In the last 15 to 20 years, dozens of states have recognized the importance of financial literacy. This is because the financial landscape has become increasingly complex, and the speed of that complexity has only grown as technology shifts the financial industry. When you begin to count the number of financial apps just in the investing and budgeting category over the past few years you can clearly see how quickly things can change.
One example of this was the investing app Robinhood. When the company was founded back in 2013 it became a hit with investors because they offered fractional shares and $0 commissions. Fast forward to 2020 and Robinhood has forced major players like Fidelity, TD Ameritrade and Charles Schwab to bring their commissions to zero as well.
Technology has also transformed the world of sending and receiving payments. Apps like Zelle, Venmo and CashApp have emerged as a simple and easy way to send money and pay for goods. We also cannot discuss the increasing complexity of finance without talking about cryptocurrencies and while Bitcoin was the most popular, there are more than 1,000 different cryptocurrencies in existence.
Managing Your Money is Increasingly Complex
Comparatively speaking, managing your money before 2000 was relatively simple. In 1998, 59% of Fortune 500 companies offered a pension. By 2019 that number dropped to just 16% as employers moved more in favor of the 401(k).
This shifted the burden of financial planning to the employee and raised the need for financial literacy and states took notice. In 2015 only five states required financial literacy for high school students according to MarketWatch. Today 21 states require financial literacy for high school students to graduate.
Despite these requirements, most Americans still fail simple personal finance quizzes each year. For example, in 2017 CNBC reported that 94% of Americans failed an 11 question financial literacy quiz. It isn’t difficult to see how that lack of financial literacy can have a real impact.
- 45% of Americans have no money saved for retirement
- 40% of Americans cannot cover a $1,000 emergency expense
- $466 billion in credit card debt is carried from one month to the next
In total, this lack of financial literacy cost $307 billion each year. In theory, one would conclude that high-quality access to financial literacy would drastically improve these statistics. This argument can be summed up as, “If you know better, you do better.” Evidence, however, does not prove that.
The problem is that financial literacy alone will not solve the problem.
Most Financial Literacy Programs aren’t Targeted to the Right Audience
A number of studies have been published in the last few years suggesting that experiential and just-in-time education efforts are more impactful. This is because common financial literacy topics like mortgage loans and income taxes aren’t applicable to students now or in the next 10 years in some cases.
In New Jersey, for instance, students are required to know how to, “compare and contrast the advantages and disadvantages of various mortgages.” However, the average first-time homeowner is 31. This means that the average 17- or 18-year-old is learning something that they may not use for another 13 years — and over that 13 years, the financial landscape is likely to evolve dramatically during that time.
“If a person is unable to connect their knowledge with action, then having the knowledge does not serve them,” said Accredited Financial Counselor, Brandy Baxter. “What’s missing is the education and tools needed to show people how to connect this information with their future selves. When people develop the skills to see the future benefit of financial literacy, they are better equipped to take action today.”
Researchers Daniel Ferdinance and John Lynch found that “many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention.” This means that any skills learned in a financial literacy class will recede in less than two years.
What can we do about it
A better solution is just-in-time education. This is a more targeted approach that gives participants only the most relevant information that can be applied immediately instead of waiting years to apply it. This is similar to a bank requiring you to take a mortgage lending and credit class before going through the application process or learning about banking and budgeting before opening your first bank account.
Financial Literacy Doesn’t Address Structural Problems
Learning about the importance of your credit score, how to budget and learning about interest rates shouldn’t be discounted. Having a strong understanding of those areas can help improve one’s financial situation, however, in an environment where the cost of education, child care, housing and medical expenses are increasing while wages are flat, financial literacy can only alleviate but so much.
This is all before factoring in student loan debt felt by more than 44 million Americans. These factors are what have led some into the gig economy where, after working a full-time job, someone has to earn extra income just to keep up with basic expenses.
Financial literacy also doesn’t always address structural systemic racism or gender disparities. Black women in America were paid only 61% of what non-Hispanic white men were paid in 2018. This means that it would take a black woman 19 months to make what a white man does in 12 months according to research by the American Association of University Women (AAUW). Keep in mind that black women also hold more student debt than any other group. Holding all childcare, housing and healthcare costs equal, financial literacy may not have the same benefits across all demographics due to unequal pay and student debt outcomes.
What can we do about it
“Financial literacy is currently marketed and segregated into demographic categories: adult, children, retirement,” Baxter said. “I would propose a holistic, family-oriented approach where the family unit is provided financial education based on their family’s unique situation.”
To expand on that, financial literacy programs must acknowledge the systemic barriers that students regardless of age will face and tailor this message to fit the audience in a way they can take action. Not doing so is sending a message that financial literacy lives in a vacuum, distant and removed from the reality that people are facing today.