Why financial literacy fails (and what to do about it)
April is Financial Literacy Month in the United States. This is a pure and noble thing. I think it’s great that there’s one month each year devoted to promoting smart money habits. That said, it has become increasingly apparent over the years that most financial literacy programs fail. They don’t work. And this isn’t just me speaking anecdotally.
In a 2014 paper from Management Science, three researchers conducted a “meta-analysis” of 201 prior studies regarding the efficacy of financial literacy. Their conclusion?
Interventions to improve financial literacy explain only 0.1% 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 effects on behavior 20 months or more from the time of intervention.
To put it in plain English, financial literacy education makes no discernible difference in behavior. People who take personal finance classes manage their money no better (and no worse) than the general population.
We’re pumping tons of money and time into a fruitless endeavor. All of this push to promote financial literacy accomplishes nothing. Zero. Nada.
Why is that?
It probably won’t surprise you to learn that I have some strong opinions on this subject. Today, let’s talk about why financial literacy fails (and what to do about it).
Note: This afternoon (April 24th) at 4 p.m. Pacific (7 p.m. Eastern), I’ll be part of a Facebook Live interview about this very subject. If you’re free at that time, you should join us! Update: Here’s the entire interview.
Why Financial Literacy Fails
Financial literacy fails because it almost universally addresses only one part of the problem: math and mechanics. FinLit (as it’s sometimes called) focuses on facts and figures while largely ignoring behavior.
This is insane.
This is like promoting sex education that talks about penises and vaginas while never discussing what it’s like to be madly in love with somebody, so in love that your brain stops working. For sex education to be effective, it has to deal with real-world circumstances and behavior. It has to teach about psychology and emotions, not just body parts.
The same is true with financial literacy.
In fact, the same is true with actual literacy. The National Assessment of Adult Literacy says that working literacy has two components.
- The operational piece of literacy focuses solely on knowledge. It involves word-level reading skills such as recognizing words.
- The conceptual piece of literacy focuses on everyday tasks: “Literacy is the ability to use printed and written information to function in society, to achieve one’s goals, and to develop one’s knowledge and potential.”
The first part of literacy is about mechanics. The second part is about practical application.
Modern financial literacy efforts spend nearly all of their time on the knowledge piece. I’ve reviewed maybe a dozen FinLit programs over the years. Most pay no more than lip service to behavior, to the conceptual piece of financial literacy.
Let me give you an example from my own life.
When I was in high school (w-a-y back in the mid-1980s), every senior in our district was required to pass a class in personal finance. It covered topics like compound interest, the Federal Reserve, how to write a check, and the dangers of credit cards.
I took that class. I aced every test. And five years later, I had the beginnings of a debt habit. I’d mastered the knowledge but not he behavior. The behavior was never taught.
From what I can tell, the kids from my high school grew up to be no different than the rest of Americans. We learned the basics of financial literacy, but it had no perceivable impact on the way we saved and spent and earned. We still made stupid mistakes. We still spent more than we earned. Why? Because facts and figurs are only one-half of financial literacy. (And I’d argue they aren’t even the most important half.)
The solution to financial literacy isn’t to feed people more facts and figures. It isn’t to teach them how bonds work or to explain the sheer awesomeness of a Roth IRA. If we want to boost financial literacy in the United States, what we really need to promote is behavioral education.
Behavioral Finance
Personal finance is simple. Fundamentally, you need to know only one thing: To build wealth, you must spend less than you earn. The end. That’s it. We can all go home now. Everything else simply builds on this.
Why, then, is it so hard for everyone to get ahead?
For some people, the problem is systemic. There’s no doubt that some people are trapped in a cycle of poverty, and they truly need outside help to overcome the obstacles they face.
But for most of us, the issue is internal: The problem is us. In other words, I am the reason that I can’t get ahead. And you are the reason that you can’t get ahead. It’s not a lack of knowledge about compounding and credit cards that holds us back, but a chain of bad behavior.
The math and mechanics of personal finance are easy. It’s the psychological side of money that’s hard.
One of the key tenets of this site is that money is more about mind than it is about math. That is, our financial success isn’t determined by how smart we are with numbers, but how well we’re able to control our emotions — our wants and desires.
There’s actually a branch of economics called behavioral finance devoted exclusively to this phenomenon, exploring the interplay between economic theory and psychological reality. There’s a new wave of folks who are exploring the gamification of personal finance; they’re trying to turn money management into a game. More and more, experts are seeing that our economic decisions aren’t based on logic, but on emotion and desire.
It’s time that financial literacy programs incorporated these new(-ish) approaches into their curriculum.
For years, I struggled with money. I knew the math, but I still couldn’t seem to defeat debt. It wasn’t until I started applying psychology to the situation that I was able to make changes. For instance, I used the debt snowball to pay down my debt in an illogical yet psychologically satisfying way. It worked. And I’ve learned that by having financial goals — such as travel — I’m much more inclined to save than if I have no goals at all.
Behavioral Literacy
- First, we soak in a bath of the mass media. We’re constantly exposed to a barrage of programming in which we’re given subtle messages about what people do (or should) consume. We cannot help but be influenced by the power of marketing. (I’ve talked to many people who think they’re immune to marketing. I just shake my head and think, “You, my friend, are the most influenced of all.”)
- Secondly, we don’t think about our spending. We spend on impulse. Or we spend to subconsciously keep up with our family and friends — to keep up with the Joneses. We spend to make ourselves feel better when we’re down and blue. We spend to show off. We spend on things we think we want instead of the things we actually use and do. We spend because spending is a habit.
Instead of teaching Americans about credit cards and rates of return, we need to be teaching them about behavioral finance. We need to be showing them how to break free from the marketing messages that are all around. We need to be showing them how to set (and achieve) personal goals, especially financial goals. We need to teach skills like conscious spending.
There’s a reason that my core message doesn’t start with math and mechanics. It starts by asking people to think about their goals and purpose. This is the piece of financial education that’s missing in our society. This is what financial literacy education ought to be teaching.
Note: For a clear demonstration of how I’d approach financial literacy if I were to design a program, check out my Money Boss Manifesto. It’s a free ebook that outlines the financial philosophy I’ve developed after nearly fifteen years of reading and writing about money.
The Bottom Line
Sometimes people wonder why we don’t spend more time on the nitty gritty of money around here. Why we don’t cover more topics like where to find the best credit cards or how to create a budget?
It’s because deep inside, I believe these things are secondary. I believe behavior is more important. Building a better budget isn’t going to change your attitude toward saving and spending; but changing you attitude toward saving and spending could very well lead you to building a better budget.
Ultimately, if we want Americans to be smarter with their money, we need to encourage them to consume less media — to avoid advertising — and we need to teach them to master the emotional side of personal finance. We need to show them how to change their behavior. We need to appeal to their self-interest. We need to help them find intrinsic motivation to save.
Each of us needs to dig deep inside to find what it is that’s important to us, what it is that brings us joy, and we need to prioritize that instead of all the other garbage.
I’m not suggesting that we abandon traditional financial literacy completely. But I think a constant push for more financial education is a waste of time if it’s only going to focus on mechanics, to stick to facts and figures. To truly be successful, financial education has to address the behavioral side of money because that is absolutely the biggest piece of the puzzle.
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There are 192 comments to "Why financial literacy fails (and what to do about it)".
My TV is a 19 inch cathode ray tube model. My computer is 8 years old. One of my cars is 17 years old, the other 8 1/2 years old. I’d say I’m pretty immune to consumerism.
What percentage of the world population do you think owns at least one TV, computer, or car?
I don’t know if I see the connection between owning older electronics and cars and being immune to consumerism. My TV is new (no have cable, just a DVD player) – it was a gift anyway, my computer is 3 years old and my car is newer, but that’s only one small part of me and who I am financially.
How do I know you don’t have a mad comic book collection, three closets full of clothes, and travel for pleasure every other month?
This “I have less than thou” attitude gets a little old sometimes when it comes to PF.
A lot of time is the new thing that are so tempting. It forces us to want to buy the sh*t we don’t need.
There’s a difference, too, between immunity and an unusual allergic reaction. The old saying, “The virtue is in the mean,” may apply here. An outright rejection of new things or an aversion to them, even when they would add extremely significant benefit to your life, would be just as much a problem of consumerism as an insatiable drive to acquire more new things when they don’t benefit your life.
Note: I’m not saying you have old things because you have a consumerism problem. I’m just saying don’t take the fact that you have old things as foolproof assurance that you’re immune to consumerism.
Consumerism and personal finance is not living owning as little as possible. It’s about knowing what you can afford.
If everyone live the way you live, we need a new governing system, because capitalism won’t work – and that’s a discussion I won’t be going into.
You did not mention if you had Facebook, Instagram or Amazon accounts. The idea that TV is STILL the culprit is amusing. I am over 60 and just got rid of my Amazon account. It advertised to me constantly. So easy to buy- just one click. Consumerism is alive and well on our computers (and immediately at our door).
I’m in agreement with you on this one. I think that it all has to do with the attitude toward money, rather than the money itself. I think that the mindset can be changed, though it will be with one mind at a time.
The issue that I’ve got with the whole thing is that people are becoming desensitized to the solutions that are available. It’s definitely about attitude – the same things that go into being better with debt are the ones that go into doing better personally.
You’re on the right track, keep it up. 🙂
We’re doing a better job of working on these behavioral projects in developing countries rather than in the US. Until very recently the push in the US has been on literacy. It’s as if we think Americans just need more math but people in developing countries, it’s ok to say they have behavioral problems. When, in reality, it may even be the other way around given the relative levels of financial literacy.
There’s probably some people that once they get compound interest, they’re fine. But most of those people already get compound interest in the US! (Because they got it in high school.)
I should add… the literature on financial literacy shows:
1. People who are more financially literate have more money (but correlation is not causation).
2. Mandatory financial literacy doesn’t seem to work that well, at least not high school classes. (Though some more recent programs are showing small increases in outcomes compared to earlier work on the subject.)
3. Voluntary financial literacy seems to work for folks who volunteer to get it (compared to control groups who volunteer but don’t get the literacy). (At least among people who work at a certain anonymous large company.)
So increasing financial literacy helps if people already want to know about it. Just mandating it doesn’t help, though some programs may be better than others.
I’m probably never going to get around to digging up those citations to make a full post about the topic though. There was a special issue in The Journal of Consumer Affairs on Financial Literacy in 2010 if you’re interested.
When I quickly looked into this recently this seemed to still be the current position.
The things that seemed to make a difference were good quality early years maths teaching (which is expensive so hard to get people to sign up to politically) and specific financial training before making a financial decision. E.g. Tutoring on credit cards, mortgages, investments,pensions shortly before the person needed to make a decision on them.
It is too easy to get credit, too many people buy on impulse and delayed gratification is not being taught very well at home. Wants and needs are too often reversed in priority. People should work on saving to buy something rather than buy it now and pay for it later. How to instill that is the issue. Either you learn it the hard way or it can be instilled at home when you are young.
Many parents TRY to instill smart spending and frugality to their young children, but it doesn’t always work. There are too many outside influences on us today.
And this is huge problem, that nowadays we have no patience at all, we want everything now, at every cost.
As a high school math teacher, I’ve taught financial literacy for several years. From what I’ve experienced and observed, the mathematics is the easy part–yes, compound interest is an exponential function, but that’s about as hard as it gets. The rest of the math is middle school level. The difficult part is understanding human thinking and behavior toward money, and learning how to overcome your emotions and deal with your finances rationally. So many adults struggle with this; how can we expect teenagers to do any better? I’ve seen adults who “know” a lot about finances but have terrible self-induced money problems.
I hear you there! When I taught a careers class, (mandatory for high school kids in Ontario) we did a lesson on student loans. The attitude I got from kids was that “we’re going to end up in debt, so why does it matter how much?” They just couldn’t grasp what it meant to have a loan — they were more interested in the maximum amount they were entitled to each year and what it would buy them.
When debt is seen as “normal” in our society, the numbers don’t always matter.
The exponential function isn’t that hard to understand in a purely mathematical sense, but it is actually rather hard to internalise and intuitively grasp on a “how it affects your life” level.
