Financial Literacy — A Skeptic’s Perspective

 It’s an odd thing to admit in Financial Literacy Month — but I’ve been a financial literacy skeptic. 

Not always, of course. Once upon a time I was one of those industry voices decrying the burden placed on employment-based retirement plans. Employers (and advisors) who — in the course of a 25-minute workshop — had to convey the range of concepts required to make knowledgeable investment decisions to an audience of adults who had never been exposed to any of that prior to that session. Considering all the (relatively) useless things that ARE mandated in school curriculums, some basic finance concepts seemed like a pretty reasonable “ask.”

State Steps

And though it’s been a long time coming, a number of states[i] now do require students to take a financial literacy course for high school graduation — and that number continues to climb. That said, what constitutes complying with that requirement — varies. And, if it’s like a lot of the classes I was required to take in high school, that knowledge may not last — at least according to research.[ii]

While the findings in those studies have some limitations — not the least of which is their determination of the outcomes measured, and the aggregation of a wide variety of scholarly work (and assumptions) — as someone who has long been one of those voices advocating for greater financial literacy — this has been a bit of an eye-opener. With this broadening exposure to personal finance in school, why aren’t these programs — why isn’t financial literacy — taking root in a meaningful way?

As I mentioned earlier, there are a number of classes I took in high school (and college) that I quickly dismissed as soon as the final exam was concluded — because I didn’t much like the subject (or the teacher), but often because I just didn’t get the point. Might that be the case with these personal finance offerings?

Literacy Lessons

But what IS financial literacy? At its core, financial literacy is supposed to be about understanding money — how to manage it, how to grow it, and how not to let it slip through your fingers by the 15th of the month. But in practice,[iii] it often gets reduced to a pop quiz on acronyms (IRA vs. 401(k), anyone?) and the occasional reminder to “live within your means,” as if that’s some kind of revelation.

True financial literacy isn’t about memorizing definitions or passing a multiple-choice test. It’s about giving people the tools and confidence to make informed financial decisions at every stage of life. It’s not just knowing what a mutual fund is — it’s understanding when and why you might want to invest in one. It’s not just grasping compound interest — it’s appreciating that there is a huge impact of starting to save in your 20s versus your 40s.  Math, while surely helpful, shouldn’t be required, certainly not at the outset (though I may get some pushback on that).

‘Know’ Hows

Over the years employers — aided by plan design — have done a lot to help those who lack the knowledge (or courage) to make savings decisions on their own. And, courtesy of developments like auto-enrollment, target-date funds, and more recently managed accounts, we’ve managed to help workers make better decisions, without their action, but often (always?) without their knowledge or understanding. 

But true financial literacy — or what these days gets labeled financial “wellness” — connects knowledge to action. Because here’s the uncomfortable truth: most people already know the basics. They know they shouldn’t be spending more than they earn. They know they should be saving for retirement. At some level they know high-interest debt is a trap, even if they can’t do the math. 

Look, we’ve spent decades pushing retirement savings, but if someone’s living paycheck to paycheck, telling them to max out their 401(k) may feel like a cruel joke. Financial literacy has to start with the foundation: how to manage daily cash flow, how to build an emergency cushion, how to understand a pay stub or a credit report. The “long-term” can wait until the basics are covered — and the basics DO need to be covered, and with any luck before they find themselves sitting in a 401(k)-enrollment meeting (which, of course, is rarer by the day).

At the end of the day, it’s not about what people know — it’s about what they do with what they know. And financial literacy, when it’s done right, turns hesitation into action. 

And “skeptics” into believers.

• Nevin E. Adams, JD

 

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[i]  See Which States Require Financial Literacy for High School Stud - Ramsey:  Alabama, California, Connecticut, Florida, Georgia, Indiana, Iowa, Kansas, Kentucky, Louisiana,  Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Utah, Virginia, West Virginia, Wisconsin

[ii] Indeed, the research on the subject of financial literacy in schools — at least pre-college — is not encouraging. According to a 2016 paper titled “High School Curriculum and Financial Outcomes: The Impact of Mandated Personal Finance and Mathematics Courses” “there is little evidence that education intended to improve financial decision-making is successful.” These authors pose the question “Can good financial behavior be taught in high school?,” only to conclude that, “It can, though not via traditional personal finance courses, which we find have no effect on financial outcomes.” Similarly, a 2014 paper by three professors reviewed 168 different papers covering some 200 studies on the topic of financial literacy and financial education — and found that what they termed “interventions to improve financial literacy” accounted for “only about 0.1 percent of the variance in the financial behaviors studied.” 

[iii] Noted academics have boiled that complicated concept down to three fairly fundamental questions —though personally I don’t see how knowing the answers to those particular questions would help anybody make a financial decision in the real world, much less a decision about saving or investing in a 401(k) plan. Which brings to mind questions not only what the personal finance curriculum covers, but what kind of contribution it is making to financial “literacy.”

Father's Time

 As Father’s Day approaches, I’ve been thinking about my dad, the life he led, the choices he made, and his legacy.

Mind you, I’m not talking about money. In fact, I didn’t learn anything about finance from my dad.  Not that our family’s income provided a lot of “room,”—but Dad avoided big purchases with the fervor of Ebenezer Scrooge. However, he’d spend that much (and more) on small things (mostly books, which remain in jaw-dropping abundance in my mother’s home 18 years after his passing!).

