There is nothing like a crisis to illuminate the benefits of basic financial skills. A staggering number of households entered the pandemic unprepared to withstand any economic shock, let alone one of the magnitude of COVID-19. The consequences are reminiscent of the 2007–2008 US financial crisis when individuals were enticed to buy homes that exceeded their needs and finances, then found themselves struggling to pay mortgages they could not afford.
Despite it being painfully obvious that people need basic knowledge to make good decisions, regardless of whether they are facing a financial crisis, there are always voices against financial education.
In a curious and interesting way, the arguments against financial education are similar across countries and over time. They tend to be fueled by a good amount of fear. It is time to put the fear to rest.
The first assertion is that we cannot all become experts, and it is unnecessary and expensive for everyone to be knowledgeable about finance. Analogies to support this argument run along the lines that we do not need to know what is happening under the hood in order to drive a car nor must we be scientists or medical experts to manage our own health. We can rely on a mechanic if the car breaks down or a doctor if we fall ill.
This argument depends on two false premises. The first is that financial education aims to transform people into experts. This is not so. And this is not the aim of most education. We do not teach literature so that students can write the sequel to War and Peace but, rather, so that they can appreciate the value of a good book. Financial education aims to teach basic concepts. Just as reading and writing are needed to effectively participate in society, knowledge of basic financial concepts is also a necessity.
The other false premise is that people will consult experts if they need help. Research shows that the people who consult financial advisors are already financially literate. In other words, financial literacy and financial advice are complements rather than substitutes. Without basic financial knowledge, people do not know where to look for financial advice or how to choose the advisor who is best for them.
Just as car owners who know little about cars may forgo important maintenance and people who do not pay attention to their health may go to the doctor only after a silent illness has grown into a serious disease, individuals without basic financial knowledge will have difficulty taking care of their finances. In our complex economic world, that inability comes with harmful implications.
The second assertion stems from a fear that governments and regulators will stop protecting consumers who are financially literate. This assumes that citizens who are knowledgeable can and should fend for themselves and that regulators will do little more than warn people to read the fine print when making investments or entering financial contracts. There is little empirical support for this claim. Countries that have promoted financial education also have strengthened regulation and put in place reforms to protect citizens. The promotion of financial education puts citizens’ well-being at the center of policies. As the OECD and its International Network on Financial Education continually state, financial education and regulation go hand in hand. It is not an either-or proposition. The goal is to help people make financial decisions that benefit them while also serving society as a whole.
The experience of the past 15 years has made clear that prevention is better than a cure when it comes to crises. Financial education is an important component of prevention.
The third argument against financial education is more of an academic one. Some researchers and practitioners argue that financial education is not effective in changing people’s behavior, and money spent to implement it will be wasted. There is older research that indicates financial education brings little or no change in financial behavior. However, much of this research looked at narrow interventions and programs for which limited information was available.
Certainly, small or fleeting interventions will not end financial illiteracy. One hour of financial instruction is not going to make much of a difference, nor is even longer-term education in school if the teachers are not properly trained or the curriculum is not rigorous. To move the needle on financial literacy, the instruction must be done properly.
Financial literacy research is no longer in its infancy. It has become a field of study with its own Journal of Economic Literature code (G53). We now know who lacks financial knowledge, as well as how to make financial education more effective. A recent meta-analysis was conducted looking at randomized experiments (which provide the most rigorous evaluation of financial education’s effectiveness) in as many as 33 countries. It shows that the effects of financial education are substantial. It also shows that financial education is generally not costly.
In 2018, Portugal mandated financial education in school as part of a new citizenship curriculum. I had the pleasure of interviewing Portugal’s Minister of Education, a leader who is not afraid of backing financial education. He noted that Portugal’s decision was fueled by three considerations:
1. Having taken stock of the 2007-2008 financial crisis, the country’s leadership wants to ensure that citizens have the skills and knowledge to navigate difficult times.
2. In a changing world, young people, more than ever, need to speak the language of finance if they are going to be successful in life.
3. Financial education is a component of citizenship; financially literate individuals will be able to benefit society as a whole.
I think we can all follow Portugal’s example. We should not to wait for a third crisis to take action. It is time to be fearless.