Experts agree the average American knows way too little about personal finance and that ignorance sets them up for major problems down the road. A 2012 study from the FINRA Investor Education Foundation, for example, found most Americans couldn’t even pass a basic quiz testing key financial principles — such as what happens when inflation outpaces the amount of interest you’re earning in a savings account.
Not all experts agree, however, that financial education at a younger age is the answer. Recently, a fierce debate has begun to brew over how, and when, financial literacy should be taught — with some experts arguing teaching financial literacy in college and in K-12 schools is completely ineffective. (Many experts instead argue financial education is more effective when it’s taught just before a major decision is about to take place, such as when you’re getting ready to take on a new loan.)
In this month’s issue of the Pacific Standard, prominent personal finance journalist Helaine Olen made a provocative claim about the efficacy of teaching financial literacy in schools: Contrary to what many personal finance experts claim, “mounting, resounding evidence shows that financial literacy education doesn’t work.”
In the article, Olen bases her claim on three recent studies, two of which have just come out in the past year. One widely cited study from 2009 tested the financial knowledge of 79 young adults who had previously taken a personal finance class in high school and found by the time a year or more passed, the students retained little of what they learned. “After several years, those who took the course were no more financially literate than those who did not take the course,” wrote study authors Lewis Mandell and Linda Schmid Klein.
Another study, cited by Olen, analyzed the results of 168 papers on financial literacy interventions and found the current evidence for formal instruction weak. “The widely shared intuition that financial education should improve consumer decisions has led governments, businesses and NGOs worldwide to create interventions to improve financial literacy,” wrote study authors Daniel Fernandes, John G. Lynch, Jr. and Richard G. Netemeyer in an article in the journal Management Science. However, most of the people who participate in those kinds of financial education programs fail to follow through on what they’ve learned.
The final study cited by Olen analyzed the financial behaviors of people living in states where high school-level personal finance courses are required. Unlike a 2001 study that found the opposite to be true, researchers this year found the high school-level courses had virtually no effect on how people handled money later on. “Instead we find additional training in mathematics leads to greater financial market participation, investment income and better credit management,” wrote study authors Shawn Cole, Anna Paulson and Gauri Kartini Shastry in the report.
Not enough research
As CreditCards.com’s Yasmin Ghahremani points out in a special report on financial education, there have yet to be any definitive studies proving that financial literacy instruction before college is effective. But neither is there strong evidence to back Olen’s contention that personal finance education is a big, well-intentioned fail.
In her article, Ghahremani points to a study released in November that she says experts find promising. According to the study, newly enlisted soldiers who took a mandatory personal finance course saved more, on average, than soldiers who didn’t take the course, spent significantly less on credit and participated in the military’s retirement plan at a higher rate. “Overall, the results suggest that financial education coupled with assistance and advice can improve financial outcomes in a number of areas,” wrote study author William Skimmyhorn.
Smaller studies have also found personal finance education to be helpful, but have been plagued by problems with how they were conducted. As Federal Reserve researchers Ian Hathaway and Sameer Khatiwada wrote in a 2008 paper on financial education studies, it’s hard to evaluate the effectiveness of financial literacy courses because “most financial education programs do not include impact evaluation as a component of their program design.”
I agree with Helaine Olen that teaching people how to handle their money more effectively isn’t going to save them from bigger, systemic problems that are contributing to their money woes — such as joblessness and stagnant wages. However, I’m yet to be convinced financial education itself is a waste of time and money.
If anything, I think the available research shows instead that current methods for teaching financial literacy are clearly flawed. (It’s also worth noting, as Ghahremani does, that standards vary wildly between schools.) But rather than dismiss financial education entirely, perhaps it’s time to look harder at what educators are currently doing wrong — and what they can do right. (For more, check out Yasmin Ghahremani’s story on financial education abroad.)