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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43 Comments

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  1. Hey Ramit… you’ve got a broken link tag:
    href=”http://delicious.com/ramitsethi/book-testimonials”>

  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 mint.com 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,
    Oleg

  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.

  11. Hey, just letting you know that Robert Kiyosaki’s Rich Dad Poor Dad book argues what you are talking about and he has a website somewhere which promotes teaching financial literacy to kids.

    I am in high school, and one of the problems is that students are too “embarrased” to take the course if it were offered because usually the concepts with inflation, interest rates, etc are pretty simple and easy to learn, yet people don’t know that this course is more valuable than all the calculus they could ever learn.

    anyway, yeah!!

  12. “Kind of like how everyone looks at me, expectantly, whenever I’m in a club and bhangra music comes on.”

    Or how someone expected me to know where you could buy some Spanish rice (which you MAKE from white rice). :)

    “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.”

    This is spot on. I mastered health/fitness one year, my finances the next (well, I got out of debt, I don’t know that I’ve “mastered” it yet), and now I’m working on entrepreneurship.

    Great post.

  13. Caveat emptor seems to be the accepted mantra.

    But we must have laws with teeth that inflict harsh punishment – mandatory lengthy prison terms – for people who fleece the public.

    People are ignorant and trusting. I believe everyone who sold a mortgage to all those who defaulted on their mortgages shoud be forced to repay the fees and do thousands of hours of useful community service.

    That would help a bit. Honest sales people. What a concept.

  14. I think you’ll find that your people that are to be rewarded for their willingness to be separated have figured out that “education” is lifelong and understand the concept that even in math the right answer changes over time. This is the biggest problem with financial education, what you need to know as you get older changes, 65 yo’s really don’t need to spend a lot of time learning about college loans and Fafsa’s, 20 yo’s shouldn’t be too concerned about distribution requirements on 401k’s. The main point is the people willing to separate themselves will know what the default is and have an advantage, the people willing to be the default will always be the default. If it helps me to help them, sure lets do it, but I certainly wouldn’t disadvantage myself to do so.

  15. @Nick Humph: You’re in high school and reading this blog. You win.

    @ramit: Just a note: note everyone who reads your material is a blog-reading nerd. I found a reference to you on a Wesabe forum, and this has been the only blog that I read faithfully for over a year. In fact, I only found out about Reddit a month ago. My point is that I will invest my time in reading a blog that has interesting, useful content, but I have a low threshold for tolerance of things that waste my time. You have proven informative and useful, so I will continue to read (and yes, I have bought the book).

  16. Agree completely.

    The only real problem here is a lack of personal accountability and sense of entitlement that only seems to be increasingly prevalent in society today.

  17. Excellent post. I especially like the parallel w/r/t fitness. Education isn’t a catch-all solution because it tends to teach people things that they already know–the boring stuff that actually works (e.g. “live below your means” or “lift very heavy weights for a long time and eat lots of protein.”) When people ask me about lifting weights, they don’t want to be told to do squats or eat lots of chicken. That always gets an impatient “I know, I Know…” They’re looking for some kind of magic supplement that will make them ripped. I imagine the same goes for personal finance.

  18. Right on!

    Education is not the answer–between the internet revolution and the success of people like Suze Orman, sound financial education is available to more people than it ever has been before.

    The real problem is that people do not seek out sound advice and many who do learn something do not apply it to their lives. We all have a friend who knows that he should be saving for retirement and knows that he can’t afford something, yet keeps spending anyway.

    The idea of Libertarian Paternalism is a great solution.

  19. If you haven’t you should check out “E-Myth Revisited” by Michael Gerber for a similar example of education not working. He talks about a company that attempts to prevent blue streaks on the walls by people hurriedly erasing whiteboards and smearing the blue ink onto the adjacent white walls. They post warning signs, give company-wide speeches, and lead people on blue-streaked wall tours all to no avail. What finally works is a physical, non-educational solution, they put a plastic guard around the whiteboards making it impossible to streak blue ink onto the wall and problem solved.

  20. It all comes down to the person. Education will help if you use that education.

    Some people don’t understand that having a savings account of 2% means almost nothing in terms of growth, because of inflation. Inflation in Calgary is 5%, even if I have a saving account at 8% interest, my real rate of return is only 3%

    People have to be responsible for themselves. Same goes with eating right. I think it’s obvious, people who know how to take care of their money have an advantage. People who could care less, well it’s up to them.

    Cheers
    Clinton

  21. Took a bit to wind down to your point, but okay I see it. A majority of the American media, even if they agree with you secretly, will call this approach neo-socialism and the robbing of free will in lieu of progressing towards a Japan-like society that saves and saves and never spends. I’m just saying.

    So, no, I don’t agree that the surrounding systems need to get better or that the government needs to increase withholding only to hand it to the banks that feel free to play fast and loose with my money. I think personal finance needs to become ‘cool’ – innovative marketing campaigns that present financial wisdom in bite-size nuggets. Cool data visualization posters. Prominent banking firms like BofA and Wells Fargo building in pop-style financial education (yes, I do see the irony in informing their customers about the evils of banking fees). Mostly so that financial wisdom is in the conscious of people who are walking or driving around the country, and this in turn makes it easier for them to ask questions and push forward changes.