“The greatest shortcoming of the human race is our inability to understand the exponential function.”
— Albert Bartlett
http://www.youtube.com/watch?v=F-QA2rkpBSY
I taught consumer finance to lower middle class middle schoolers. That is the age to catch them! They have not made enough money, yet, to seriously get into trouble. The entire class was on opportunity cost rather then dwelling on math. After the class was going for a bit I had some of my students’ parents ask me to help THEM during our parent teacher conference. Fascinating.
We start too late. JD hit the nail on the head- talk about the emotion.
Still, I had a friend and her husband sit with me to talk through basic finances. They were within five years of retirement. I could not get them to see that taking out a 30 year loan, for a house that cost way more then their current savings, was a poor idea. It was frustrating. If I had only taught them in middle school!
Dickens had Micawber explain it pretty clearly; however, I guess few people read Dickens now-and just explaining spending more than you earn leads to unhappiness isn’t enough.
I don’t ask people why they have to have an Iphone, IPad, Kindle, whatever- but it seeems people want to convince me(not salespeople- friends and family) why I need to have these things.
I hear you Andrea! I am bugged constantly as to why I don’t have a cell phone. Finally my MIL actually bought me one and paid for a year subscription on it! I don’t ever use it, I don’t need it, my life will not become fraught and complicated without it! I’d rather put that money towards things I enjoy and appreciate, please.
I had a friend in college who refused to have a cell phone. Every time we went anywhere and he needed to make a phone call, he’d just ask to borrow mine. If people wanted to know where he was, they’d call the last person anyone saw him with.
I finally started refusing to let him use my phone, and saying right in front of him that he wasn’t there when people called to try to talk to him. I told him if he wanted the convenience of talking to people whenever he or they needed to, he needed to get his own phone and quit mooching off all his friends. It finally sunk in to him that he’d been reaping all the benefits of a cell-phone-saturated environment without paying his share of the costs.
Not saying that’s your situation, but it wasn’t until someone pointed it out to him that he realized it was true.
I’m not disagreeing with you at all…that sounds like lousy behavior on his part, and a sensible response on your part. I just want to add that since the advent of cell phones everywhere, it’s become practically impossible to find a pay phone…drives me nuts, because it basically forced me to get a cell phone for back-up.
Good for you for standing up to him Lindsay but I can safely say that is not my situation. 🙂
I did not have a cell phone because I did not need one (still don’t). I have a phone on my desk at work. I have a phone in my house – with an answering machine.
If I am not available to answer those phones and someone wants to speak to me, they can leave me a message and I will call them back when it is convenient…not while I’m walking down the aisles in the grocery store – or out with another friend.
If I make plans to meet a friend at 8pm for dinner, I show up at 8pm. I don’t text at 750pm to say “running late or change of plans” – I make a plan and I show up! 😉 And I certainly wouldn’t tell someone to call me on another friend’s cell phone!
People have become reliant on instant contact: FB/Twitter/Cellphones (with email!)/Texts. If I can’t reach someone I try again later, I don’t expect them to drop everything or ignore people they are with to speak to me – and I don’t intend to do the same to anyone else. And if I’m paying for home service on a phone, I have no intention of spending MORE money on a cell phone too. That’s all. Take that peer pressure!
Exactly. For many years, I did not have a cell phone and it was fine. I constantly had to explain to people that being reachable at all times was not a convenience to me – it was an imposition. I did not see a need for having a cell phone, no matter how much other people thought it was vital. I had a fine job and bought a home without having a cell phone.
However, when I was planning to SELL my home, I saw that having a cell phone would be a great convenience to me and would facilitate the process. So I bought one. This was just under 3 years ago.
Urgh, I get this all the time too, from people at university with Macbooks and iPhones asking why I have a PC (and why I never bring my laptop to school) and why I don’t use the internet on my phone. And so so many other things.
Why can’t you drive? I couldn’t afford lessons and it’s not necessary for me right now and even if I could, I couldn’t afford insurance. Why aren’t you coming out tonight? I didn’t budget for it, and I don’t want to drink my money away. How come you have to work over the winter break? Because my mummy and daddy don’t give me an allowance like yours do!
Some people are just so rude about these things. It’s none of their business if you want to eat value baked beans or don’t have a television, but they always make it their business.
One of your very best articles, JD! I couldn’t agree more. As Dave Ramsey says, “Personal finance is 80% behavior and only 20% head knowledge.” Like you, this has rang true in my personal financial life. Only when my behavior changed was I able to apply my financial literacy in order to begin to have success with money.
Yes, very true. Dave Ramsey’s books were a wakeup for me too; a psychological reason to take steps I logically knew I should have done long since. And when I actually started doing those logical things (spend less, save automatically), of course they worked.
I will say that there were no financial literacy classes in the late ’70s in my high school, and it was never discussed much by my family. Changing your spending habits for some people can be like losing weight. You have to be ready to make the change.
I had a thought while reading. Interesting post, by the way.
It’s hard (at least for me to do away w/ all TV. (and this may sound stupid) What about talking to the TV When I recognize that an ad is trying to sell me something, then deliberately speak to the TV..”quit trying to sell me this item…it is not something I need…and I am trying to win with my money.”
Yeah….I know it’s a little off-the-wall. But it gets the message to me mainly & also my wife and kids.
Anyone done something like that to fight against the constant advertising?
I don’t talk to the TV so much as snort in disgust at it.
One thing that helped was studying marketing and communication — I know all the tricks. I usually fast forward through commercials, but when I do see them they’re sort of an academic exercise. I can’t help but think “oh, they’re using that picture or this line to manipulate my emotions”.
I agree the problem isn’t about numbers — it’s that people need to know how to think for themselves.
Glad to see I’m not the only one who does this. The other person in my household will never let our TV go. I insist on muting commercials if I’m in the room, which drives him crazy (but having them on drives me crazy!)
Anyone heard of (or tried) the un-TV experiment? I just heard of it recently and recommend googling/reading up on it, it sounds very interesting. One part of it is to just sit in front of your TV for a 1/2 hour and watch it – while it’s turned off! Just to prove what an unproductive time-waster it is, even an “innocent” 1/2 hour show.
I wrote a paper in grad school on financial literacy/education and didn’t delve into the behavioral part, but what I did find missing was financial capability, or the ability to actually use the knowledge and information one learns about money. This is why financial education can be very ineffective for teenagers – they just don’t use money enough to make it relevant to their life. It’s also one of the most important aspects for low-income populations, many of whom don’t have bank accounts – they can’t just learn about them in a class and be expected to go try it on their own, the class should incorporate actually opening a bank account and going through the steps on using it.
I don’t know, I spend way more on books than I do buying Chanel perfume. I need to mute Amazon!
We turned commercials into a game to test my theory that everything advertised is crap. If they are spending such a large amount of $ on ads to convince you to buy it A) it cant be that good and B) you’re not getting a good value because they are still making a profit even after spending all that $ on ads, what does it actually cost to make/provide what they’re selling?? Obviously there are exceptions but I can go a whole show of stuff that is total crap. Sugar, sugar, low quality for the price bras (VS), chemical air freshener, chemical laden makeup, swiffer or some other magical mop replacement, financial product, back to show, repeat.
@Christine – While I respect your opinion, I think you’re not looking into the full picture. Advertising, like credit cards, are tools. The problem isn’t in the tool, it’s in the person who wields it.
Advertising is an integral part of a free society. Want zero advertising? Head to North Korea. Without advertising, old products prevail and new innovation will never take hold. This very blog wouldn’t exist without J.D’s marketing.
And the very fact that you argue advertising is unnecessary if the product is good shows just how much you need to catch up on human behavior. There’s a reason why advertisers spend billions on it: it works. A great product is a MUST, but by itself, is not enough.
Last, the price they charge has nothing to do with the cost of production or advertising. It’s basic economics. Higher demand, lower supply equals higher price. Advertising increases the former.
I agree that TV is a time waster – so I moved the couch and put an excersize bike in front of it. If I want to watch a show, I need to be on the bike. Now at least I am getting fit when I watch TV and not just sitting like a lump. It helps me think about which shows I actually want to watch. And as for commercials – I took some marketing courses in college and I think if more people thought about the point of commercials they wouldn’t be so effective. People need to think and use some common sense instead of just believing what they hear.
@Andre
Strawman much? I neither said advertising is unnecessary, inherently bad, or should be illegal. It is necessary, *particularly* when you want to sell cr@p. And I’m not sure what JD’s marketing has to do with anything, his marketing and a company paying millions of dollars for a TV ad exploiting the use of subliminal messaging are not the same thing. I haven’t seen any Get rich slowly commercials during X factor lately, although it would be cool if I did.
@Christine – Thanks for your clarification. Not sure how your strawman reference applies here though.
Your original comment said, “If they are spending such a large amount of $ on ads to convince you to buy it A) it cant be that good…” and I merely pointed out “And the very fact that you argue advertising is unnecessary if the product is good…”
I’d also disagree that advertising is necessary “particularly when you want to sell cr@p”.
Illegal drugs, cigarettes, marijuana, pornography, etc thrived despite the lack of advertising. If advertising sugar-filled products is banned tomorrow, I believe those products will still thrive “underground”.
Advertising is a small part of the puzzle and your attack on commercials seems simplistic.
If anything, it’s environmentalism, charities, other good causes and healthy living that *particularly* need advertising. Making people do what’s good for them is hard work.
P.S. It’s been well established that subliminal messaging does not work.
Ditto marketing study. I think it’s marketers (and psychology of spending folks) who have the keys to changing consumption behavior.
It’s not the TV, though – or only indirectly, through changing peer expectations. It’s friends, colleagues, peers, family. My BIGGEST consumer experience of the year is Christmas – all because it’s important to family members. Not self- or marketing-driven at all, emotional reasons that go back to their own childhoods in the ’50s and ’60s.
You hit the nail on the head when it comes to where some of our influences comes from. I don’t watch TV aside from a movie on DVD, but I recognize influences *outside* of a television set, even aside from blatant advertising such as billboards, buses, or even shopping centers and malls. (Even during the few times I watch TV, 95% of what’s advertised doesn’t appeal to me. )
This time of year depression, loneliness, isolation can drive people to spend even without the typical influences. I know I’m not immune to it. A new body care product or lipstick could “brighten my day” and I have to look at that. Not that its “bad” per se, but ask myself what’s really driving me to spend, even if its a small amount of money.
I talk to the TV, yell at the commercials, talk sh!t to the spokespeople (especially that crazy Target woman) and laugh at product placement in the shows themselves (Biggest Loser is the most blatent culprit.) I actually find myself annoyed and irritated…probably not such a good way to feel, but I think it helps.
We have a good TV show in Australia called “The Gruen Transfer” (the also “Gruen Planet).
Don’t know if it’s accessible outside Australia, but here’s the website:
http://www.abc.net.au/tv/gruentransfer/
It’s looks at advertising and picks it apart in terms of techniques used, why some ads work and others fail, etc. The panel members work for advertising agencies so provide an ‘insider’ view.
I’ve found it to be very educational and I find myself critiquing more and more commercials now.
That is a tough one. I am still thinking society needs more education. Your right that the education that we are currently getting is not working. I am thinking it needs to be mixed with more of a psychological aspect of money as well.
We have somehow internalized the message that credit cards are our safety net, rather than savings – be it money in the bank or food in the cupboard.
We are so disconnected from what it takes to really survive in the bigger world that, for most people, the process of buying things has replaced every other form of effort that normally goes towards ensuring survival.
Breaking the cycle of money/stuff is the key, and an ongoing battle in my own life. I killed my TV and have been without for over a year now, I have no plans to replace it, and that has helped. However, I have a substantial annual bonus coming in a week’s time, and in my head I have spent it at least twice over. I plan to pay down debt with it and buy a few things that will improve my daily life, but man, the “want” list that dances through my head is looooong!
