If you just make them do well on a test, or put them in a room where you're trying to sell them something, it's of negative value.

I like the OP's quoted point about not making everyone into financial advisers. I think part of the problem is that we try to focus on teaching people how to invest -- debt ratios, portfolio balancing, etc. -- when what we should be teaching them is how to budget, spend beneath your means, etc. You have to get people to the point where they can save 10% of their income before it's worthwhile to teach them how to earn a good return on their savings.

[Proletarian]

Financial education is certainly a waste of time and money on the poor. For example, I fail to see any practical application to the poor of education on investments, tax-preferenced accounts, mortgages, and real estate. It would bother me to have to sit through such classes, especially if I had to pay for the privilege.

[shadox]

This is not about protecting people from themselves, it is about protecting people from other, more sophisticated people that have an interest in selling you stuff that works for them rather than for you.

This definitely calls for government regulation. It has nothing to do with personal liberty.