    I think the answer is ‘education’ of a more polished, bite-size variety, but I also agree with you in that if it is called financial literacy, nobody is going to care.

  22. Ramit,

    You are correct in saying that “more education” is not the answer. The main problem is that human beings are not wired to make smart financial decisions. All our instincts that helped us survive and dominate the planet make us poor financial planners. In fact it is almost counter-intuitive.
    Pain aversion, fight or flight, and our herd mentality are strong instincts that cannot be easily overcome. You have to do a lot of work to retrain your brain to think about finance and how it works.
    And we have to accept the fact people are irrational and won’t always make decisions based on logic (and they shouldn’t). Maybe then we make some progress in teaching people how to handle money.

  23. Ramit, you had me when you said “Libertarian Paternalism”.

  24. Well said, you’ve got me interested in those future posts with the aforementioned controversial solutions.

    The people you most need to reach are those who don’t even know you exist… how’s that for a challenge?!

    P.S. @#21, I think he addresses the problem of a “socialistic” descent in the section “We should segment people who are willing to invest time and resources for bigger wins, and reward them”

  25. Finance education seems a lot like sex education. Sure its gotta help some (the too young/completely clueless may get the necessary basics that without they never stood a chance), but for the vast majority the real problem is not a lack of knowledge.

    Most teenagers know they shouldn’t have unprotected sex with multiple partners as much as they know they should spend less than they earn. Still happens all the time.

  26. [...] 1/3 young adult posses basic knowledge of interest rate, inflation and diversification.” But education is not the solution to all personal-finance problems (Ramit [...]

  27. Whoa, the only thing worse than people saying more education is the answer is people saying more INSURANCE is the answer. Thanks Time Magazine!

  28. i absolutely disagree with your total disagreement with the point being discussed. I think financial awareness is important for laymen.
    i have many friends in the media etc (non finance fields) and they are totally afraid of facing the issue of their finances. From what iv gathered so far they basically let their money sit in the savings ac till they find some way of spending it.

    They are ashamed of admitting that they dont understand money management, end up paying a lot more taxes than working with it or worse, make FDs or maybe take up dads advice and put it in PPF.

    Simple things like power of compunding, saving, thinking long term need to be re-taught to adults. And like it or not Ramit….face it, you’ve been educating ppl.

    xoxo

  29. So your answer for people lacking the willpower to make proper decisions for themselves is someone else forcing a decision that they deem reasonable on them?

    • Yes, Traciatim, sometimes it is. And it’s not about making an irrevocable choice for them, but making intelligent defaults and always allowing them to opt out. Most people are guided by defaults, so getting those right can result in massively positive outcomes.

  30. I’m kind of torn on the whole “defaults” argument. Take the 401(k) example. Making enrollment the default would be more costly for the employer, because now instead of providing matching contributions to the 60% of employees who signed up, they’re providing them for the 90% of employees who didn’t opt out.

    You know what that means. It means the company will cut back on their matching contributions. Thus, those individuals intelligent and motivated enough to proactively enroll in their 401(k) end up suffering at the expense of the lazy/ignorant slugs who couldn’t be bothered to help themselves. Isn’t this dragging society down to the lowest common denominator?

    But why stop there? Why don’t we make it a requirement to provide your resume to the government when applying for unemployment benefits. Then, the government automatically fires off your resume to every job posting in your field within 50 miles of your home. That way, you don’t have to waste your whole day searching and applying for jobs – you can just sit back and watch Jerry Springer, and let the government do your job searching for you. Your resume will automatically land in the pile, next to actual hardworking people who were already actively applying for jobs and trying to find work again.

    Or how about protecting morons from accidentally overdrafting their accounts? We could make it a requirement that banks contact account holders when their balances reach a certain limit, and help them avoid accidentally overdrafting their account, saving them millions in bank fees. Of course, the banks will just raise their regular fees on everybody else (read: the responsible people who actually bother to keep track of their finances and avoid getting into an overdraft situation in the first place), but hey, at least it’s one less way for financially illiterate morons to hurt themselves, right?

    Come on. At some point, we’ve got to let people sink or swim on their own. And shackling non-swimmers to swimmers by “default” only serves to make EVERYBODY drown. Face it – the reality is that part of the reason your bank fees are so low is because some lazy chump out there can’t be bothered to balance his cheque book. The reason your credit card doesn’t have an annual fee is because you’re neighbor is too impatient to save up for his vacations and carries a big balance on his. The reason your IRA is growing is because the companies in it (Nike, Wal-Mart, Coca-Cola, etc.) spend billions convincing morons to pay for their products, even when they can’t afford them. Are we really prepared to reduce the lifestyles of those who worked hard for it, just to help out those who couldn’t be bothered to improve their own lives? I think we should tread carefully here.

  31. Sound suggestions, Ramit, but who says education can’t help, too?

    Proper, pragmatic education that can be appreciated by joe average.