How many kids a year or two after they graduate can tell you the formula for the quadratic equation or the number of lines in a sonnet unless it was something of interest to them? I know high school dropouts who can quote me odds on horses at the track, piston displacement requirements if you want to bore out your engine, or what the cost of an item is 10% on sale with a 15% off coupon. It’s not lack of ability, it’s lack of interest or perhaps more lack of being able to or being willing to connect it to our own lives. I’ve no problem including such material in schools, but honestly don’t expect it to have any kind of real impact as long as we, as a society, continue to glorify high spending folks and their “stuff”.
My best bad example is my own college attending child. Hours discussing the dangers of debt throughout high school. Plenty of conversations of how other friends (theirs and mine) can’t seem to save anything. Tons of agreement from their lips on being frugal and the importance of conscience spending. Their first credit card? Maxed out in a month.
Of all my children, this was the one I would have pointed to for having it together and not getting into debt. All the indicators were that they’d get and A in the class and an A in reality rather than starting their financial life out with an F. Now they are learning how to be somebody’s debt slave, and not liking it. Sometimes the only real learning comes from the school of hard knocks.
I just hope this serves as a very expensive wake-up call to your child, and they turn things around from here on out. I made some dumb financial mistakes when I was first out of college, and I’m glad I learned from them at the age of 23 instead of 33 or 43.
I’m hoping it wakes them up as well. Get this though, because they’ve been paying on the card on time and carrying a balance, the card company upped the card’s credit limit. Talk about deepening the trap, it’s like they’re luring you in until you hit the point of no return.
I was thinking the same thing. This is more of a cultural issue than an educational one. People can be educated as much as they want on this, but if it doesn’t interest them then they will mindlessly fall trap to what our consumerist society wants them to do, spend. We come to this site because we want to be educated in this or enjoy the conversation about it. I will say though that the more people care and try to influence others and lead by example, the more others will be influenced by it. After all that is where a cultural influence comes from. The FIRE movement gets a lot of haters, but I think that it is good to have people selling the positives of cutting down on expenses.
When I think back to my neighborhood as a child and see how each family spent money and see how those kids now spend money there are many connections. We all played together, watch TV together and went to the same schools.
The next door neighbor was your quintessential’cheapskate’. His 4 kids all have great jobs and they are all ‘cheapskates’. The family down the street always had the best toys at Christmas and new cars. That kid is now deep in debt as an adult.
I think we do need to educate our kids but I believe behavior is learned in the home and you need to make a concerted effort to overcome those behaviors that are not working for you.
I agree that we pick up a lot of our attitudes towards money from our parents, but I also know families (my own included) where siblings have very different attitudes towards money even though they were raised the same way.
Sometimes people rebel against their parents’ spendthrift ways, and sometimes they rebel against their parents’ frugal ways. I think the influence of friends also plays a big role.
Definitely. One of the reasons I became a CPA was because my parents were spendthrifts and I felt insecure about money as a child. My parents went from a new Mercedes to a Ford Tempo in about 3 years. I wanted control of money and it lead me to becoming an accountant. Children definitely rebel against both overspenders and oversavers.
Great article – I agree, it is more about habits and behaviors than it is about the math.
What we experience as children we often follow as adults. It is the job of the parents to help shape our behaviors as adults. What is fascinating is when siblings have very different views of money. But that is a whole other topic of discussion.
This post is right on the money! 🙂
It’s just like obesity. People are not obese in this country because they don’t understand or know how they get fat. And it’s not because they are rich or poor or stupid. It’s lack of discipline and self control, which ties in very closerly with consumerism and finances. It’s a state of mind not head knowledge that is causing these consumerist problems.
You are DEAD ON. It IS a lack of discipline and self control. IMO, we teach neither in society. We respect neither in society.
@lisa I respect what you’re saying, but I’d encourage you to read up on the latest neuroscience research on these issues. It is more complex than the Calvinistic perspective that dominates the U.S.
This is not to make excuses, I just find the reality of the situation more interesting than “lack of self discipline.”
Jeff, I’ll take your word for the latest in neuroscience….there is nothing on the latest on my bookshelf and I’m not going to run out and buy it. Although I’d hardly call myself ignorant, mine is admittedly a layperson’s approach based on what I see/do/hear/read. All I know is that I am extremely disciplined, have gotten rich slowly and am not obese. I have been presented with numerous opportunities to do the opposite and consistently rejected them. When I can not avoid seeing mainstream media…like at a party last evening….I don’t see being self controlled and disciplined in finance or health rewarded or celebrated.
For people who have always been disciplined, it’s easy to see self control as an on/off switch. However, there have been a number of studies conducted that show self control/discipline is more akin to a muscle: it can be strengthened over time, but it can also be exhausted if overtaxed on a given day. At the end of a long stressful work day or week, it is significantly harder to follow through with disciplined behavior (like going to the gym or eating a healthy meal) and say no to instant gratification, whether it be food or spending. Living in debt is pretty stressful, making it that much harder to consistently say yes to the behaviors that will get you out of debt.
@lisa, I’m right there with you. But us being that way does nothing to help those who aren’t. Just like no matter how hard I study, I will never have Einstein’s IQ. We all have limitations. *I think* part of JD’s thesis is that we need to do whatever works to help folks be financial sound, not just wish it away with more education.
not to mention plenty of ‘immediate gratification’ products (both food and financial) with no lasting positive impact.
Junk food, junk financial products, junk consumer products. Hm, I sense a trend 😉
Catalog behavioral aside – we moved recently & now are getting a bunch of catalogs (I’d de-listed us to almost zero catalogs at our old address). This morning I realized that the fact an item is in a catalog almost guarantees that it is a ‘want’ item, not a ‘need’ item. Mentally/emotionally this realization gives me permission to ignore the catalogs – I feel more ‘responsible’ and less ‘scrooge’ as I ask to be removed from the mailing list & drop the catalog in the recycling bin.
I think the critical piece that financial literacy is missing is the human element. Numbers in a vacuum simply don’t resonate with most people. It’s important to put a human face to debt. Explain why and how it takes a toll. Parents too often abdicate their responsibility to schools and fail to stand their ground. Dave Ramsey readily shares that his children attended a state college. He is a multi-millionaire. However, middle class families across America support their child’s choices to attend a four year institution that will cost upwards of $150K. It boggles the mind.
When I completed my graduate program, we all had an exit interview. The purpose of the interview was to impress upon us that our loans were debt and should be repaid and we had to sign something to that affect. The school provided pizza, made a few casual jokes about debt, and quickly dispersed the form and collected it and dismissed us without much fanfare. We were all pensive about the six figures of debt hanging over our heads, and yet no meaningful exchange took place.
Self-directed financial literacy is probably the best. You have to want to change your life.
If student loans were regulated and consumer protections restored, students would not be able to take on so much debt, and tuition would not be allowed to inflate to match the huge amounts of the usurious loans. That is a simplistic view of the problem, but something needs to be done on the loan/lending side — as well as on the borrower side. State schools are great — but I am offended to hear that they are a “bargain” when the same state school I attended 25 years ago for $1,000 a year (tuition as a freshman) to $2,000 a year (tuition as a senior) now costs $12,000 a year (tuition only) and no, salaries have not duodecupled in 25 years. Something is very, very wrong.
What you’re missing is the thta state schools are a *bargain* because they are subsidized. Teh difference in price betweena state school and a private school is LARGELY(not all) due to subsidization from tax revenue. When states have to cut taxes an easy place to cut is from higher education, because at any given time on a fraction of the states residents are actually paying tuition and care about the increases that will be a result. Yes private tuition costs have risen to match the loans – and likewise state costs so something must be done about the predatory lending practice of private student loans, and some reality about the likely salaries for kids who decide to take on these hugely inappropriate student loans.
Bingo! State schools and community colleges are not necessarily inherently cheaper. Rather, they’re a way for people to benefit from marginal cost consumption. If EVERYONE went to these kinds of schools, tuition would skyrocket, as would the total public cost of education.
I can relate to this post on so many levels 🙂 As a female, the message I’ve been getting my whole life is that I’m supposed to enjoy shopping ans spending on clothes, hair, make-up, etc. Shopping is a fun thing I’m supposed to do with my friends on the weekend. I’m supposed to treat myself to “something pretty” when I’m feeling blue.
As a career woman, the messages are pretty much the same. I’m supposed to be living the glamourous lifestyle of a single woman who can spend her disposable income all on herself.
Thankfully, I have as many friends and family who are against these ideals as follow them. It’s far easier to question the media than stand up to people you know.
Beth,
You are absolutely right about how difficult it can be to stand up to the pressure from friends and family regarding your own financial decisions. We live quite frugally since we’re trying to get rid of student loan debt. Yet, every time we see my husband’s friends or family we hear about how we need to get the next greatest video game system, tv, blu-ray, etc. We were criticized for not having more than 12 channels of tv, for not having the internet for a couple of years, and for driving old cars, etc. We certainly don’t owe them an explanation regarding our financial decisions, but it creates an awkward (and tiresome) situation.
Stephanie, I’m in your shoes. The extended family doesn’t understand why we are cable-less, or why we drive old cars, or why we don’t go out all the time. They tell us we “have to” buy new things; I think they tell us this because *they are uncomfortable with our choices*. Seeing someone who is careful with their money makes them feel insecure about their own spending. At least, I think.
And it stinks about being told at every turn to buy, buy, buy. I hate malls; why the heck would I want to spend a perfectly good afternoon trudging through one? That’s not relaxing at ALL.
I hate the purchasing parties, where you are invited to buy jewelry, purses, or makeup. I hate being invited only to these sort of parties, and never to the other get-togethers the hostess might hold (for example, a birthday party). The message is that I’m only good for my money.
I have to admit that this is why I couldn’t be a good Tupperware lady when my DH was in college working on his PhD.
I was trying to sell Tupperware to other poor student wives. I just couldn’t do it, as I felt strongly that they needed to be using recycled margarine tubs instead of expensive Tupperware.
So I quit. I loved Tupperware and still do, in fact, but couldn’t convince myself to try to convince my friends they needed to buy it when what they needed to do was pay their school bill!
Fantastic post! It is so true that money is much more emotions than math. If it was math we would all be rich! I know that for myself it took many years of digging into why I spent, reading books, getting coaching and therapy and doing some in-depth soul searching. I did not just wake up one day and decide I was done with the emotional hang ups. The biggest thing I learned when going through this process was that our beliefs about money impact our behavior and that it is not one layer. Once you address one level, you revel another level, and it keeps going. But eventually if we keep at it we can get to why we are doing the behavior and then change it! Then the rewards are even better because you have also changed yourself for the better!
While I think this post is certainly correct, it is very difficult to “learn” behavior in a traditional sense. It is either there to begin with or you learn it the hard way (many of us here I think went through that stage of overspending before we “found” personal finance).
Those marshmallow tests that showwed 3 year olds with the ability to delay gratification became successful later in life while those who couldn’t wait were less likely to be successful sort of bring this point home. It may be an inherent trait, too.
I just read an article today (I’d link it but worry about moderation) that said if people were given an imaginary $1000 to spend or save, they would much more likely save it if they were first shown a computer generated image of themselves as an old person.
Maybe people struggling with earn/spend ratios should use computer generated pictures of themselves at old age on a sunny beach enjoying retirement as their screensavers for incentive?
Excellent, excellent article.
Other Day i was talking to my wife about what i would like to change, i told her, i would like to limit the hours of TV like old times when we were growing up. (In 80’s India, we used to get 3 hour morning, 2 hour afternoon and 3 hour in the night). No broadcast after 10 PM.
And in this limited time of TV, we had compulsory 2 hour news and 1 hour informational stuff.
Neither consumerism through TV serials nor through advertisement.
You could teach people all day until you’re blue in the face, but until you are FORCED to change, it probably won’t happen. The best success stories arise from people who were on the brink…and they were forced to either sink or swim. The worst I had it was after my first layoff 10 month out of college, but I was still okay because I grew up with frugal parents and learned some great life skills. I dislike that consumerism has turned us into the selfish, show off society we are today. If we had less to buy less, maybe we would become human again, instead of walking, texting zombies running into each other. Are we really better off than people were 60-70 years ago just because we have more meaningless stuff?
We don’t need more literacy or behavorial education.
It wouldn’t matter anyway.
