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How to Solve the Financial Literacy Problem

Many Americans experience financial jeopardy at some point in their lives, and experts share an opinion about a strong cause: there’s no formalized way to learn how to use money properly, so most people must learn by experience, making mistakes as they learn what is necessary for building a solid financial foundation. It would save a lot of headaches if we could somehow warn people in advance that they’ll need to consider financial consequences when making decisions in their life. This consideration would help families and individuals build wealth over time. This early warning would have more meaning if we could somehow extol the virtues of the often unstated goal, financial independence.

Financial literacy advocacy programs try to address this problem. Encouraging good behavior with money at an early age could help increase the probability of achieving financial success in the future. With efforts conforming to this principle, some high schools offer money management classes while some companies like ING Direct offer tools to help younger students learn about money management. These approaches have not been proven to have a positive effect on long-term financial fitness.

Kid with moneyI’ve previously discussed the limitations with money management classes in high schools. First of all, if a child doesn’t receive the first lesson with money until he or she is a teenager, the student has already formed an attitude about money that will define the relationship during the important formative years when he or she later begins earning money for living for the first time. At the age when children are forming their money personalities, they are most influenced by parents. If the parents aren’t making an effort to set a good environment and example for handling money, it will negate any effect by a money management class as a teenager.

Most teachers are not trained in personal finance, so they cannot provide the best instruction. And without mandatory money management classes, only a small percentage of students will choose this class as an elective. Those who choose this class make this choice at the expense of other possible electives, many of which enrich the mind rather than purport to enrich the wallet.

At the same time, society can’t rely solely on parents to transmit good financial habits to their children, even if the right tools are provided by outside sources to help those parents.

The problem of poor money management skills manifests itself in lower-income communities more than middle-class areas. Change, in the form of professing the opportunities that one can enjoy through financial independence, must come from within the community. It’s important for successful individuals to be involved with the community, serving as a role model, particularly when parents don’t have the skills or resources to serve in that role. Poor financial management and a lack of economic mobility can become a cycle. As a child grows up without a great financial role model, he or she will continue to be poor role models to his or her children.

The only way out is to break the cycle, and the only way to break the cycle is for successful individuals to assume the job of parents as financial role models.

Photo: Pink Sherbet Photography

Updated March 8, 2012 and originally published January 16, 2012.

About the author

Luke Landes is the founder of shizennougyou. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 23 comments… read them below or add one }

avatar 1 Anonymous

Unfortunately, I don’t see a remedy for this problem. There is no shortage of information out there, but the financially illiterate folks won’t be reading this blog. I believe that a lot of money management is common sense – you don’t write a check for more than you have in your account (unless you have overdraft), don’t pay 18 % interest on a credit card balances and have money in a savings account paying almost nothing in interest, don’t buy a house when you can’t afford to pay the mortgage….We can go on and on. The best you can do is take care of yourself and teach your children financial responsibility.

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avatar 2 shellye

Very, very true. There is an abundance of financial literacy materials out there, and lots of people (myself included) who are willing to teach. But teachers often don’t have time in their class schedule to have a guest speaker teach on the subject.

Additionally, many parents don’t or won’t teach financial literacy to their own kids because they have made a mess of their own personal finances, then don’t want to talk about it.

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avatar 3 Anonymous

I agree that it is definitely going to require financially successful and fiscally responsible people to step up and take an interest in helping teach our next generation.

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avatar 4 wylerassociate

I think the real problem is ignorance because those who are financially illiterate and have internet access shouldn’t have any excuses not to read as much information about improving personal finance. Those in low income areas who don’t have internet access are people that need help but the problem unfortunately for them is that venues where they would get this type of financial information (community centers, churches) are closing because of their city’s poor fiscal situation.

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avatar 5 Anonymous

One of the problems with the concept of teaching personal finance is that personal finance is just that – personal! There are a million ways to do it, many of which work for some but don’t for others. Obviously at their core they should all be based on “spend less than you earn,” but the way different people can approach that are as numerous as there are people.

Secondly, I think it’s difficult to teach personal finance concepts to kids and high schoolers because they don’t have enough a) income and b) expense to understand the consequences of their financial decisions. I think that’s one reason there seem to be a million 27-year olds with strong personal finance goals (as indicated by the typical Free Money Finance reader profile subject), there are a ton of recent college grads a few years into their careers and they’re recognizing that they can build a great financial foundation by being smart right now. Most didn’t learn that as kids, but learned by (often bad) example once they were old enough/wise enough to form their own opinions on the matter.

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avatar 6 lynn

I’m thinking students can be taught at an early age with pretend money and a pretend budget, in schools. A little gift shop could be set up to use the money. The only problem would be if Jonny did do so well, mom or dad would be angry that he came home with a frown sticker instead of a smiley face. That’s another blog.

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avatar 7 lynn

That should be ‘didn’t do so well’.

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avatar 8 Anonymous

This is tough. If we were able to pick one lesson and start teaching it early, something like Don’t Spend More than You Have, they may be able to safely handle or avoid credit cards. Even just one lesson like that would have saved me years of hardship.

It is hard to say no to something when everyone else is saying yes

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avatar 9 Anonymous

I think there is a real opportunity to harness the Internet and mobile technology to help parents be more effective financial mentors to their kids. The right software can give parents a nice framework/roadmap (instead of being just an Internet fire hose of info – to @wylerasociate “no excuses” comment), adapt to the personal philosophies of each family (to @Jonathon’s “personal” comment), and focus on basic yet powerful skills (to @John’s) comment. This is what I have committed the last 6 years to building at FamZoo and will continue to pursue. An increasing number of others are making valiant efforts in this area as well – MoneyTrail, ThreeJars, FamilyMint, DoughMain, Zefty to name a few. Kudos to all for chipping away at the problem and dedicating their efforts to instill solid life skills in kids everywhere. To find out more about a broader effort to improve life skills education for kids, check out the Parenting 2.0 group on LinkedIn.