  32. Ramit,
    If your blog is not education, what is it?
    So education “is not the solution”, huh? ;-)

  33. Certainly your ideas on what we “should” do have merit. You are making an assumption that corporations/businsses will do what they “should” do – like making powerful defaults that do the right thing because people will never change their defaults. Why do you assume that corporations/businesses will do what they “should” do when you don’t assume that an individual will do what they “should” do – like understand their personal finances better and change their defaults because they “should”?
    The business that produced the GPS device you use in your vehicle is making money from your fallibility. Is that the same thing as asking a business to create products that make up for one’s fallibility when it means cutting into their profit potential?
    Aren’t we already segmenting people who take the time to understand their personal finances (and understand them really well) and providing them with bigger wins – like a lower rate for a better credit score or a higher rate for having saved more money?
    I’m not sure education is the answer to financial ignorance but I’m not sure your suggestions hit the mark.

  34. Kevin, your casual use of the words “morons” “slugs” and “chumps” to describe people signals to me that your ideas are not on the right track.

    No matter what the default is, there will always be incentive out there for hard-working people to do better than default.

  35. Ramit,

    >“Hey Ramit! I really want to become financial literate!” Its dry, boring, and unrewarding.

    I guess that is why you didn’t name your site I Will Teach You to be Financially Literate! But can someone learn to be rich if they remain ignorant on interest, investing and inflation? Maybe you need a post category: Boring Things You Still Need to Know About…”

    I think that education is the answer… although not necessarily through the traditional educational system! Today, people who read blogs are the elite. Twenty years ago only the elite had email or read internet news groups. That will change… maybe you just need to get to #1 on the NYT bestseller’s list for it to happen a bit sooner.

    -Rick Francis

  36. The sooner that we can all agree with the fact that humans (every single one of us) are inherently lazy and irresponsible then the better it will guide us to make smart choices. Notice that I did not say that we are all lazy and irresponsible just that each and every one of us left to our own natural inklings tend to be lazy and irresponsible.

    From an organizational or social policy point of view I am a big fan of the aforementioned Libertarian Paternalism approach just so long as it is not twisted into some kind of controlling approach and not administered correctly – as you put it: “And it’s not about making an irrevocable choice for them, but making intelligent defaults and always allowing them to opt out.”

    That being said, the Libertarian Paternalism approach can only go so far and in the end it all comes down to the issue of good ‘ol personal responsibility. Absent mind control or an organization/government making decisions for us (which none of us want – I should hope) then it is left up to each one of us to proactively educate ourselves – and that’s the way it should be.

  37. I like this. I hear on (smug) pf blogs a lot about “personal responsibility” and how if people can’t (or won’t) figure out this money stuff on their own, tough luck to them. Because the rest of us have got it all figured out. They just won’t educate themselves, so they deserve to miss out on the 401k match, pay overdrafts, and have to starve on social security when they retire. I hate that view.

    Do we really want to punish people, or do we want to have the most people possible making good choices? I love the idea of making good choices the default.

  38. [...] Edu­ca­tion is not the solu­tion to all personal-finance prob­lems | I Will Teach You To Be Ric… “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.” (tags: edu­ca­tion finance) [...]

  39. [Your Bhangra comment was hilarious - but should we conclude that you do break it down at the club to Bhangra anyway, but are just annoyed that it's expected? (like this post, you do comment on the article but are annoyed it's expected?)]

    Back when I was a kid, my sister and I didn’t wear seatbelts and fought over who got to sit in the front seat. I slept up in the backwindow of our volkswagen rabbit on long distance trips. Looking back I realize I would not have survived a crash. Then seatbelt laws were passed, car seats were invented, public service announcments aired and hundreds of thousands of lives have been saved. If we know the potential devastating effects of not having a safety net, why do we (as a society) not take steps educate/mandate self-protective measures? (and I don’t think Social security and unemployment do this). When it comes to finances, the every-man-for-himself mentality prevails and unfortunately it means that ignorance is perpetuated so it can continue to be exploited. Case in point: past poster who correctly pointed out that if we defaulted 401k enrollment, employers would reduce matching accordingly.
    Wow that came out very conspiracy theorist…

  40. Wish you had an option on your blog articles to send the article to friends. i always look for it after I read your blog posts.

    i could copy and paste it into an email – but that is a barrier i seem to hit continually :)

  41. [...] Education is not the solution to all personal finance problems from @ramit I love how creates a bit of controversy but then continues on to address it at the end.  He makes some pretty good suggestions to.  Perfect post to end on.  Maybe the best for last? [...]

  42. In Australia we have a system of enforced retirement savings called “superannuation”.

    Basically 9% of your salary is paid by your employer straight into a fund (that you can choose), and you can’t get to it until you’re 65 (or you face some really serious emergency).

    The result? After over a decade of compulsory contributions, Australian workers have over $1.177 trillion in superannuation assets. Australians now have more money invested in managed funds per capita than any other economy.

    Read more at http://en.wikipedia.org/wiki/Superannuation_in_Australia