The 5 groups to blame for our financial illiteracy

53 Comments

Blaming everyone for being dumb is one of my most enjoyable activities. Today, a delightful foray into the world of why we’re financially illiterate — and whose fault it is.

Let’s start with a Freakonomics article by Stephen J. Dubner:

“1. Do you consider yourself financially literate?

2. If so, how did you get that way?

And now, a third question:

3. How important is widespread financial literacy to the health of a modern society?

Before you answer the first question, take this little quiz, borrowed from the website of Annamaria Lusardi, a professor of economics at Dartmouth who knows and cares more about financial literacy than anyone else you’re likely to encounter:

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 correct answers are …

a., c., and b. I am guessing that the vast majority of this blog’s readers got all three answers correct. But there’s probably money to be made in betting the opposite way.

Those three questions are the ones that Lusardi, along with Olivia Mitchell of Penn, have been inserting in a variety of major U.S. surveys. In a new working paper titled “Financial Literacy: An Essential Tool for Informed Consumer Choice?” (abstract here, download here), Lusardi writes that among respondents age 50 and older, only half of them got the first two answers right and only one-third of them got all three answers right.”

* * *

So what’s going on here?

It’s easy to point at others and say, “Duh, those are so easy. EVERYONE knows about interest rates! Haaha ha ah ahahaaha!!!”

But if we’re honest, we can all acknowledge that our finances are not as optimized as they should be. We over spend. We don’t save and invest enough. When it comes to spending, we claim certain things are important (“investing for the long term!”) but our behavior doesn’t reflect it.

And it’s incredibly hard to change our behavior.

Whose fault is it?

Lots of people, especially anonymous online nerds, love to claim that our entire financial situation is our responsibility. In “Ugh, why don’t fat people just eat less?” I showed why this is patently false.

Others like to debate minutiae and blame the economy, Wall Street, and everyone but themselves. You’ll notice this especially among commenters on newspaper sites.

Book excerpt: 5 groups to blame for our financial illiteracy

In my personal finance book, I put together a targeted list of people to blame. Here’s an excerpt:

“Why does just about everything written about personal finance make me want to paint myself with honey and jump into a nest of fire ants? Personal-finance advice has been geared toward old white men and taught by old white men for far too long. I don’t understand why newspaper columnists continue to write about tax-optimization strategies and spending less on lattes, hoping that young people will listen. We don’t care about that. We care about knowing where our money’s going and redirecting it to go where we want it to go. We want our money to grow automatically, in accounts that don’t nickel-and-dime us with fees. And we don’t want to have to become financial experts to get rich.

Now, I fully recognize that I’m a big fancy author (that’s right, ladies) and am therefore part of the “media.” Perhaps it’s uncouth to mock my brethren. Still, I can’t help myself. Pick up any major magazine and chances are you’ll see an article called “10 No-Hassle Tips for Getting Ahead with Your Finances.” Amusingly, the same writers who breathlessly encouraged us to buy real estate in 2007 are now advising us on “what to do in the downturn.” I’m sick and tired of the same old boring, tired, and frankly horrible financial opinions that are paraded around as “advice.”

More on this in Chapter 6.

Other People We Can Blame for Our Money Problems

There are other common excuses for why we don’t manage our money. Most of them are complete B.S.:

  • “Our education system doesn’t teach this,” people whine. It’s easy for people in their twenties to wish that their colleges had offered some personal-finance training. Guess what? Most colleges do offer those classes. You just didn’t attend!
  • I also often hear the cry that “credit-card companies and banks are out to profit off us.” Yes, they are. So stop complaining and learn how to game the companies instead of letting them game you.
  • “I’m afraid of losing money,” some of my friends say. That’s fair, especially after market losses during the global financial crisis, but you need to take a long-term view. Also, you can choose among many different investment options—some aggressive, some conservative—
    it depends on how much risk you’re willing to take. (Because of inflation, you’re actually losing money every day your money is sitting in a bank account.) Fear is no excuse to do nothing with your money. When others are scared, there are bargains to be found.
  • “What if I don’t know where to get an extra $100 per month?” It doesn’t have to be $100. And you don’t need to earn another penny. I’ll show you how to streamline your existing spending to generate that money to invest. Remember, $1 saved per day is $30 saved per month.

Too many of us are paralyzed by the thought that we have to get every single part of our personal finances in order before truly getting started managing our money. Should I use my 401(k) from work or open an IRA? Should I go for mutual funds or individual stocks? Do I need a variable annuity?