People only learn one of two ways. By watching someone else or by doing it themselves.
And they only REALLY get the point when they see the bad side themselves.
And the only way to really see the bad side is to feel it.
The only way to really know why you shouldn’t touch a hot stove…is to touch a hot stove.
This isn’t some new revelation that we figured out because we are some superior generation. We are not. A lot happened before we were born, and many should understand that.
Stick to Grandma’s advice because it is sound. Let them touch the hot stove…then they will learn.
If you really want to educate, let people educate themselves. When you really get in deep, then you make the change and start paying attention.
That seems to be the running theme with most PF bloggers. Didn’t care, racked up debt mindlessly, woke up and realized they were drowning, and finally hit a point where they had to do something about it.
Until you hit that point, education doesn’t matter.
ummm . . . by this advice, if I want to know that crack cocaine is bad, the only way I’ll know that is if I use it. I can think of numerous things in my life where thankfully I learned a lesson through education, as opposed to learning by doing.
A recent study found that the key to long-term success was not a child’s intellence, but their ability for self-control. It’s an interesting and eye-opening idea, to me. We teach our children to study hard in school, but we rarely teach or stress self-control, believing to be something iniate within a person.
Back in my teaching days, I saw smart kids fail simply because they didn’t have the self-discipline to do the work and they wouldn’t accept responsibility for their actions. When they blamed others for their problems, they also expected others to fix those problems for them.
I disagree. Sometimes you do have to let people make their own mistakes, but that isn’t how EVERYONE learns. (I managed to learn drunk driving was a bad thing without doing it myself or knowing someone who did, and many drunk drivers go on to be repeat offenders.)
I don’t know what the solution is, but I do know it isn’t “one size fits all” — as many financial literacy solutions tend to be. Different people have different personalities, learning styles, motivations, etc.
Some people never learn from their own mistakes because one crucial piece of the puzzle is missing: accountability. If people are always blaming someone else for their problems, then any education initiative isn’t going to reach them until they accept responsibility.
And there it is: accountability! Just like the spouse who spends the other spouse’s hard-earned money without a second thought or the child who hands in a project having had someone else do their work, there is no consequence.
We think we can change our own or someone’s bad behavior simply by suggestion, but often the impetus to make that change must be felt on a personal level, often as a result of irresponsible behavior. And sometimes more than once.
I see your point, but I disagree to a certain extent.
I think parents are really the first line of defense against bad financial decisions. But so many adults are bad with money, that it’s unrealistic to expect them to teach their kids how to use money wisely.
It’s true that many people turn their lives around once they hit the “financial” bottom, so to speak, but think about all the time and resources and pain they could have saved if they could avoid that. Plus, many more folks, once they hit the bottom, find it extremely difficult to climb out of the hole. All that energy they spend climbing out of the hole could have been spent on reaching the pinnacle of financial independence instead (er, to take the climbing metaphor a touch too far!).
My parents were very good at teaching me the importance of avoiding consumer debt, and partly because of that I never got into credit card debt. That’s potentially tens of thousands of dollars that their education and foresight (and my willingness to listen to them) has saved me.
I was also fortunate to have the same good lessons taught to me by my parents but my husband? Not so much. Marriage brought me debt and it is still something we are battling to overcome – mostly because of emotion.
Once the debt is created it is almost too late for most lessons to have an effect – a different attitude has to be found to recover from debt than is needed to avoid debt in the first place.
JD, I think you’re right about this one. However, in my opinion, I think you should add a new category on your book list addressing this very topic–about behavorial education (like how to make change and how to improve willpower). I realize that this subject is not just about financial goals, and perhaps that’s why the topic didn’t make the list, but to me, this is the hardest part.
I REALLY loved the article posted a few days ago about willpower. It would be great to have more on this subject.
Maybe this is why you like Adbusters so much, JD. Have you read Juliet Schor’s work?
Mentoring is more effective than general “financial literacy” – I have had great luck demonstrating the joys of an emergency fund with friends who had me hold their savings.
Lots of people lose all their cushion to overdraft & other bank fees – so I’ve had friends who asked me for help give me $10 or $20 out of each paycheck, with receipts & everything, and then had that cash on hand to bail them out when their cars got towed or they had overdraft fees or whatever. Even a $200 emergency fund can make a huge difference in a pinch.
Great post — I think it gets to the heart of the matter.
Another example of how behavior affects us is that it appears as though work ethic and the do-it-yourself mentality are reduced with each generation.
I’ve observed in my own life that when I need something, my default position is to just run out and buy it, though when I think back to my childhood, to shell out cash was my dad’s last resort. His approach was to build it, fix it, grow it, etc. My dad made considerably less than me by today’s standards yet he paid his credit cards in full every month, only purchased used cars he could pay off in 1 year and his mortgage consisted of a 5k loan he used to buy materials to build his own house (which they still live in), and he knew nothing about construction when he started!
My dad’s no Warren Buffet — he hasn’t a hot clue what to do with his money, but he’s amassed a fair sum simply because we was willing to roll up his sleeves and get his hands dirty which helped him save tons over the years. I respect that and admire him for it and I recently decided to try and adopt this approach.
About a month ago our car was giving us trouble so we made an appointment to have it fixed. Unfortunately (perhaps fortunately) our mechanic of many years couldn’t locate the source of the problem. He only charged us for a half hour labor but we took the car back unfixed. With cash being tight I decided to try and research the problem myself and after mining through various Internet forums, managed to find some helpful information. Eventually I narrowed it down to a bad spark plug wire and after a new set for $25, which I replaced myself, the problem was fixed. Heck, why I didn’t try that sooner?
Perhaps a simple thing, but it taught me a valuable lesson and will hopefully help change some financial habits and help keep money in my pocket in the process.
I’m also thinking about ways to model this for my kids. Perhaps one of the best lessons in “financial literacy” we can leave the next generation is how to roll up your sleeves and get your hands dirty, just like grandpa used to do.
Dean,
In this legislative age we are often taught that rolling up your sleeves and getting your hands dirty will get you killed. I grew up on the East Coast – and wouldn’t have considered fixing ANYTHING myself until a few years ago. I mean – fixing something yourself is what hillbilly wacka dos do. If it should be fixed there is someone to ‘take it to’ if not – it should be trashed and replaced. I totally agree with you that we do way to little of the “use it up”, “wear it out” and “make it do” parts of frugality.
I think the phrase
“Don’t try this at home, we’re what you call EXPERTS”
has killed a lot of ingenuity for Americans. It’s led to the belief that we shouldn’t try ANYTHING at home.
I have felt the need for experts as well, and have overcome it by asking myself if there was any way I could make the item worse by trying to fix it. If I couldn’t, I would go ahead and try. Sometimes I could, sometimes not, but it always felt good to give it a shot!
You mean litigious age, not legislative age?
Duh, litigious!
There were two crucial differences when your dad was growing up.
One was, it was harder to buy things. Credit was hard to come by. So rolling up his sleeves might have been the easier choice often enough that it got to be a habit, without him putting much mental effort into it.
The other is the economy was structured much more equitably and suffered fewer crashes (I guess I’m making assumptions about your age here – my parents are Baby Boomers so this was true for them.) He had every expectation that work and thrift would pay off for him in the long run. A lot of us grew up without that.
My kids say I’m old but I say fiddlesticks to that! OK maybe I am old…
I appreciate your comments but I’m not sure they quite reflect his situation.
My dad was born in the 40’s so he’s seen a number of booms and busts over the years, went to college, held a management position in the medical system for 30+ years, had a decent salary and sufficient access to credit.
He could have spent his way into oblivion but that just wasn’t the way he operated – back then or today.
My grandfather experienced the great depression first hand and had to work hard – I mean really hard, for what he had. This was what my dad observed growing up and just the way it was, and an attitude he maintained as an adult.
As a parent I want to ensure my kids have a good childhood, and I’m sure that’s what my parents wanted for me growing up, but in our effort to do and provide more for our children we may be robbing them of what would help them the most – how to work hard and do things for themselves.
While I agree with this post to some extent I think it paints with too broad a brush IMO.
I know plenty of hands-on 20 and 30 somethings who make/fix all kinds of things.
My parents always hired experts and they’re in their 70s and 80s so hard to generalize. (And I’m thinking back to my aunts and uncles; pretty much 50-50 proposition there.)
But there’s a flip side too. Don’t try something you clearly can’t do. I have a family acquaintance, very well-off, who is now a widow with four children because her husband decided to install the home theater equipment himself and was electrocuted.
They absolutely could have afforded the work being done by a professsional. Very sad. I realize rare but I know of many similar, albeit less lethal, examples of this. (Older neighbor falling off ladder sustaining broken collarbone, etc.)
My little niece and nephew hemmed and hawed about potty training. Then they got into school and saw that everyone else was potty trained. End of discussion.
The ERE guy wrote: if you spend $30k per year, then reading about someone who spends $20k/$15k is inspiring, $10k is nutty, and $7.5k is crazy.
My takeaway: So reading about Ghandi and working among the poor may not raise your percieved wealth if you are not already very frugal. But having a slightly better income relative to your coworkers and social circle would. Watching commercials, entry level jobs and wealthier friends would have the opposite effect. Not sure the effect fb has.
I started blocking updates from my Facebook friends who announce every little thing they buy. I guess because Facebook and Twitter are so immediate you can tell the world about your purchases right away when you’re in that “just bought it” euphoria. The funny thing is that if I called them or went to visit, they wouldn’t brag about their stuff. I guess the novelty wears off?
This is strange. I can’t think of a single friend of mine who posts about what she buys on FB. Hmmmm.
I find that strange too. NONE of my Facebook friends (many of them family) post about what they’ve just purchased. Can’t say its a generational thing because they are between the ages of 16 and 60.
I agree 100%. We need to move beyond building “knowledge” and focus instead on developing “insight” in how we as individuals behave when it comes to money.
I’m a big fan of GRS. Keep it up.
Bruce Sellery
Host, “Million Dollar Neighborhood” on OWN
This is a great post, so I tweeted it. It’s given me much to consider. I’ll work on creating behaviors to follow so I can reach some goals.
It is a matter of discipline, but you can also make it fun.
Back in the late 70s/early 80s, we had 5 student loans for 3 graduate degrees. Once we were both employed full-time (huerray!) we continued to live on my salary and use my husband’s to pay off all our debt.
This was in the days before the internet, when the banks would give you enormous coupon books to use for debt repayment. It was so fun to go into the bank and tear off PAGES of these things to hand to the clerk! (who was usually rather annoyed). The physical and visual process really kept us going.
Physicality — of forms or paper money — is a big help in self-discipline.
PsyBlog had a great article on how to improve self control a few years back.
http://www.spring.org.uk/2008/09/how-to-improve-your-self-control.php
Basically says the same thing you are here J.D. – that mechanics are secondary. You need the “why” and then you’ll either find the way – or make one.
That’s why a book like YMOYL was so instrumental to so many people in turning things around. You don’t even have to follow the 9 step process totally (I certainly didn’t) although it is a good process. The power of it is in the inspiration to see how much more choice you can have in life when you have some degree of financial independence. It doesn’t have to be the whole enchilada, but a good, solid cushion that gives you the ability to do things like quit a bad job without having another lined up, not sweat it if the furnace goes in the middle of winter, be able to buy a car for cash…
Based on my work as a credit counselor, I have to mostly disagree. I think a foundation of any behavior is education, knowledge, and training. Does this mean every person who receives a good education in financial matters will behave responsibly with respect to money? Of course not. But many will who would not have, absent the education. While working as a credit counselor, I met clients daily who showed complete ignorance of the most elementary principles in finance, such as What is Interest? To expect responsible money behavior without education–whether it be self-education or public education (a different question)–is akin to expecting 16 year olds to simply divine how to drive an automobile on their own, without any instruction. An accident waiting to happen! Thanks for the post.
But don’t you, as a credit counseler, get mostly the worst cases. The ones that failed and do not know how to get up?
I think J.D. was more concerned with the the many, many more average consumers, who do not fall that far, but who would likely be off better if they managed their finances better.
