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Education is not the solution to all personal-finance problems

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Every time a provocative article about personal finance comes out (like this recent one about 401(k)s), dozens of people forward it to me, complaining, “Ugh, if only we had better education.” Kind of like how everyone looks at me, expectantly, whenever I’m in a club and bhangra music comes on. Get a life.

Doesn’t it seem like people throw “education” around as the solution to every problem in personal finance? Oh, if we could just get young people better educated. How? Who’ll do it? Why hasn’t it been done for 50 years? Oh, those are just details.

This has been driving me nuts for a long time, and I’ve been spending the last few years thinking about better ways to change people’s attitudes and behaviors (here are some of my results). I’ve recently ranted on how personal finance is not about willpower, and how we love to demonize fat and poor people for not trying hard enough.

So when it comes to education, I start rolling my eyes when people suggest education is the magic bullet. Let’s get real, please. As heretical as it is to say in our society, “education” is not the panacea for personal finance. That’s a simplistic throw-away answer that does nothing to address real solutions.

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I completely disagree

People have been saying that for 50 years and it hasn’t worked for many, many reasons. “Wishing” there was more education doesn’t accomplish anything except making us feel better about ourselves for feeling bad about our society.

Here are a few ideas I’ll argue:

  • Nobody wants to learn about financial literacy — but instructors and organizations keep teaching this worthless topic. People may want to learn about being rich or paying for their wedding or how to travel to Tahiti, but I’ve never, ever heard a young person say, “Hey Ramit! I really want to become financial literate!” Its dry, boring, and unrewarding.

    In fact, even I don’t care about financial literacy. Did you know that the back cover of my book says, “6 weeks to financial literacy” — copy I accidentally glossed over when we developed the design — and when I noticed it after launch, I immediately had it changed for the next reprint?

  • There are powerful interests against teaching personal-finance in schools for reasons including the following: Not enough qualified people to teach it, perceived (or real) liability, “it’s never been done,” “what are the metrics?” and “we are already overloaded.”
  • Many purported “educational” seminars and organizations are really thinly veiled fronts to sell expensive, scammy products that benefit their salespeople. I have no problems charging people premium prices for premium goods, but when people are paying unnecessary fees that cost tens of thousands of dollars, I start getting pissed

And by the way, when we say that people in America are financially illiterate, what do we mean? Let’s take a look at a sample quiz:

1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

a. More than $102
b. Exactly $102
c. Less than $102
d. Do not know

2. Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After 1 year, would you be able to buy more than, exactly the same as, or less than today with the money in this account?

a. More than today
b. Exactly the same as today
c. Less than today
d. Do not know

3. Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”

a. True
b. False
c. Do not know

The results are predictably terrible. Here’s an example (see more at the Jump$tart Coalition):

[F]ewer than one-third of young adults possess basic knowledge of interest rates, inflation, and risk diversification.

Ok, so people suck at personal finance. They don’t know what they’re doing, they get into all kinds of debt, pick incorrect investments and asset allocations, and then blame everybody else for their problems.

So what should we do?

We should make powerful defaults that do the right thing, because most people will never change their defaults. This is also known as “libertarian paternalism.” For example, automatic enrollment has produced astonishing results to encourage people to contribute to their 401(k)s. Isn’t that better than no default at all?

Whenever our own judgment has proven time and time again to be incorrect (see investor psychology), we should have products that make up for own fallibility. This is the same reason I have a GPS device in my car: because no matter how hard I try, no matter how much willpower I use, no matter how important it is…I still get lost.

We should segment people who are willing to invest time and resources for bigger wins, and reward them. Most people take what’s given to them and never proactively seek out a personal finance book or the huge amount of free, great information online. (That’s because we don’t want information, we want solutions.) But if you do — if you’re willing to pay for value — there should be tools that help you get far ahead of others who accept vanilla defaults.

We should unite the disparate behavioral elements to improve us in a holistic way. Think about career, negotiation, entrepreneurship, health and fitness. If you can use techniques to master one, you can use similar techniques to master all of these.

I’m going to start suggesting possible solutions over time, some of which will be controversial. For example, my blog works for a very self-selected group of internet nerds who read a lot of blogs. You guys are not typical — you are an elite, niche audience. I love that, but this is just one piece of the puzzle.