Here’s my answer: Do you need to be the Iron Chef to cook a grilled-cheese sandwich? No, and once you make your first meal, it’ll be easier to cook the next most complicated thing. The single most important factor to getting rich is getting started, not being the smartest person in the room.”

Want the full 6-week program? Get my book here for about $10.

Who did I miss? Is there anyone else we should blame? And how come we spend so much time blaming other people, but not doing anything about it?

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53 Comments

 
  1. Well, we could try to blame consumer products companies, and their insidious, infuriating advertising which aims to make us feel inferior if we don’t have the car, deodorant, dog treats, flat screen tv, smartphone…

    However, as intelligent people we know better than to believe them and can resist their seductive appeals, so blaming them probably won’t work.

  2. Personally I think the majority of Americans don’t want to think about money – ever. There is so much psychological baggaged wrapped up in it. Getting rich takes a proactive approach to your lifestyle, spending habbits, earning money, etc. If you view money as a topic to be avoided and those who do talk about money as greedy you’re never going to get there.

    This is unfortunately more true for women… fewer women read financial news. At least if you’re reading financial news (as sensational as it might be) you have a chance of running into some meaningful bit of into that might help you adjust your thinking.

  3. Ramit, may want to run the grammar check on the lead sentence about people being dumb. Think the word you want is “pastimes.”

  4. Blame Jesus, because he started the whole “it’s cool to be poor” culture. And blame your parents. They suck at teaching you about money, and sex. Now every time I want “some” I have to spend $200 and risk arrest in alley. Thanks Dad!

  5. Hi Paul

    Great article. My brother has is money in a 401k and when I asked him which funds they were investing in, and how long before he could move money around in the fund ? I just got a blank stare and a why would I move my money around.

    Crazy that he would take way more time buying a care and kicking the tires then he would figuring out how to manage several hundread thousand dollars.

  6. From the 3 question survey portion, don’t you think that by adding “I don’t know” as an answer choice the data became worthless? People taking these “surveys” probably had hundreds of questions to answrer and a portion didn’t feel like answering when the easy-out, no-think answer of “I don’t know” was available. How about if you gave people compensation for the survey based on how many questions were answered correctly. That being said, most people are indeed dumb.

  7. James — on the contrary, adding “I don’t know” makes the data more worthwhile. If people truly don’t know, then they’ll just randomly guess one of the two remaining options, thus skewing the results of the survey.

  8. This is Tyler of the Old White Men Anti-Defamation League and you are on our potty list.
    In my second country, Guatemala, there are tons of people who have elementary school education and make less then US minimum wage but they are way better at saving their money than Americans. Why, they have too, there is no one else there to pick up the slack if they run out.

  9. Hi Ramit,
    Long time reader. Love the blog. Dan Solin calls the typical financial advice we see “financial-pornography”. I think he’s right. We’re inundated with terrible, short-term focused advice. You’ve written a great book to help people out. Thanks for writing.

  10. While I’m not blaming anybody, I will say our educational system needs a lot more financial literacy classes that should be as mandatory as health. You mention college but the real educational system is the public system and it should start early. I’m talking elementary school, middle school and especially high school when habits really start to form. I’d LOVE to see your techniques especially automation taught but anything (that’s not false) works as well. It goes back to your opt in for IRAs, when you put it right in front of people to learn it’s much easier for them to do so rather than having them choose to do it. And as you know college students usually make the choice to party and drink than go to a financial class.

  11. I think the education we need (generally, not just about finances) is that, a lot of times, it is not just about willpower! This s were automation, or else, creating a system comes in!

    Still, it feels as if the monk/holy person who has so much willpower to deprive themselves of almost everything is too strong of an image. And the message is one: not everybody can do it.

  12. @anoel- I am an elementary school teacher, and I am sick and tired of people adding on topics I am supposed to teach. Every year, people demand another subject be taught, in addition to raising test scores. Give me a break. There are only so many hours in a day; and there are only a few dollars left in the budget. Yes, it is soooo important for students to eat healthfully, protect themselves from uv rays, say no to drugs, be safe around guns and strangers, not catch a std, be honest, have healthy self-esteem, not smoke AND be financially literate, but some of this has to be taught at home.

  13. From my experience, I really wish that I had learned more about personal finance from my parents when I was an impressionable teenager. While I’ll have to admit, I was quite aloof to what money was all about, and rather smarmy in my own right to listen to any advice given, it was never discussed to a level that I would appreciate today. My introductory lessons to money management included the obligatory allowance that so many of us kids from the ‘burbs thought we were entitled to. I got $10 a week from the time I was 10 until I was 13. Upon my “aging” to actual teen years, I was given $20 each week. My dad sat me down this day, and said, “If you can show me that you can save some of this and not spend it every week, I will give you more!”.