Peter–not at all. My clients reflected the spectrum of humanity. I would say the typical credit counseling client is the typical American.
Thanks.
I agree with you, as human beings we have the intellect and rationality to act responsibly with our money. However, we have been wired from birth, and possibly before, to consume.
We live in a society which promotes the acquisition of consumer goods. We are taught from an early age to buy certain things. We are constanly bombarded with the message that our self worth and the value of our life is based on the type and quantity of goods we consume.
I don’t think anyone is totally immune to these feelings. We treat people who don’t buy into the consumerism mantra as being strange. I think a lot of people feel as if there is no way that someone can be happy without all these things we are “supposed” to acquire.
I am like J.D., I do not not know what the answer is or how to improve the odds of a fundamental change via education.
Funny. I consider myself financially literate, but I’m realizing I’m really not. (And yes, I aced Consumer Education in the mid-70s.) I’ve alway been frugal to tightwaddish and have “managed” my money by living under my means. To the extent that we were able to buy a condo last year with a 70% downpayment.
The problem is that I “manage” money by letting it accumulate in my bank account into the four (sometimes five) figure range before shoveling it into savings accounts. I have CDs but I’m scared to death of the stock market.
Recently, in an attempt to act more wisely, I transferred money again AND set up an automatic transfer to my savings. I left enough to pay an insurance premium that would come due. But since I’m not used to monitoring my cash flow closely, had no qualms paying for tickets for an event that wasn’t planned when I rearranged the bank balances. When I checked the balance yesterday I realized I’ll have to watch my withdrawals until the end of the month (pay check will be deposited later because of the holidays) and either adjust the dates of some automatic withdrawals or make a transfusion from my savings.
Moral: Caution has been masquerading all these years as Acumen.
I think it’s a 2 pronged approach – you need to learn about facts and figures (what kind of mortgage can you really afford, how long it will take you to pay off your credit card if you only make the minimum payment etc.), but you also need to learn how to live within your means. It’s much easier to learns facts than it is to modify your behaviour.
I try my best to stay away from advertising and constantly seeing this rampant consumerism but ad agencies are becoming increasingly adept at inserting their message into the programming. Reality shows with specific restaurants selected, movies with subtle product placement, etc. Really it’s hard to get away from advertising so changing our thoughts on how we spend and save really is the answer.
“And I’ve learned that by having financial goals – such as travel – I’m much more inclined to save than if I have no goals at all.”
This was the thing that finally spurred me to work on building a savings now, at the age of 27. I realized I wasn’t getting much of anywhere just spending my paychecks as soon as they came in (I’ve had a lifelong feeling of money burning a hole in my pocket as soon as I’ve had any.) Numbers don’t do much for me. But goals — the bigger things that I can do with my money, if only i put some aside –that’s my real motivation.
JD –
Okay, I’m going to take you along on a little mad ride if you don’t mind.
You say that ads are the problem and they should be avoided. But the ads will find you. They will get you. They are everywhere. You can run but you can’t hide. So you need self-defense. And your weapon is MEDIA LITERACY. Once you can decode ads, it doesn’t matter how many you get– you become immune to them. Even allergic. Me, ads make me NOT want to buy things. Put it in an ad today and it’s off my shopping list tomorrow.
Still, without ads, there is social pressure to spend. How do you deal with that? Me, I have an “I don’t give a damn about your stupid opinion” attitude but most people don’t. I’m a bit of a loner and an outcast by choice and I can get away with it, but most people operate in a social environment with unspoken rules and expectations. Think, speak, dress, behave, spend a certain way. If you don’t love Christmas you hate America. You are in or you are out. Be like us so we can trust you, give you a promotion, let you in our country club. Outside remain the losers who can’t cut it. Are you in or out?
We are social animals, everybody has some sort of social drive, and we strive for status of some kind or another, so as long as possessions signify status people will try to climb the social scale by displaying their brand-name plumage. Hey look at my tie, what a nice tie I have, I am important. Yes sir you are.
So the real question becomes– can you eliminate the social hierarchy? Communism tried, but failed. Can you operate independent of it? Probably not. Thoreau lied. Can you eliminate the drive to climb the social ladder? Maybe with a lobotomy.
Ultimately what you’re asking for is impossible. Consumerism is simply the latest incarnation of the social drive to get ahead of the pack. Back in the day it was brawn and cunning and pheromones that secured you a meal and the chance to have offspring. Then it was land ownership and nobiliary title. Today we live in the Bourgeois age and commerce is king. And everyone wants to look the part.
Anyway… if you hate ads, you hate America
now look to your right: ally/amex/order today 😀
LOL. Yes, the statement “My top tip? Kill your TV. Watch your shows some other way.” was the ONLY thing about this article I completely disagree with. Last night the TV hooked up to the DVR was being used, so I turned to the internet to watch a free stream of a TV show. Apparently, I had never done this before because I was FORCED to watch the ads at the commercial intervals in the show! There was no way around it; there were two commercials at each interval that had to be played. If I had access to the DVR, I would have fast-forwarded right through them. That in itself made me glad that we hadn’t made the switch to a cable-less house yet. So, finding other (apparently free) ways to watch shows will not solve the problem; I assume the only way to avoid this is to spend $ and buy the season or the shows on iTunes.
I watch on Hulu and Netflix so I have no DVD. I try to make Hulu give me the most amusing ads. Of course I don’t buy from them. Only suckers believe in commercials. But hey, commercials make it possible for me to get Hulu so I won’t complain.
Here’s one commercial that made me laugh yesterday: some guy who claims to be “average” (has average job, grills average steak) but is by all appearances a privileged 1 percenter gets a gift of a bottle of scotch with an inscription on it– apparently Johnnie Walker can engrave your gift bottles if you buy the premium “blue” stuff that’s $200+ a bottle.
The hilarious thing is that this 1 percenter gets to feel “special” and “one of a kind” by the magic powers of booze engraving. He’s no longer “average”! I’m thinking, “just look at your expensive suit, a-hole, you’re not like the rest of us. Don’t cry to me about “average” Go find a weird hobby.”
The sad sad part of course is that this ad is not directed at 1 percenters, it’s directed at deluded 99 percenters with aspirations of grandeur. Ayayay! Poor suckers. Burn that plastic.
Now don’t get me wrong, I love a good scotch, it’s tasty and gets you drunk in the nicest possible way, but a cure forbeing “average”? Haaa haaa haaa. Oh the hilarity.
that was “no DVR.” DVRRRRRRRRRR. aghhh.
You can’t eliminate the hierarchy, but you can shift which part of it you’re in. There are less consumerist subcultures to belong to and get social validation from.
Yep, that’s absolutely right. There are many ways out of the high-school hierarchy mentality. I was just poking holes at the “ads” argument. 😀
Yeah, ads are the least of it.
Though, media literacy doesn’t really counteract the underlying issue of media images affecting our idea of “normal”, either directly by making really rich, thin, white people look like a bigger share of reality than they are, or indirectly by changing the behavior of the peers you get your direct pressure from.
I feel like a broken record, but Juliet Schor and others have done a lot of accessible research on what affects spending behavior (so have a lot of other people who translate it into sales tricks or trade secrets, but Schor presents it with an idea to curb overconsumption.)
Media literacy IS learning about those images. One of the many things I learned (it was a college class) was how the bookcases that appear behind the host in “serious” shows (you know the kind) are a special small size, as normal bookcases are too big. Just like that you learn about all the smoke and mirrors, and then you just keep looking–
So every time we watch a tv show my wife and I say things like “wow, how can they afford that huge apartment in New York” or “look, they never wear the same thing twice” or “notice in this show all black people are either criminals or cops” or “all the girls the guys sleep with in “the wedding crashers” have the exact same body type and long hair” or “of course, another arab terrorist”– once you learn to see, you can’t learn to “unsee”– it’s neo’s red pill.
ps- i haven’t heard about schor but i wouldn’t mind some links if you can post (not wikipedia obviously but things you’d recommend looking at)
I read her first two popular books in deadtree edition back when they were new – The Overworked American and the Overspent American. I haven’t read her newest book, Plenitude.
She blogs here http://www.julietschor.org/blog/
and publishes articles at the New American Dream website. Her recent work is more about sustainability than the older stuff, which was a lot of research on what people buy and how they make buying and saving decisions.
In India, Till now we compare on how much education and wealth one has got. But sadly things are changing there but not to American extent.
We still compete on number of houses a person has and the gold he/ she can accumulate
Great post and discussions so far! One thing I’ve noticed is that we haven’t really gotten into what financial literacy is and who is responsible for delivering it. I was surprised to see that the recommendations from Canada’s Task Force on Financial Literacy isn’t just aimed at individuals and schools. Part of its that employers have to offer appropriate education about retirement options, and financial institutions have to provide clear, plain-language information about their products and services to help people make informed decisions.
I don’t know if or how these recommendation will play out — some of them seem a little too bureaucratic for my liking — but the focus is on life-long financial learning.
If anyone is curious, here’s the link:
http://financialliteracyincanada.com/report/report-toc-eng.html
In thinking about the anti-ad message, to me, I don’t think the ads are as much of the problem as the shows themselves. For example, the movie, High School Musical, has the star basketball player living in an AMAZING house and having everything he wants, even though his dad is a high school teacher and coach. It makes me laugh because teachers have such a small salary-the only teachers who I know who live like that are the ones who have husbands that work very good jobs. (My husband is a teacher) Most of the shows that are popular all show a very nice lifestyle and it comes off as if this is typical middle-class America.
When our country went crazy on debt, I don’t think it was because of ads. I think it had a lot to do with what one perceived as “everybody is doing it” mentality. A neighbor buys a nice car and you wonder when you should get one.
Agreed. I don’t watch t.v. anymore, but the ads for shows that I do see, as well as movies that I watch, all show people who are supposed to be average living in mansions, wearing designer clothing, eating at expensive restaurants, and surrounded by more Stuff than you’d find in a mall. I always attributed it to the shows being produced by rich people reflecting their own lifestyle as “normal”.
Yes. I think most people know the ads are trying to sell them something, which makes them easier to resist, but the “this is what your house should look like” message that is indirectly conveyed through the shows is a lot sneakier.
Great post! I agree with you too. Behaviour is incredibly important. However it is not tied to attitude very strongly. From studies the correlation becomes stronger when attitudes are tied with a high sense of self awareness. Hence your idea of becoming aware of advertising affecting your behaviour is needed.
Maybe kids should also keep a finance goals journal. The goals would be small personal goals they set for themselves. They could mark the steps they take throughout the week to save for these goals and sacrifices they made to keep on target? Also areas that where they failed and spent money where they didn’t have value. It would help them to practice thinking about why they make the decisions they do.
Many people mention families as one of the bigger influences as well. Totally agree with this. Imagine being a parent who is not tracking their spending and not budgeting properly. Imagine your kid coming home and questioning everything you do? Haha Families who do not have everything together can sometimes make a lot of excuses for their behaviour instead of encouraging their child to learn better methods. Children are influenced by this. Maybe this means this will be a slow process of change? Maybe someone has some better ideas of how to deal with this issue?
I pretty much agree with everything except that I have a TV and I like it. I don’t get cable on it, we use it for DVDs and video games. I do feel like I’m less exposed to ads by not having cable.
As far as behavioral education I do agree with it, but like some others said, not everyone needs to suffer through trial and error. I’m in college getting a degree, but some classes I want to take are finance classes.
Even though I have read more than a few books on personal finance, I feel that by taking a couple of college classes would also help me as well. I want to know what they teach accountants and finance majors at college. I want to know what the experts know.
I’m 28 so the older that I get, the more financial freedom matters to me.
P.S. I wonder if behavioral education isn’t taught because the banks, and finance experts want the mainstream public to be ignorant. I mean think about it.
IF you keep someone ignorant then they stay in debt, won’t pay off their loans, they won’t retire early, and they won’t compete with you in the market by starting their own businesses. It’s hard not to think that way after the predatory lending practices of banks that happened in the late 2000s.
I know people have a responsibility in being financially smart and making wise choices, but I do wonder why that is not taught in public schools. It’s like the elite don’t want to compete with the masses, no wonder public school education is poor.