Bottom line: Don’t think that the magical idea of “education” will solve all personal-finance problems. Yes, education is important — both the quality of education and the quantity — but more important is changing the surrounding systems: better investment products for customers, understanding how our community affects our health and money, offering tailored options for different people (e.g., poor immigrant family of 5 vs. upper-middle-class of 3) and using automation and technology whenever our own judgment proves consistently faulty.

I’ll dig into these more over time.

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  1. Hey Ramit… you’ve got a broken link tag:

  2. Thanks, I fixed it. WTF are you doing awake at 3:08am?

    [Edit]: Ahh, you’re in Australia. Sweet.

  3. Haha… welcome to the borderless world of the internet… LOL!

  4. What do you mean education isn’t the answer? Don’t you know that schools should be responsible for teaching things that parents can’t?

    Pardon my sarcasm 🙂 I’ve worked in public schools and seen how so many parents expect teachers to teach things like respect, character and discipline. I think schools can’t fix all problems — the learning has to come from home and community involvement too.

  5. We tell kids to get out of gangs and offer up an alternative of sitting at home doing nothing. We tell kids to get educated in finance and then spend billions of dollars telling them to buy stuff because they are the holy grail demographic of 18-35.

    The question is speaking out against something that is broken (worthless) or offering up ideas on how to fix things (education not being an idea). I learned how to balance my checkbook in high school and then promptly followed it up by never doing it, ever, still.

    The good programs that are out there like Dave Ramsey are good because they would be good for getting in shape or starting a business or fixing a relationship because they boil down to one thing: Get off your backside and do something about your life.

    Thanks Ramit, your bill pay automation changed my life.

  6. It is not enough just to be educated, you have to be motivated as well. A lot (and I do mean a lot) of us want someone to hold our hand through the hard parts of getting our financial lives in order. We want to get the ball rolling, not spend significant time/energy recreating the wheel. That’s exactly what most of the financial help books/plans/blogs try to do. Education provides knowledge, nothing more. Just like a college degree, it means nothing unless you use it to take you where you want to go.
    I’m glad to read this site. I knew to get a 401k, Roth IRA, I knew I was supposed to save ~5%, and that I should spend less than what I make (thanks mom and dad/dreaded economics class). I didn’t know how much easier automating things would be. I am very happy to have everything available on and I have used the book to take care of the most difficult part of stabilizing my finances: getting my ducks in a row to set up a much better foundation. This site provides excellent education for financial facts, but it does something more. This site makes personal financing enjoyable. It isn’t boring, it isn’t a one-time read (no offense to the book), it is a relatable source of information with rants and pictures (sometimes grotesque) that tie the real world together with finances. And no, I have not been paid to say this. I’d like to though. : )~

  7. Hey Ramit,

    Rather than putting bandages on a leaking boat, you fix the hole.

    Get at the source of the problem and solve it, rather than trying to come up with half-assed solutions that try to patch up an existing problem. Your example of auto-enrolled 401k is spot on: the source is human laziness, and by fixing that and making enrollment automatic, you fixed the hole.

    The fixing of the source isn’t always obvious, and definitely not the easiest, at least initially. However, like automation, you only have to do the work once.

    Once the system (fixing the hole) is set up, it’ll run by itself, and the problem is automatically extinguished.

    Great thoughts, Ramit. Looking forward to seeing your future ideas on this topic,

  8. I agree with most of what you say. Just because we are taught that we should eat healthy doesn’t mean we will and the same logic can be applied to finances. I didn’t get serious about my finances until I read a book that opened up my eyes to the simple task of truly paying attention to where my money goes. From that point on personal finance became interesting to me and so I learned.

  9. I agree that the kind of education is key, not just having more. I think a part of Dave Ramsey’s success is that he focuses on doable steps that people can follow. He doesn’t get into minutia with his baby step system.

    I read your blog because you offer that as well: concrete advice. Readers can look at your 30 day challenge and walk away with stuff they could do today and save some cash.

    I don’t want to read from a blogger about timing the market or predicting gold prices. Give me something practical.

  10. Before financial literacy, we should start with basic math. Before online banking became popular, I knew, actually still know, people who have a hard time balancing their check books. It’s simple addition and subtration, and they still do it incorrectly, even when they know the answer from looking at their online statement.