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avatar 10 lynn

This would work in an ideal situation, but people are devirse and the ideal doesn’t exist. That’s OK because I’d rather see freedoms than ideal.

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avatar 11 Anonymous

Is the problem really financial illiteracy? Surely the math related to compound interest and interest rates is taught no later than 7th grade in everyone’s math class.

I think the problem is more about teaching delayed gratification, and a de-linkage between money and happiness. People can see the 18% interest rate in big black letters on the credit card every month. So why do they continue to use the card? I don’t think it’s because they don’t understand what 18% means, most of the time. It’s not like once they figure out that 18% interest is bad, all of a sudden they are new people, pay down all their debt and are financial saints the rest of their lives. Simple math/financial education is not the answer.

I think the rules of thumb about how to handle money and mental rules are more helpful… advice ilke LBYM, etc. Growing up my parents always told me they paid off their credit card every month and they never ever carry a balance, that carrying a balance is an easy way to get yourself into big trouble… so guess what, I paid off my CC bills every month, and never carried a balance (I was too afraid of what would happen if I did.)

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avatar 12 Anonymous

I don’t think the math has anything to do with financial literacy. I too learned the math of compound interest in school, and even as a great math student, it meant diddly squat to me in terms of money or personal finance. That’s the point of the article…how do we teach personal finance?

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avatar 13 Anonymous

Financial literacy programs can be so useful if the information could be communicated without using so much business jargon that confuses the financially illiterate ever more. People are open to advice about managing money.. until you start throwing acronyms and percentages into the mix, then it becomes homework from hell. It helps to apply theories to everyday circumstances. once they have the concept it won’t be so much of a surprise when you teach the proper terminology and different uses.

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avatar 14 Ceecee

I worked in a public assistance office and there was a crying need for financial literacy. The clients all paid huge fees to cash their checks because they didn’t understand the basics of a checking account. It can be very intimidating when you don’t learn at a young age.

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avatar 15 qixx

I think a big part of the problem is not in the teaching but the trouble of what to teach. Do you teach your children/students the virtues of living frugally or making more or barter? The lesson of “You can’t buy that. You don’t have any money.” often turns into a spending spree once someone gets a little income or a credit card. How do you teach fees are bad? I think the hardest part about teaching money is it that money is an abstract idea until you have some. Most younger children have a hard time learning in abstract.

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avatar 16 Anonymous

Agreed – can’t be abstract, need to practice, make mistakes, learn through real financial experiences over extended period of time. I think the book The First National Bank of Dad by David Owen does a great job of laying out a model for the experiential learning of personal finance skills. Several sites out on the Internet now make it easy to put those concepts into practice with minimal effort and minimal prior financial knowledge.

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avatar 17 Anonymous

Check out the PSAs recently launched by the AdCouncil – their sole intent is to encourage young adults to save early and save often. A step in the right direction for sure!

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avatar 18 Luke Landes
avatar 19 Anonymous

Awesome! A new round of ads was just launched a couple weeks ago. They’re hilarious and they get the point across.

But many of the commenters are correct – the people who generally need financial education are not the ones reading the blogs…

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avatar 20 Anonymous

How do you make kids learn anything? You sing about it. At least that’s what I do.

Kids aren’t going to learn anything unless it’s shoved down their throats or it’s cool. Personal finance will never be a priority in schools, so we have to make it cool somehow. Humor and/or music is the only way to go in my opinion.

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avatar 21 Anonymous

The problem with examining the state of financial literacy and trying to pin all your hopes on education is that it’s only half the battle–it needs a little supporting help from its best friend action. While the fitness metaphor has been beaten to death, it offers great insight here: we all know that all we have to do to maintain a healthy weight is eat right and exercise, but knowing you’re not supposed to chow down on a large combo meal doesn’t come into the equation if it’s 11:30 a.m., you didn’t pack a lunch, and your stomach is growling NOW.

The reason the behavioral finance movement has been gaining so much steam lately is because its closing the loop on the gap between knowledge and action; a lot of bloggers are advocating it by telling readers to “pay themselves first” and “automate transfers.” Education, sure, we could always use more of it, but examining how we can be saved from ourselves may be worth even more.

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avatar 22 Anonymous

Great post with good points. Learning financial literacy by example is the best way to go. However, we must still try to reach students through financial literacy programs. Junior Achievement and many others are trying to fill the void, but we always need more volunteers – regardless of age or experience.

A big hurdle is making money a less taboo subject. A 2009 Capital One survey found that only about a quarter of parents discuss money management and banking concepts with their teens. Compare that to 70 percent of parents who teach their kids how to do laundry (according to the most recent Charles Schwab Teens & Money survey). In essence, we’re teaching our kids how to keep their clothes clean, but now how to afford them.

Let’s start giving future generations the tools to prevent another economic crisis — the kind of financial acumen that will empower young people to never have to say, “I didn’t understand what I was signing.”

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avatar 23 Anonymous

I just learned this morning that the H.S. my son goes to will be requiring students to take a personal finance class for graduation requirements. I think this is great news. However, I strongly believe that financial literacy should start in elementary school and be part of the entire curriculum through H.S. Maybe adding another hour to the school day and/or extending the school year would help with implementing this type of course(s).

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