    Well, in my youthful ignorance, I would save for a few weeks. At that point, like many kids my age, I realized that I had $100+ sitting in my little bank/jar/wallet! I broke that shit open and went and blew it on whatever, enjoying myself to the fullest, and waiting for the next bank-busting weekend to come. I went to my dad, preening over my achievement, and he would say something like “Well, it’s a good start.” and that was all I heard.

    Every few months I would get the “You need to save more” lecture again. It would maybe get me to save for two months this time, instead of one. As I got older, my toys got more expensive, and so I saved a bit more. In the end, I always blew it away in one fell swoop.

    My allowance never passed $20. I never learned proper saving vs spending habits. My dad never told me that it was still okay to spend some of this money, so long as I had a system to retain a portion of it and let it grow. I’m 26 now, and have had friends look up to me saying that they wanted me to help them get their finances in order like mine were. I never bothered to tell them that mine were a disaster, wrapped in a pretty little excel spreadsheet that I used to tell myself that everything was okay.

    Had I been able to learn some of the things that I have over the past two weeks reading Ramit’s book, and this blog, from my parents? I’d probably have bought my first car outright, or at least secured some awesome rate and not the horrible one I have now. I can go on and on about what would have happened if I knew 10 years ago what I know now.

    In the end though, yes, my parents are largely to blame. I was a sponge as a kid, taking in everything thrown at me. Had education about money been thrown at me, instead of actual money, I’d probably have more right now.

    -Tony

    • At some point you can’t blame your parents for your mistakes anymore. If you are making your own decisions — then you get to own the mistakes that often come with those.

  14. The media. They are a bunch of idiots. Period.

    • I don’t think you can only blame the media—it is not their job to educate people on finances, it is their job to make money for their parent companies.

  15. A couple of thoughts:

    1. We may be stuck in a culture of repetition. Children tend to do what their parents did. If your parents were debt spenders who did not build a nest egg and had little concept of money management, you will follow the same path unless someone turns you in a different direction.

    2. I think there is something of a generational language barrier here. Read Money magazine. It is probably the most boring periodical published today. Ramit’s comment about old white men writing for old white men rings true.

    It could be that people only buy those magazines when they have money to invest and that generally they have to be a certain age before they feel that they have money to invest. Ultimately, we have to change that dynamic. Ramit, and others like him, are affecting change by targeting a younger demographic and encouraging investment at a young age (even if we don’t “have the money”).

    The internet should affect that as well, by making more information available for free and eliminating the traditional barriers to information.

    Ulitmately, if you have smart media, presenting financial security as a necessity to successful life, you should see younger people adopting saving as a lifestyle, regardless of the choices their parents have made.

  16. I didn’t learn much financial information from my parents, but I did pick up their attitude towards finances. The attitude that money is a tool, which requires planning to use well. Attitudes are extremely difficult to “teach” and financial education in schools would not address this part of the problem.

  17. So who are the five groups?

  18. Blaming is easy, taking action is hard. Most people just choose to work more instead of thinking of ways to manage their own money, it’s just so much easier. IMHO, there’s always somebody else we can blame when something doesn’t go the way we want it to be. But whether you want to let the situation control you, or be in control, that’s a conscious decision you have to make.

  19. Nice article. I got the questions right but the first one was so easy that I kept thinking that there would be a catch, We learn a lot from our parents good or bad money-wise I’ll give you that one.

  20. Someone much smarter than me (Maya Angelou) said something along the lines of:
    “If you don’t like something, change it. If you can’t change it, change your attitude. Don’t complain”
    While there is always someone to blame (and there always is!), part of the problem is and always will be that at an individual level we need to take responsibility. I agree that there are companies out there to get you and they spend hundreds of millions of dollars finding better ways to make you spend more. It’s not a simple matter of saying I will not spend x amount. But part of that equation is understanding that such companies and people exist and making sure you protect yourself as best you can.
    Without putting too fine a point on it, blaming someone will probably make us feel good and I love doing it as much as the next person but we have to realise that it is up to ourselves to take responsibilities for our action and at the end of the day, that’s what makes a difference – a conscious decision making process

  21. [...] Ramit Sethi on the 5 groups responsible for our financial illiteracy. His answer: Do you need to be the Iron Chef to cook a grilled-cheese sandwich? No, and once you [...]