Agree entirely with your points, but I do feel that one of the two “action items” you outline is more important than the other. Avoiding advertising will prove to be nearly impossible, given its ubiquity. Consumers are presented with around 5000 brand messages per day, according to one study. Even if one chooses to remove TV from their daily routine, I believe that consumerist temptations will not decrease in any significant way. Resisting or eliminating that temptation internally – what you call “mastering the emotional side of finance” – is a much more powerful notion, much like the man who is taught to fish, rather than given a fish, in the old adage.
I don’t watch tv since we don’t have one here in Poland. I use adblocker. However, when we visit the states, I am often exposed to tv.
I notice a huge difference. I NOTICE the commercials and they do affect me. I find myself wanting more and more–even if not the things they are actually advertising–just “something else.”
I find I’m much more content living here in Poland. Probably because people have less and electronics in the stores are more expensive, so they are not really an impulse item, but must be planned for.
And they don’t have the fabric I like at all here. I guess it is more or less “default frugality” because of lack of product or lack of good prices.
GREAT article! I 99% agree (except the comment I posted as a reply to El Nerdo). Anyway, I think a fundamental issue to your points, JD, is that MANY Americans have a very embedded sense of entitlement. They feel like they deseve this, that and the other, so they spend, spend, spend. How do you fix that? I have no idea. Not only that, but this is getting worse. People in my generation (Gen X’ers) and younger who are now parents seem to give their kids anything and everything, especially if it makes the child behave. This is going to do nothing but help proliferate a sense of entitlement to the children if they are hardly ever denied anything.
Speaking of entitlement, look at the Occupy Wall Street movement; one of their core “demands” is to forgive all student loans. WHAT?!?! Who told any of those people that a higher education was free? Why did they ever think they didn’t have to pay for college? It TOTALLY baffles my mind. And the argument that the loans are too much also baffles me; schools tell you up front how much tuition is. If a school is too expensive, go to a different school! No one told you to go to the private college or to choose an out-of-state school. I chose an in-state public college, mainly because of the costs and because I knew I couldn’t afford anything else; I received a fantastic education. I just can’t believe how entitled some people are, and honestly it makes me quite upset.
I was reminded of this onion article:
“Nation Waiting For Protesters To Clearly Articulate Demands Before Ignoring Them”
http://www.theonion.com/articles/nation-waiting-for-protesters-to-clearly-articulat,26353/
My impression is that they’re only very loosely organized, so it is inaccurate to describe them as having a demand that precise (forgiving their college loans), but it would be accurate to say they’re angry about the financial system and the continuing lack of accountability.
Education was a bubble, and it has burst. I saw an idea I found intriguing. That Universitys and colleges should be responsible for loans (in the future, not the ones already issued) if their students can’t pay them back. This would stop educational institutions from simply churning out graduates with no regards for whether they’re in demand or not.
I think that idea wouldn’t succeed for a number of reasons, but it is thinking outside the box and I’d like to see more innovative ideas that can bring incentives in line with, if not the greater good, at least not farking things up royally.
Claire, the student loan problem might make you angry, as it did me, before I researched it some and my research changed the way I look at it. It is a complicated problem. Tuition is too high for most people to afford. So they need loans. OK, loans were around 30 years ago, too (when I went to school). The problem is that student loans are granted to folks who cannot afford that much debt, and tuition rises to match — it is simply assumed that students will just get the loans.
I suppose people don’t need to go to college or grad school. That is one choice they might make.
Another problem with the student loans is not so much that you might graduate with 20K or 50K or 100K in debt, but that people who get the loans do not understand how the interest works — and that 20K loan can triple, quadruple, become an 80K loan — I am not kidding. All because of the interest and this is happening to folks who graduate and cannot get jobs and cannot repay the loans. They would if they could. They assume the tuition is 20K and that’s the size of their loan and they agree to repay. But it is not explained to them that if they miss payments, their 20K loan can become an 80K loan that they may never be able to repay.
Also, people who have professional degrees which require licensing (for example, doctors) can have their state licenses revoked if they cannot repay the usurious loans. I’m not talking about a normal loan here. It’s the predatory loans without consumer protections.
When it comes to “forgiving” student loan debt, I agree that the principal/tuition should not be forgiven. But I think we ought to consider allowing people whose 20K loans become 80K loans to get out from under that, somehow.
What do you think?
I think it is a complicated problem.
Amen. School tuition has risen far faster than inflation, and it is loans on the backs of students that have propped up those tuition hikes. Meanwhile, students taking out the loans often don’t really have a concept of how the payments will add up VERSUS take-home pay. I remember thinking I’d be doing well after college if I made $25k after graduation; that’s over two thousand dollars a month! Ha. Ha ha ha. (And I’d had a PT job since I was 14, so money wasn’t totally foreign to me. But salaries versus bills wasn’t real.)
Also, the underlying question about OWS and student loans is–why can we bail out big banks but not our citizenry? I think it’s somewhat more representative of our country’s issues than just about the actual loans.
Unfortunately, students not understanding the implications of paying back student loans is often the failure of their parents. Paying for college is actually an excellent time to teach teenagers about finances.
I agree that many parents do not, themselves, understand the implications of student loans.
But I would not take that a further step and “blame” parents (I’m not sure that you were). I think most people do not understand how student loans work (that they are predatory and that consumer protections have been removed). I think if more people understood what they really are, then there would be more of a protest against them.
Having said that, I think student loans tie in very nicely to this article on behavioral finance. As it appears to me, we currently live in a culture/society that sends a very strong message that in order to get a “good job” you must have a college degree. And actually, since I graduated 25 years ago, that has ratcheted up to where nowadays a bachelor’s degree is often not enough. you don’t have the money for all these degrees? No problem! Just get loans. pay for it later, with your exalted salaries.
But yes, it is an unsustainable bubble. There are now ratcheted up expectations for employers to hire employees with advanced degrees. Whereas 25 years ago a bachelor’s (or even associate’s degree) was sufficient for many good jobs, now you had better not even think about it unless you have that master’s or Ph.D.
So, these *are* the expectations. It is a behavioral thing. And it puts people in a bind. Sure, they could choose not to go to college at all. Or work their way through (if they can get a job). And now, further insult, many newly minted graduates cannot get jobs. To pay back their loans.
I’m not sure that that is a lesson that any parents could have taught their kids: “what if you can’t get a job with a good salary after you graduate?” It takes a pretty hefty emergency fund to cover that contingency.
That is one reason many are returning to school and getting even more loans (and more degrees, with rising tuition to match); to avoid going into default (as long as you are enrolled in school the big payments don’t start).
It will have to end somehow, somewhere. The in-state, full cost of a college education at my state’s university(tuition, fees, room and board) is estimated at $20,000 a year. That’s really an insane amount of money, multiplied over 4 years.
What would happen if all of a sudden kids just refused to go to college at all? (or only the rich could go). I don’t see that happening, though (people refusing to go because of the high costs). So I’d like to see the government step in and do something about the loans and rising tuition. Regulate them so that the interest rates are at a reasonable level, so the loans cannot quadruple.
And of course I’d love to see salaries keep pace with inflation and rising tuition costs, medical costs, housing costs. There are a lot of people out there living paycheck to paycheck, NOT buying the big screen HDTVs. Just the basics.
I liked the idea someone mentioned, that colleges share some responsibility for the loans being paid back, if their graduates cannot find jobs.
How many college graduates do you know who do NOT want good jobs?
Well, the place our country is in now, economically, did not happen overnight.
Wow, I am glad that my comments generated some interesting discussion. I guess part of my point is that for many people, in the process of getting what they want (such as a going to school or buying a house), they seem to blindly do whatever they need to do (like obtain a loan) to get it. They almost seem to unconsciously sign the paperwork without thinking about it. More people need to stop during the process, be more conscious, and say to themselves, “Wait a second, exactly what am I about to sign? How much is this really going to cost me? Are there any parts of the repayment plan that are not something I would agree with?”
I do agree that for a younger person (such as someone who is still a teenager and about to go to college for the first time), I would sincerely hope that their parent(s) would be with them and help them look at the loan information and try to help them understand the implications they are about to face. You can’t expect a teenager to really understand that.
I just wish more people would take the time to really look at financial burdens, like loans, that they are about to assume. There are people out there who will help you decipher a contract or a loan repayment plan who are not associated with the loan company and therefore will not be biased. Similarly, I did this for a friend of mine. Since I am an accountant, she came to me with paperwork from three different loan companies; she was about to go to medical school and was completely confused by all of the jargon in the terms of the student loans. I took the time to look at all of the conditions for all of the loans and found the one that would cost her the least overall. I was happy to do it for her and glad I could help her out like that.
I agree wholeheartedly it is important to pay far less attention to advertisements and the marketing of products. It is still valuable to know about the products and this can be achieved through reading news accounts (the development of the Kindle, for example). And yes, the psychology of economics is very important. BUT, once people actually begin to save, they do need some know-how about bonds and stocks and interest rates, retirement accounts, etc. – – i.e., financial literacy—to manage their savings.
I’m not trying to hijack the discussion, but as I was reading J.D.’s post I couldn’t help thinking “all this applies equally to weight management.”
And the more I thought about it the more I thought “this is actually a manifestation of a systemic *cultural* assumption, in the U.S., that we can have anything and everything we want, at the exact moment we want it, and that the consequences will either pass us by or we can deal with them later.”
We want extensive public services, but we complain about taxes. We want instant highly palatable food, but we complain when it makes us fat. We want the world’s safest automobiles, but we complain when the prices go up. We want the most advanced medical procedures available on demand, but we complain about the cost of health insurance. We want 500 channels on our high-def satellite TVs, but we complain about pervasive advertising.
I don’t doubt that teaching behavioral psychology early in life would be helpful. But my cynical side whispers that most people are just really comfortable with the status quo and – as others have said – it is not until something in the status quo shifts over from temporary discomfort to active pain that most people change their ways.
Just ask cardiologists.
These are interesting ideas, but they didn’t resonate with me. I am wondering how universal they are (I like to challenge ALL assumptions, and I like it that you are speaking about “cultural assumptions” and making an assertion that these are common enough that we all share them… I really don’t know. It would be great to find out what the majority REALLY wants and REALLY thinks.
For instance, yes I want smart and useful public services, and absolutely I am willing to pay for them through my taxes.
I’m scared of fake and processed food and although I’m very busy, I am willing to take the time to cook real food from sources I can figure out (local, CSA, etc.).
Sure, I want a safe car. I have one. I bought it used. It’s paid for. I’m a safe driver.
I do NOT care nor want the “most advanced” medical procedures. I simply want to live a healthy life, for as long as I remain healthy. No heroic measures. I take care of myself. I avoid things which make me sick, and that includes careful scrutiny of medical establishment drugs and “procedures.” And yes, I am Very Angry at the high cost of health insurance. Accidents can happen to anyone. Medical emergencies can wipe out a family’s solvency overnight. This is a horrible problem in our country, and affects poor and middle class citizens in much greater numbers than the fortunate few who have excellent health care coverage. We are all deserving of this.
Who wants 500 channels and a high-def TV? I’d love to know. Nobody I know wants this. We are pretty busy, anyhow, working to pay the bills, raise our families and doing things for ourselves to save money.
The older I get, the less I want these things that you imply are universal wants — maybe that is the explanation? I’m 50.
Excellent post, JD. I can’t wait to see where this “epiphany” takes you.
I’m a psychologist and I really enjoy your column becuase I think it speaks often to just this issue. Being healthy, finaancially or otherwise, is not usually a problem of a lack of knowledge these days – it’s a lack of ability to put what we “know” is best into practice.
More on the behavior/psychology aspect of money, how many financial decisions do people make without having emotion attached to it? Especially when it comes to opening statements, making decisions how to invest, deciding how you’re doing compared to the Joneses. A lot of neglect of financial issues probably has more to do with trying to avoid the emotions around it than anything else.
Laura- this is well put. I would agree.. using money and other things as an avoidance vehicle.
