by Joan Warner
Quick, fill in the blank: April is _________ month.
Did you say “tax”? You’re right, at least in the US. Did you say “the cruelest”? You know your T. S. Eliot.
April is also Financial Literacy Month, when the business press laments Americans’ ignorance around money; banks, mutual-fund companies, and think tanks sponsor events and outreach programs; and all parties agree that unless we learn to spend, save, and invest more intelligently, we’ll wind up in cardboard boxes eating cat food.
Messaging of this kind has gone out every April since 2004. But when it’s all over, Americans are no smarter than they were before. According to a recent S&P Global Financial Literacy (“FinLit”) Survey, only 57% can correctly answer five verysimple money questions. That’s alarming not only because we are increasingly responsible for our own long-term solvency but also because, as Oxford Economics has shown, the tepid US savings rate undermines GDP growth and fiscal stability.
I called up Annamaria Lusardi, economics professor at the George Washington School of Business and longtime financial literacy champion, to find out why we don’t teach this stuff in high school alongside basic biology. She reminded me that five states do, in fact, require students to pass a dedicated personal finance course before they graduate. In Lusardi’s opinion, that’s 45 states too few. “Financial literacy is an essential skill for the 21st century,” she says. And unlike cooking, which you can learn by watching, making good money decisions is “sufficiently complex and scientific that it’s not acquired by observation.” Lusardi adds that people who don’t know how to read and write can’t participate fully in society — and people who don’t know the difference between a stock and a bond are pretty much in the same predicament.
Call me naïve, but I see a huge opportunity for the financial-services industry to offer free, ongoing personal-finance education, targeted especially toward the young. Teaching the public good money habits would achieve three splendid goals:
1. Repair the industry’s reputation. Years after the Great Recession, consumers still trust finance companies much less than other businesses. That might change if people got straightforward, actionable, and non-self-servingadvice — more about that in a second — from their banks, insurers and mutual-fund providers.
2. Draw new customers into the financial mainstream. My father put two kids through college by buying a few Unilever shares 20 years before we were born. But because millions of Americans don’t understand the time value of money, they fail to harness the financial markets’ power.
3. Educate consumers to use financial products wisely. Think of the risk that would vanish from the industry if customers comprehended even the basics of long-term investing. And can you imagine how much easier advisors’ jobs would be if their clients understood the suitability standard?
Lusardi worries, rightly, about the potential for conflicts of interest when financial service providers get all educational. No question, there’s a lot of horrible advice out there. I just found a Financial Literacy Month–themed press release from an insurance company telling millennials that “you’re never too young to buy life insurance.” This is wrong on so many levels I don’t even know where to start — a real trust-destroyer, and exactly how notto do financial education. By contrast, Vanguard offers a free, online K-12 program for teachers that breaks down the fundamentals of personal finance without (as far as I can see) once mentioning index funds.
I can think of lots of other ways the industry could promote financial aptitude. TV comes to mind. Video games come to mind. Or what about wearable device that motivates you to live within your means and save 10% of your income? Call it a FinLitBit.
Joanie Warner is the Thought Leadership team’s Managing Editor for financial services.