Debunking Financial Literacy Myths

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The CFPB says that FIs spend US$17 billion on marketing and that just US$671 million, or about US$2 per person, is spent on financial education.

And like uncritical, brain-dead slugs, many of you don’t just believe this, but tweet it, implying that the spending is out-of-whack.

My take: Comparisons of financial education spending to FI marketing spend are spurious, and belie the facts about financial literacy and what really needs to be done about it.

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First of all, who’s to say that FI marketing isn’t educational?

If a bank’s or credit union’s marketing efforts inform consumers about the choices they have, and how to choose one FI over another, couldn’t it be argued that that’s “financial education”?

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Second, there’s no relationship between what FIs spend on marketing and what the country spends on financial education.

Instead of comparing financial education spending to FI marketing, why didn’t the CFPB compare it to Obama administration’s programs that spends US$500 million — roughly US$24 per child between the ages of 0 and 5 — to help kids sit still in kindergarten?

What’s more important? Getting 5 year-old kids to sit still for the three hours they’re in school, or preparing kids and adults of all ages to make smart financial decisions?

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We have a literacy problem in this country.

We’re illiterate about financial literacy.

Research from Aite Group, and commissioned by Chase Blueprint, found that just 17% of Americans consider themselves to be financially illiterate. Among consumers surveyed, 24% considered themselves to be financially illiterate in 2010, so the US$671 million that’s being invested is having an impact.

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For those of you mathematically challenged, 17% is a minority. Less than one in five Americans consider themselves to be financially illiterate.

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The other research finding you need to know is that financial illiteracy is not any more of a problem among lower-income consumers than it is among higher-income consumers.

Among consumers earning less than US$30k per year, 16% consider themselves to be financially illiterate. Among those earning between US$30k and US$70k, that percentage is 15%. And of consumers earning more than US$70k, 19% consider themselves to be financially illiterate.

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So much for that misconception.

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This isn’t to say that it’s all a bed of roses. Just 20% of consumers consider themselves to be “very” financial literate (also, without much difference between income levels).

Clearly, there’s plenty of room for improvement.

But to compare financial education spending to FI marketing — or to any other number — is spurious. What FIs spend on marketing, or what Obama wastes on getting kids to sit still, has no bearing on what we should be spending on financial education.

The decline in illiteracy, and the increase in the percentage of consumers that consider themselves to be very financially literate (up from 14% in 2010 to 20% in 2013), suggests that the investment in financial literacy is working.

Could it work better? Sure.

Would spending more money on financial education be a wise investment? I wouldn’t argue that it wouldn’t be.

How much more should be spent? And where should that money come from? Ahh, now there’s the rub. These are the questions that don’t have any easy answer.

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By contrasting financial education spending to FI marketing, the CFPB implies that it’s the FIs themselves who should spend less on marketing and more on financial education.

By that logic, General Motors should invest in sending us to driver’s education, right?

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This challenges our government’s thick-headed notion that we have to spend money on something for it to improve.

We wouldn’t have to spend another penny on financial education to improve literacy levels, if more parents spent more time (or even some time) on teaching their kids some financial basics.

And for adults, it’s more a matter of priority.

Neither my wife or I ever received any formal (or even informal) financial education. But I’m probably at the “literate” level and my wife is at the “very literate” level.

How did she get there? She took the initiative to learn. All self-taught.Neither the government nor some FI had to spend money teaching her. 

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Bottom line: The key to improving financial literacy is not spending more government money, or making FIs foot the bill. It starts in the home. And it requires us to hold our government a little more accountable for how it spends its money.

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