Learning behavioral finance is the key. As a financial planner and adjunct professor of finance, I have had the opportunity to see how different types of people react to and handle money. Through this experience and my experience working as an adjunct professor, I have developed a course for teenagers focused on behavioral finance. Using real life examples from past clients and students, we explore why people make the decisions they do as well as strategies on how to trick yourself into making the right decision. http://www.moneymindedlearning.com
Seeing the change in the the way the students think, at least initially, has been an extremely rewarding experience.
Great article! I’m fascinated by the field of Behavioral Economics, because I have found myself often making irrational money decisions (and dieting decisions and dating decisions and education decisions…) despite my knowing better. Once we understand that we need to be in control of our decision making process–and that control sometimes means keeping outside influences at bay–then we tend to make decisions that are actually in our self interest.
If you haven’t, please read Predictably Irrational by Daniel Ariely. It’s a fabulous discussion of how our decisions are motivated by completely irrational forces.
This is a fantastic posting! Not the least because the diet situation is quite the same!
It’s not that people need more information on losing weight.
The rules pretty much are: eat less than you burn; eat enough in volume of low-caloric food to not feel hungry; do what works for you (in terms of kinds of food, when-eating-what etc.).
And yet, it’s the behavior that’s so hard to change. So it’s really quite the same situation – and frankly, I not only need to lose weight, I also need to save more money, so tackling both these subjects is my current agenda 🙂
Do you guys remember sex education in school? Not really, but I remember those painful, unsightly images of sexually transmitted diseases on people.
Maybe financial education can be like that. Show the seemingly happy family with toys, stuff and their McMansion. Then show their bank accounts and the downward spiral of finances.
Eeeek. It’s all about prevention!
JD’s spot on! Literacy is not applicable knowledge – in Finance or any field. Good financial habits require discipline which can only be possible through behavioral change.
These are things people hear over and over and unless they put it into practice it does not make real sense.
1. Live below your means – budget and track your spending
2. Automate your savings – I have come to realize over time that this one thing done right has a much more lasting impact than time spent investing in volatile securities
3. Advantages on not owning an Idiot box (television) –
. Wife and I get to spend quality time without distractions
. No money spent on cable, Netflix (we do the occasional DVD from the public library or Redbox)
. Not influenced by advertising or media coverage on Black Friday or Cyber Monday or Sale Everyday
. Find creative ways to use extra time – investing in skills through education
4. Buying for value rather than price, spending money on experiences rather than stuff
Regarding the emotional side of personal finance, I think this has ALWAYS been a problem throughout human history; the difference is that there were more external constraints prior to the 20th century. It’s true that 19th century aristocrats could gamble their fortunes away, or poor people owe money on their accounts at the local country store, but credit cards seriously upped the ante. In most cases, if you didn’t have the money, you couldn’t do more than drool at the window display; now you charge it. In the past, you didn’t have to be disciplined; circumstances did it for you. If you did have money, you could be (and usually were) flagrant about your spending. At the same time, clothes used to cost so much that women made their own, stores carried fewer goods than today, t.v.’s were pricey and cell phones, iPads, etc. didn’t exist, so there was simply less to buy.
The rise of the Consumerist Society in the 20th century and the removal of those limits has IMHO led to the current explosion of debt and overconsumption. IMHO this is encouraged by Wall Street and Big Business because they discovered that in so doing, they could remove money from people’s wallets and add it to their own.
I have often thought that if “the 99%” REALLY want to stick it to “the 1%”, the way to go is to dump all big-box-bank credit cards, stop shopping at big-box stores, stop buying trendy goods, and basically refuse to buy into the Consumerism mindset. But as J.D. and others note, behaviors and mindsets are hard to change. Plus, our entire society is structured around large businesses pushing goods; it would be hard for 300 million Americans to suddenly refuse to buy anything from a large business. But it would be very interesting to see.
I work in an organization that is part of the Colorado Department of Higher Education. My title is “Financial Education Program Associate.” The “Financial Education Program” that I help manage is a set of free, online financial literacy courses called Education Cents (www.educationcents.org).
The first course in our repetoire is “Psychology of Money,” and most of our courses have two parts, a “Head” section, which deals with the nitty gritty, and a “Heart” section, which deals with the psychological, and behavioral, side of personal finance. (We’re working on putting together a Heart section of the rest of the courses.)
I love my job, and one of the reasons I do is because I agree with you, J.D. I think we have to know more about why we spend and how we think about money in order to affect real change. I am thrilled to be part of an organization that’s trying to do that, in some small way.
Thanks for sharing your epiphany.
What a cool job, Megan!
YES.
I made the mistake of geeking out about PF to someone recently. Said person had their education paid for by parents and I would wager has never struggled for money nor had a partner with opposing financial habits. Explaining to him the “personaL” or behavioural side of finance? Right over the head. Finances should be logical, but they are also emotional.
This article is AMAZING. I’m so heartened when I see articles and books that start to address the psychological underpinnings of our culture.
We know what we’re supposed to be– an all-A student, surrounded by nice things, a perfect performance, a smiling face– but we don’t know how to get “there” in a way that’s healthy.
Some commenters suggested that it’s the school of hard knocks that teaches us what’s important and what’s not, and pushes us to do the right thing… “or else”. There’s a book called “The Price of Privilege” by Madeline Levine that might show why it takes hardship to learn, but points out a better way for this to happen.
She discusses how to teach children autonomy and accountability by letting them have small but real failures as children. Parenting in a culture of affluence means that it’s easy and culturally acceptable to bribe for a result or pay to smooth over the pain of your child’s mistakes. It isn’t so easy to let people you care about fail and learn, especially your own children.
By first 1) honoring that failure exists, 2) removing it’s social stigma (i.e. “If I fail, I am [insert negative belief here]”) and 3) supporting the person in seeking THEIR OWN better solution, we can teach children and one other what it feels like to fall and get back up again. Just as others have voiced, I believe this character-building work needs to be taught by educators in addition to their primary subject matter, and it needs to be infused into family relationships and the larger culture as well. Maybe once this happens we will see a change in our bad habits such as poor money management, obesity, drug abuse, depression, etc.
“The Price of Privilege” by Madeline Levine
… and just for fun,
http://siobhancurious.wordpress.com/2011/09/26/fail-better/
http://www.nytimes.com/2011/09/18/magazine/what-if-the-secret-to-success-is-failure.html
While reading your blog today I was reminded of an expierment my sister in law and I did when our children were in high school. We had very little money during those days and we wanted to each have beautiful Christmas tree that year.
We purposely left all money and credit cards at home and went to the mall to look (only). That was during the time “The Origional Christmas Stores” came to our area. Of course we had to go there too. There must have been at least 50 or more trees that had been decorated – each in a beautiful manner.
We took hundreds of mental notes and left with out heads spinning with ideas for our own tree and home decorations. The most important thing is that we didn’t buy anything when we made second and even third trips there.
We saved the money we might have spent on a whim and shopped our previous years bounty of decorations and used them in a different way. We both had beautiful trees that year and for several years afterward.
The thing that we learned from this is that we can shop and not spend. That’s hard but we did it. It got easier as time went by. My takaway from that expierment was that I can use what I have in a different way, save money and still have the shopping expience.
The money I saved the first year went a long way in paying for my son’s wedding that year. The money I saved over the next year helped pay for my daughter’s wedding. After that, saving came a lot easier for me.
The expierment taught me to control not only my money but my shopping attitude. I am now able to have cash, check books and credit / debit cards with me and not spend when I see something I like or think I need. It’s more of a personal learning curve that should be taught by parents from an early age rather than a class in high school just for a grade.
Great comment, Texaslady! I learned a long time ago how to shop without spending a dime. I window shop all the time for clothing, household items, decor, etc. I then go home either fix up my home with what I have, make a garnet or put an outfit together with what I have in my closet. Being able to sew doesn’t hurt either. 🙂
Basically you said it, you have to practice saving and practice self-control.
I think once you have the basics of everyday life such as “enough” furniture, appliances, clothes, electronics and toys, it’s easy to control your spending and window shop because you already have enough things.
At least that’s how it is for me. The allure of shopping isn’t so strong. I don’t own too much, but I own enough. I think it’s great how you and your family got creative about Xmas. There’s no need to go into debt for one day.
I like Xmas trees as well but I’ve decided to buy an artificial decorated 4 foot Xmas tree. Yep I’m lazy, lol. 😀
My grandmother (1%) loved to go “eye buying”.
We see the effects of consumerism most with our kids. In addition to all the media hype, they’re also trying to find themselves and deal with peer pressure. Yeah, people laugh at my Treo 650 all the time, but it’s much harder for the kids to face ridicule from their peers. But that’s what builds character, right?
Like good eating habits, we hope our lessons on financial behavior keep them from having to learn the hard lessons we did.
perhaps it’s not that financial education doesn’t work, but that there’s not enough financial education.
imagine you never took a reading class for the first 17 years of your life, and then took a hooked on phonics your senior year of high school. despite the reading class, you found yourself still having a terrible aversion to trying to read. would you say that literacy classes don’t work?
perhaps if they started teaching financial literacy early, and taught it every year, it would be easier to think logically when making financial decisions.
warren buffet has stated one of the best indicators as to how successful someone will be in business is how young the person was when he started a business.
just some food for thought.
I don’t want to sound like a paranoid conspiracy theorist – but I can’t imagine public high schools getting on the “live below your means” bandwagon. Urging all those future spenders to save instead of spend? Teaching them to ignore the siren song of easy credit? Suggesting they TURN OFF THEIR TV’s? Isn’t that kind of behavior practically un-American at this point? I’m not saying public schools are in league with credit card companies and advertising agencies – but then again, many public schools in this country sell soda and McDonalds in their cafeterias, so it’s not too hard to imagine.
As a mom of 4, however, I absolutely love the idea of teaching “behavioral finance” in school. Maybe then my kids wouldn’t be as embarrassed by their “radical Mom” who likes us to – gasp – live within our means!
Brilliant article J.D!
It’s good to see the acknowledgement that financial literacy needs to be about more than just maths.
Here in Australia we actually have a TV show dedicated to deconstructing advertising that’s been very successful. It’s called the Gruen Transfer, there’s a few full episodes up on Youtube. Here’s one if you want a good example: http://www.youtube.com/watch?v=Pijmw2xNt6M
The show is a good balancing act of humour and education. You may not get some of the jokes but it’s still a really good example of how to push behavourial finance into mainstream view.
I even did my first finance blog post on how finance can learn how advertising’s success: http://www.creditcardcompare.com.au/blog/what-finance-can-learn-from-advertising.php
Good financial habits need to be encourage, practiced and rewarded. Does financial literacy change people’s habits? Only if the person wants to change. Practicing the skills and finding a reason(s) to use the skills is equally important.
This is a great article and it starts to bring up an issue that I have been thinking about for awhile. The link between mental health and spending. If we could impliment behavioral ed … yes that would be nice. But people are going to get depressed during lows in their lives and hurt themselves financially by not caring. Or a personal example… I love shopping because of the stimulation of it.. I am very visual, and have a bit of ADHD. I love all the colors, stuff to ponder, etc.. I just try to go to the Goodwill as well. But I know this about myself, and even though I have had to rescue myself from debt a couple times, I learned (ADHD has an impulsive component as well). It has to be lived it can’t be taught. Like other commenters I too hope my children dont have to learn the hard way like I did. But after all “know thyself” is carved over the oracle at delphi, and how many years does it take to get to the point that you know yourself enough to have self control??? For some quicker then others I am sure. However, isn’t it a that you don’t know how bad your habits were until you are looking back at them…arrggh!!
Im a 23 yr old black male…most people my age in my community have no.clue what an IRA or an Index Fund is…and there are very few attempts at changing this.
Financial Literacy is still needed
Hi JD,
One thing that I think you overlook in an otherwise compelling post is that financial literacy classes provide kids an opportunity to think objectively about money while they are not thinking of it in terms of being their own money. Having been raised by parents whose financial worries I learned about through the wall but not through any more direct contact with (or discussions of) our finances or financial situation, I can tell you that you direct experience leads you to feel that money leads and controls you rather than the other way around. Even if a person doesn’t remember much of the details from a financial literacy class, the objectives of a good financial literacy class should be to teach students how to think about money in objective terms. Teaching them how to feel control over money rather than the converse may be the most important skill they can take forward with them.