My dad was a man of few words—spoken words, anyway. At 6’ 5”, he was an imposing figure, all the more so behind the pulpit from which he’d speak three times each week. He was a good speaker, though not a natural one.

He worked hard at it, studied his subject matter (hence the books), and practiced his presentation relentlessly each and every week. I always thought it odd that such a quiet, introverted man would choose that career, but it was something he felt called to do at an early age, though it couldn’t have been easy.

He had opinions but didn’t seek to impose them on others. Indeed, wresting opinions from him was difficult (and sometimes frustrating). Significantly, he walked his “talk”—his faith, his love and respect for all people, even those with whom he disagreed—and those were attributes in short supply, even then. He was always a voice of reason and tolerance.

Though I talked about my work several times over the years, for much of my working life, I don’t think my dad ever really understood what I “did.” Oh, he knew I worked for banks (when I did), figured that being a “senior vice president” had to be a good thing, knew that it had something to do with pensions (though he didn’t have one), and (eventually) grasped that it also had something to do with something called a 401(k).

But as for understanding what I actually did every day, well, he mainly cared that I enjoyed the work, that I found meaning in my chosen field, and that I was able—or felt I was able—to make a difference.

While Dad touched many people with his ministry, he touched thousands more with a random, almost accidental opportunity. Back in 1972, he was asked by a friend to write 13 guest columns in a denominational newspaper—an “opportunity” that went on for more than three decades (alongside his “day job”).

In fact, one of the great joys of my life came when 20 years into my retirement industry career, I was also presented with an “opportunity” to begin writing for a living—and my dad, though he surely didn’t always understand what I was writing about, could appreciate that I was eventually following in his (writing) footsteps. 

His impact on me and my life notwithstanding, I’m a different person than my dad, though his example is never very far from my thoughts. As a former child, I’ve tried to avoid repeating the “mistakes” my parents made—some of which, admittedly, in the fullness of time, weren’t mistakes at all.

As a parent, I’ve tried to share with my kids the lessons I’ve learned (and continue to learn), tried to spare them the pain that came with some of those, but also tried to give them the room they need—and deserve—to learn their own on the life path(s) they chose—though doing so is a life lesson of its own, and one with which I still struggle (just ask my kids).

I’ve tried to share with them some sense of money and its management, the thrill of having work that gives you joy (even if the where and who you do it with don’t always), the importance of having the right life partner…

Along the way, I’ve tried to make a point of telling them regularly how proud I am of them. But mostly, I try to tell them and show them how much I love them and do so as often as possible.

In this business, we tend to focus on things like bequests and legacies, the financial “leftovers” that are passed on to those we love. But those pale in importance and longevity to the legacy we can—and should—leave behind in the experiences and examples we pass on to our kids.

Love you, Dad.

- Nevin E. Adams, JD 

A Second Opinion on "Self-Medicating" Your 401(k)

At a recent event, one of the speakers was taking our industry to task for expecting too much from participants. “We don’t expect individuals to diagnose and treat their own illness,” he said, going on to note that with 401(k)s we expect people who don’t have any knowledge or training in investments to decide how to invest those balances.

Admittedly, those 401(k) investment decisions can be complicated for some — and, since it (mostly) is their money, after all, most do give individual participants the ability to decide how it will be invested. As nice as it would be if individuals were exposed to the basics of finance — saving, budgeting, investments — sometime in their lives ahead of that workplace plan enrollment meeting, or the pages of that 401(k) enrollment kit, that’s not the current system’s fault.

In reality, individuals are routinely asked to make decisions on things in which they have no real knowledge or training. On numerous occasions, I’ve had plumbers and mechanics ask me to make decisions to either replace or repair enormously expensive systems with no ready information other than the explanation of the alternatives from the professional who is asking me to make that decision. A professional who, in some cases, has a relationship dating back only to the point in time at which his or her name was gleaned from the Internet (or Yellow Pages). Fortunately, most of those decisions aren’t matters of life and death, even if there is all-too-frequently a certain urgency to them.


However, the event speaker’s assertions notwithstanding, while we may not expect individuals to accurately diagnose their illnesses, we do ask them to make decisions on complicated matters in which they lack expertise. For example, several years back, a friend of mine received a troubling diagnosis from his regular physician. Now the area of concern was beyond the particular expertise of that doctor, so he suggested that my friend seek the opinion of a specialist. He did, only to find that the specialist’s opinion directly contradicted that of the doctor he knew and trusted.

Now my friend had to make a decision — and one in which he had a vital interest — even though he lacked the personal expertise to fully evaluate and appreciate the options.

Keeping up with a 401(k) isn’t like when the plumbing starts to leak, or the “check engine” light comes on — clear signals that there is a problem that requires prompt attention. For the most part, retirement investment and planning issues are less obvious, though even that hardly makes them unique. My friend’s serious medical situation was diagnosed only because he had gone in for a checkup because he was of an age where you schedule them whether you think you need one or not.

Similarly, you don’t need to be a financial expert to manage your retirement savings — you just need to have the common sense and discipline to schedule regular financial checkups with someone who does.

- Nevin E. Adams, JD