A report from the National Financial Educators Council shows that 38% of people surveyed said their lack of financial literacy cost them at least $500 in 2022, including 15% who said it set them back by $10,000 or more.
In July of this year, Oregon became the 23rd state to guarantee a standalone one-semester personal finance course, a step in the right direction toward providing access to financial literacy to the next generation of students that many older adults missed out on.
However, I’ve personally coached many learners who have previously participated in financial literacy programs offered by their financial institutions, places of employment, churches or online. The learners report that the programs haven’t been effective.
Before you blame yourself for being undisciplined or not smart enough, here are three reasons why that might be, and how to get more out of financial literacy efforts in the future.
1) Your Brain Isn’t Meant For Storage
I earned a bachelor’s degree in psychology and throughout my four years of college, there has been only one concept that I ironically remember: your brain is not meant for storage. It’s meant for processing.
The challenge with many financial literacy programs aimed at both children and adults is that they assume financial literacy is a simple knowledge challenge. They are often designed on the premise that if you are given the information, and after being minimally exposed to it, that you will retain it.
However, a study published in Management Science showed that like other forms of education we receive throughout our lives, retention of financial knowledge dissipates over time. Even in programs where participants had many hours of education, the effects on behavior were negligible after 20 months or more.
So, if you’re beating yourself up for having learned money concepts in the past, but just can’t seem to recall what you learned, it’s because the programs likely weren’t designed for you to retain them. Relying on memorizing financial principles, particularly more complex ones, is a sure-fire way to feel financially illiterate, even when you’ve made great efforts.
One way to combat this is to keep a specific written notebook or journal related to your money journey. Journaling about money-related stress can boost your health and finances, and you can also write down specific concepts you want to remember in the future. Make a habit to review your journal each month as you complete your budgeting activity to see if there are any concepts you learned, but perhaps forgot, that might be useful now.
2) Many Fundamental Financial Concepts Are More Complex Than Taught To Us
Compound interest is taught in most financial literacy programs as a relatively simple concept. For example, the Consumer Financial Protection Bureau defines compound interest as “when you earn interest on the money you’ve saved and on the interest you earn along the way.” As simple as it sounds, compound interest is actually a non-linear concept and most humans are not wired to think in non-linear ways.
For example, take a guess by applying this concept without using a calculator: If you were to start investing $100 every month for 30 years, at 8% interest with annual compounding, how much money would you have at the end?
Using a compound interest calculator, in 30 years, you could have $135,939.85. All of my financial education learners who play this game are always astounded at how much that adds up. Most people would not guess even close to the correct answer. So by oversimplifying these concepts so that financial literacy education programs can check the box that it was taught, it rarely moves the needle on behavioral change.
As someone who sought out beginner investing advice at the start of my own financial freedom journey, I thought I had mastered simple concepts like diversification, tax brackets and retirement plans, only to find out later that they were much more nuanced, and I had to backtrack some of my financial decisions once I understood the more complex principles.
This is not to discourage you from starting out with financial literacy education, but it does require a commitment to a consistent and life-long routine of seeking out more detailed explanations as you move into more complex financial decision-making. It’s also helpful to keep a bookmark folder in your browser of tools like the compound interest calculator that can help you make decisions with more accurate calculations than when you are trying to guess.
3) Most Of It Is Boring And Irrelevant Until You Need It
The first formal financial literacy lesson that I remember didn’t come until I was already a working adult in a Fortune 100 company. I was working as a Human Resources representative who had to learn the basics of our benefit plans so I could answer inquiries from employees.
That was the first time I heard of a 401(k), and as someone who was giving answers to other employees, all I understood about it was that it was money I couldn’t touch until I was much older. And I got free money from the company if I put in some myself, and it would be invested in something called a Target Fund.
Even though I was tasked with the responsibility of explaining it to other people, I rarely got a question from an employee beyond when they would be eligible, and how to retrieve it when they left their job.
At my next company, the investment company’s representative was brought in to teach about 401(k)s, and other than the boxes of doughnuts he brought, I thought my time was better spent reading the emails piling up in my inbox.
After that experience, I felt more hopeless because I was getting ready to go deep into debt to fund my master’s degree. I felt ashamed that I couldn’t figure out how to fit it into my regular obligations.
For many people, even when they are in their 50s, retirement feels really far away and therefore less of a priority to learn the ins and outs of. As I’ve witnessed, they realize they’ve worked really hard for a long time and don’t even come close to enough savings.
Rather than try to learn financial concepts that feel far out-of-reach or foreign to you, try learning a topic that matters to you right now, whether it’s:
- paying down debt;
- saving your emergency fund; or
- putting together a budget you can stick to.
I’m excited to see that there are now many new voices who make personal finance more entertaining to learn, and more relevant for previously overlooked and underrepresented populations such as:
- Stefanie Gonzalez of Women’s Wealth Effect;
- Walli Miller of Financially Thriving;
- Haley and Justin Brown-Woods of Price of Avocado Toast; and
- Giovanna González of The First Gen Mentor.
The silver lining is that access to financial education is wider than it has ever been before. Financial literacy is a good start, but pairing it with consistent habits is what will truly change the trajectory of your financial future.
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