I enjoy your blog, and appreciate your willingness to take controversial points of view that make me consider my own perspectives. Well done!
Anne
I liked this article. I haven’t taken the time to read all the comments, but I think J.D. has a good point. The amount of education needed to master the math of finances is small. But mastering the mental part is hard. There are so many people telling you to be irresponsible with your money and how great it will be that a small math lesson really doesn’t stand up to that.
It’s really not an either/or, it’s both. As an abundance coach and as someone who conducts financial assessments, I cover both financial literacy as well as financial behavior and mindset. Smart people who I respect have no idea what compound interest or the Rule of 72 is (at least not before I meet with them), let alone the right things to do with their money other than some vague “save more!” idea.
So I strongly believe it’s both: educate and implement, both on a concrete level as well as an emotional/behavioral level.
Living in Central America for the past 2 years has been a wonderful eye opening experience for us. We didn’t have American television, no mass media marketing campaigns, we were immune to the propaganda nightly news and certainly didn’t have the choice of things to buy that you do in the states.
Not only did we save a TON of money because the availability of stuff just wasn’t there, but we were able to reprogram our brains and notice that we actually need very little, but still want a few comforts..just not to the extent of the average American. Lots of people confuse wants and needs.
I think you’ve hit the nail on the head on this one. It explains why some people who make a 6 figure salary can’t make ends meet and other people at the poverty line are not in debt. Live within your means, whatever that amount may be. I think a lot of people start having problems with money when they experience life style inflation. All of a sudden things they were fine living without when they were younger are now a requirement. I can afford an iPhone, tablet, fill in the blank, but if I don’t really have a need for it, or if it is something I can do myself, why buy it? Save your money for the things that matter to you.
I think our choice of politicians in the US shows how many people just don’t get the simple fact that if you spend more than you earn (or spend more than incoming tax revenue) you will eventually pay the piper.
The one benefit of the bad economy is that the unexpected hardship has now taught a few people this lesson.
I think the solution is a more pragmatic, hands-on approach to financial literacy. When I was in elementary school, my class did a project that simulated running a small business. We had a certain product or project that we were responsible for, and we had to calculate our overhead (how much it would cost to built the product, rent store space, hire employees, and so on), how much we would sell it for, etc. It also taught us how to write a check, balance a checkbook, build a budget, estimate taxes, and about a zillion other skills we had NO IDEA we’d ever need, but we did it because it was fun. (Plus we got to build models of our products out of toothpicks and glue, which is really all your average fifth-grader wants anyway, haha.)
Seriously, I’m 27 years old with a master’s degree and that is one of the best educational experiences I ever had, and I remember it in crazy amounts of detail. I think it absolutely was a major factor in becoming a financially responsible adult.
JD is back!
J.D.
Extraordinary post… Coincidentally, I’m reading a lot about behavioral economics and I totally agree with you…
Congrats
From Caracas, Venezuela
This is a great article. It has been researched that financial capability is 20% technical and 80% behavioral.
My good friend has spent 10 years working on peoples deep values, preferences and biases with money. And due to the demand has built a psychometric quiz based on the work of Carl Jung – with a monetary focus.
It is important that we engage with something that is deep yet light at the same time and is memorable – this is why he uses the animals, which are intuitive.
I think people want to learn about themselves, their behaviors and how they can advance their awareness.
Feel free to have a look at http://www.moneypersonality.com.au, there is a sample report which can be downloaded. It looks at things like wealth creation preferences, goal setting preferences, strengths, opportunities for growth, stressors, communication.
Keep up the good work. Rob
This is one of the best and most inspired things I’ve read here at GRS in a while. Which isn’t to say that other posts haven’t been good, but you really hit it out of the park with this one.
And I agree with your point about being people who claim not to be affected by marketing. I worked in marketing, and that above average exposure to advertising really gets to you. The slogans get stuck in your head, you’re exposed to a lifestyle that’s above and beyond your own, and you think that maybe you should have a piece of it. Lot’s of money goes into studying the psychology here, so people that say they’re not affected are fooling themselves. Did I ever buy anything from any of the millions of ads I was probably exposed to at work? Not that I recall. But being able to resist doesn’t mean that you’re not affected. I definitely was.
There is a big disconnect between knowing what you should do, and actually changing your behavior. This is a big issue in health promotion. People know they should lose weight, but our environment makes it hard to lose weight unless you really work at it. People tend to do what is easiest to do in the moment. You have to give people a reason to change their behavior, and they have to DECIDE to change their behavior, and they have to stick to it, which is hard.
I love this topic, and have given it a lot of thought. I’ve been meaning to blog about money and emotions for a long time on my blog about life and therapy, and this post inspired me to finally do so, just now!
I’m a psychotherapist, and I often help people look at their emotional relationship with money. I feel like money is one of those things that has a lot of shadow and unconsciousness around it beyond retail therapy. Just like you say that most people don’t realize that advertising is affecting them, they also don’t realize that their emotions are driving their bank accounts. I think a little bit of emotional literacy connected to financial literacy is a great idea.
I work with a lot of lower income students and preparing them for college. I would agree that most of them don’t really understand the financial decisions that they are making until, they have to pay the bill or student loans. Recently, I have found a free tool that I use, which breaks down what they may have to pay back at different colleges of their choice and I have witnessed them making more realistic decisions. Interest rates and savings are not going to make much sense to a student who’s parents may not even have a bank account. However, colleges that have a great basketball team, give them a cool sweatshirt and promise them a 5,000 dollar scholarship (tuition 20,000) make sense. So exposure at the right moments can make a difference.
You are correct, J.D., people have to discover what is really important to them, what brings joy into their lives, then it is easy to not only know what to do but to do it.
I know that was the case with me. Once I discovered what was really important, and it had nothing to do with consumption of stuff, my behavior changed because I cared. I quit being irresponsible with money because that behavior negatively affected that which was most important to me.
Unfortunately, too many people do not know where to look for true happiness in their lives. It’s right under their noses, but they continue to believe they can find it through consumption. If only they could consume enough of the right stuff, then they would be happy. For years, I was one of them. I had to lose everything before I understood, then it was easy. Still is.
I think you do an outstanding job of providing readers with tools, and knowledge, and modeling the attitude and mind set needed. I’m in education and deal with similar dilemmas. It’s not that people don’t know what to do, it’s that you have to provide them the stuff and context so that they’ll wanna do it. Even then, some or many won’t, because what brings someone to wanna is an individual process. Places to gather more insight, if you haven’t considered them already are in the areas of public health and performance support. You actually do provide performance support already. 🙂
100% agree. It’s a mindset. Everyone understands they should exercise, but many people do not.
However, education, which is a process, is part of the solution.
As is probably apparent, this is a substantially updated version of an editorial originally published here in November 2011. GRS readers have encouraged me to “bring forward” interesting articles from the archives. I think it’s a great idea. My only concern is that the old comments may make things messy. We’ll see.
Thanks for this comment. I have a couple suggestions:
Could you include an editors note at the top stating the original publication date and any other context? If there are any dates listed, could you include a year?
Does the original post exist with original comments? Why not just include a link to the original post with the original comments then start the new article with a new set of comments?
Yes, I think including a note at the top (or bottom) of the article would be helpful. That’s a good idea. I think it was you who suggested doing “throwback Thursday”. I like that, and I think we’ll pursue it, but we’re not going label things explicitly with that name. Instead, it’s my hope that regular readers will understand that (once we get this going) Thursday is for classic reprints. It’s not Thursday today, obviously, but that’s the day we’ll aim for.
Why not just link to the original post and comments? The Google monster doesn’t like it. If we do that, then it doesn’t know which article to point people to re: Financial Literacy. We have to pick one and point everyone to that. I’ll ask Tom (the tech half of GRS) if there’s any other solution, but right now, I’m under the impression that this is the best way to go.
One other possibility is to only bring forward the best of the comments, those that added most to the original discussion. Obviously, for this piece I opted to insert a post flagging where the old comments ended and the new ones began. Again, imperfect solution…
I dont understand. Why cant you have the same post in 2 locations with 2 titles? You can feed the Google monster with the new one and de-tag the other but have an archive copy you can link to directly from the new post.
Please, please, please return the dates to the comments! I knew this was an old post as soon as I saw it based on the # of comments it had, but I hate it when comments are not dated. Nobody wants to reply to comments posted 8 years ago, and there’s no way to tell now that the dates have been removed.
Oh yeah. I forgot to mention: I’m really very proud of the image I picked for this post. I think it’s hilarious. I love the idea of a dog trying to read. I love even more that this is what I chose as a visual representation for financial literacy. Funny on so many levels to me.
I was wondering why such a new post had so many comments.
The solution of a note attached to the article, with a comment from you showing where the old posts end sounds like a reasonable solution.
I just realized: I think part of the reason people dont comment so much is because they read on their phones. I can manage 30-50 comments no problem. But I cant scroll through 180 comfortably, especially without dates. I used to search by date so I could see what the newest stuff was.
Thank you JD! I think you’ve been rather generous in your weighting to the importance of maths; I would say more the split is more like 10:90 between maths vs psychology/behavior. And that’s why I say that anyone who says “you should *definitely* invest your money rather than overpay your mortgage.” or “anyone who doesn’t have a 100% stock portfolio is an idiot.” or “Dave Ramsay doesn’t know what he’s talking about” have no idea how people, as opposed to numbers, actually work.
This makes so much sense to me, and I never realized it! I definitely see this true with fitness and weight management (calories in, calories out, EVERYONE knows this, but psychologically it’s incredibly difficult for many). I hadn’t realized financial literacy had the same problem. I’ve often thought about how personal finance needs to be taught in schools (because my high school experience in the early 00’s didn’t have it), but you’re probably right that it wouldn’t help that much anyway. I know for me, weight management is super hard whereas financial management is very easy, even though they have incredibly similar principles.
Whoa! Time waaaaaarp…..
I’m reading my old comments and I’m actually not totally embarrassed by them. That’s a bit of a surprise.
I miss a bunch of people here.
I got a lot out of my financial literacy class in high school. But I have always been a bit weird that way.
I agree that it’s about psychology, but it’s also about applicability. It is hard to explain budgeting to someone who has never had expenses. I was never able to absorb material from my textbook until I read the homework.
The best you can hope for are hooks. I remember a story about healthy eating where a person added a can of dog food to a bowl of cereal to demonstrate what “part of a healthy breakfast” means when you see it on the commercial. I think those kind of high level messages are the best you’ll get through.
We don’t always teach enough of the things that are important. Schools teach a lot of information that is useful to just a few people (I never used calculus again) while skipping a lot of topics that would be useful to all (or most) people. Something posted by one of my relatives on Facebook sums this up nicely:
“I’m glad I learned about parallelograms in high school instead of how to do taxes. It’s really going to pay off during parallelogram season.”
Bravo! Totally agree!
Off topic just to say—re: GRS 3.0 & publishing schedules, I think would be cool to have fresh reading on Monday mornings. Something about the start of the week & what not.
Hoping all is well with you,
-Nerdo
Yep yep. As soon as I can get my Real Life under control again (haha), my aim is for fresh stuff on Monday, they Throwback Thursday that a few folks requested, then a weekend article that’s a guest post or some sort of video…
Any thoughts on how much more it affects those students with very low socio-economic factors and non-English speaking students as far as knowledge & skills in high school and what tools are necessary to help them achieve a better financial literacy concept learning for this population?
obviously financial literacy has failed. there is a goddamn dog reading a book!
There is a company brave enough to usher in some change!
You’re very right. Mechanics don’t work, and information that’s not conducive to real deployment bears no traction.
More importantly, money is different for each person so the exploration needs to be personal as well, best achieved by helping someone see what they value, enjoy, want and how the world influences that.
Financial Intelligence – the focus on behaviors – is what we preach and our entire online presence just went live yesterday.
We’re so excited to be a part of this solution because you’re right J.D. – this is one area as a nation we have completely failed.
Check us out http://www.ortusacademy.com