Does Preaching Financial Literacy Actually Create Change?

April 21, 2014

April is Financial Literacy Month. And while knowledge in many cases is power, I would say that the jury is still out on whether just preaching the tenants of financial literacy translates to what really matters – a change in behavior or the establishment of positive financial habits.

The premise is a good one – teach the basics of budgeting, debt management/repayment, investing, etc. and we’ll create a society full of people that are equipped to make positive financial decisions that in turn translates to a healthier economy.

But let’s face it – knowing better doesn’t necessarily mean we do better. After all, the vast majority of the population is aware that junk food is unhealthy for you and exercise is good for you. So why aren’t we all consuming huge amounts of vegetables and making an effort to move more? Because knowledge isn’t always enough to change behavior or habits – those can be engrained in us from an early age.

Is early financial education beneficial?

Knowing that imparting a few pieces of information about personal finance basics may not completely change how someone manages their money doesn’t mean we don’t do it, it simply means that we accept the fact that there’s more to it than that. It’s not about celebrating financial literacy 30 days out of 365 and hoping that the impact is large enough to create lasting change.

A recent article by USA Today touts a study that shows financial literacy in high school does make a lasting impact on money behaviors in college.

“Students who took a class did better on the survey’s financial knowledge questions, were found to be more averse to debt, more likely to pay credit card bills on time, and less likely to go over their credit limit.”

I know that the information and lessons I took from my money-savvy parents made a huge impact on how I manage money today. If I didn’t have that, I’m not convinced I would be tuned into my finances and how they can affect my life in the short and long term.

So more knowledge and an exposure to financial concepts early on certainly can’t hurt – and, in my case, it helped a great deal – but that can’t be every part of the puzzle.

Are the results substantial and long lasting?

A recent study by professors at the University in the Netherlands, Catholic University of Portugal, University of Colorado, and University of Virginia, showed markedly different results from the study mentioned in USA Today.

“We find that interventions to improve financial literacy explain only .1% of the variance in financial behaviors studied, with weaker effects in low-income samples. Like other education, financial education decays over time; even large interventions with many hours of instruction have negligible effect son behavior 20 months or more from the time of intervention…We conduct three empirical studies and we find that the partial effects of financial literacy diminish dramatically when one controls for psychological traits that have been omitted in prior research or when one uses an instrument for financial literacy to control for omitted variables.”

Again, teaching the power of compound interest and the importance of saving early can only go so far – especially when many “real world” financial choices are often times far enough outside of high school to diminish the power of that original messaging.

What other solutions are there?

The truth is, it doesn’t just have to be about providing financial education in the K-12 sector or nothing at all. In fact, there are other ways of imparting financial knowledge that could make the puzzle more complete. One of these, as mentioned in the above study, is just-in-time financial education.

The idea is that you acquire knowledge when you have the motivation for it – when you’re at a place in your life when it’s relevant and immediately applicable. For example you probably had no interest in learning how to buy a house when you’re 17, but suddenly when you’re 25 or 30, you want to get your hands on all the information you can.

So what is applicable to you when you’re 17? Probably the ins and outs of student loans and how to navigate the next step in your education without chaining yourself to a future of debt repayment – something that would be perfect for those high school financial literacy courses.

If knowledge isn’t the magic pill, what is?

“Money is more about mind than it is about math. That is, financial success is more about mastering the mental game of money than about understanding the numbers. The math of personal finance is simple – spend less than you earn. It’s controlling your habits and emotions that’s difficult.”

~JD Roth, founder of

I believe that it’s about paying attention to how we all tick – what actually gets us to act because we want to, not because someone told us we should. It’s about tricking our brains into doing what’s right because it can all too easily convince us to do otherwise. It’s about using personal stories to tell what works and what doesn’t and speaking about personal finance from a human perspective because it’s not just about dollars and cents.

According to Alicia Munnell, director of the Center for Retirement Research at Boston College, tricking our brains should come in the form of simple systems in which automation is key. Munnell believes that employees should be automatically enrolled in their employer’s retirement plan with automatic escalation and a target-date fund option.

If we accept the fact that our monkey brains have shortcomings that no amount of financial literacy will fix, maybe then we can create solutions that will actually work in the long term.

What do you think about financial literacy? How do you think we should treat this subject in and outside of school?