  22. You need to add “our parents”; they told us how to save and manage money and then we go and do the opposite they tell us – definitely their fault ;)

    Love the quiz – I’m going to present it to my kids.

  23. Gerard, I think ‘put up or shut up’ means the same as your quote but it’s a bit snappier :)
    Ramit I just wanted to take the chance to say a big thank you. I’ve been reading your blog for over a year and the whole time thinking, yes, I must automate my finances. One day. Last Christmas I even opened up a bunch of ING accounts but I couldn’t be arsed figuring out how to get an initial deposit in them so they lapsed.
    Anyway about four months ago I finally pulled the finger out and got the online accounts set up and some automatic transfers made every fortnight when I get paid.
    Before starting this I lived pay to pay with nothing left over, and would have sworn I didn’t have any spare money to save.
    Just a couple of weeks ago I looked in my ING accounts for the first time and there’s over $5000 in there!! I never even missed it! Admittedly some if it will have to go to pay my children’s school fees but still, it’s a miracle :)
    So now I’ve got some confidence up I’m organising an investment loan and moving from saving to investing.
    Many many thanks. To everyone else out there thinking about automating – what are you waiting for?????????????????
    Wattsy in Oz.

  24. Regarding the comments about teaching this in elementary school. I think it would be ineffective. There are all sorts of stuff taught that don’t get followed later in life. I mean, its beaten into our heads that smoking is bad for you but I still see tons of people doing it… why would financial literacy be any different.

  25. I think personal finance needs to be taught in high school…. BEFORE kids are set loose and have turned 18 and can get credit cards.

    Offering a personal finance class in college is too little too late. That’s like offering to explain the dangers of drinking after you’ve bought a round of drinks.

    A lot of college kids have already taken on a sizeable debt load just to be there, need money for personal expenses (beer, pizza, etc.), and have just been offered their first plastic (ooooh, shiny!)

    Maybe things are different today, but when I was in school, the only finance training I ever had was when someone from Junior Achievement talked to our class about how to balance a checkbook. I specifically remember being taught how to properly write out a check. So basically, we were coached on how to spend, and nothing else!

  26. [...] to Be Rich — Ramit being Ramit. Once again he’s indulging in the blame game, targeting who is to blame for our financial illiteracy. Hey, the guy just won the Plutus for Most Controversial Blog, so he’s got a rep to keep up [...]

  27. I was actually taught about finance and budgeting in Middle and Senior High School (not much mind you, but still they did do it). In Middle School it was part of Home Economics and in High School it was part of Career and Lifestyle class, which was mandatory. I do not believe it made much of an impact on anyone since in both cases it was only one or two classes.

    I just completed an accounting degree, so I do feel financially literate. However, I don’t have much experience dealing with my personal finances, most of what I made at part-time and co-op jobs went into tuition, although I did manage to save some.

  28. There is no blame to be had. Blame is a game of small people with no solutions. It is easy to say it’s not my fault. It is much more difficult to be grown up about it and say “Yes, I did it. Now I’ll solve my problem.” or even better and takes great self esteem ” Can you help me find a solution?”
    As far as the financial realm it is time that people ask questions and search for answers. Those who don’t are doomed to the life of mediocrity and debt.

  29. I think the lack of concern people have over 50 years, for two reasons: a) Because of his age and life cycle savings should manage more than in other age groups. b) Only experience and common sense should know the right answer.
    In this situation the authorities should implement some rules to assess their knowledge similar to that used in Europe with MiFID.

  30. A well rounded piece. At first I thought you were going to give everyone a scapegoat on why it is everyones but their own fault or responsibility for their personal finances but this was a refreshing read.

  31. I recommend: ‘Whatever Happened to Penny Candy’

  32. Hi Mr. Shethi,

    You have nicely pointed out the issue about failure in Education system.
    I think not only these five group are responsible in making us financial illiterate, while i also consider media in this.
    What do you say about media in this ?

  33. To all of you: Leave this guys posts. You’ll all be screwed! All currencies will collapse in the near fututre!

  34. “Personal-finance advice has been geared toward old white men and taught by old white men for far too long.”

    I am curious as to why you think that standard personal-finance advice has anything to do with race – or why you brought race into that sentence at all in the first place…

    • It’s not so much race as class. At various income levels, certain assumptions are made by our society, whether we like it or not.

      True, it was a sweeping generalization, but I think Ramit made his point quite well: Financial information needs to be written and disseminated in a way that is accessible to all people at all socioeconomic levels, and typically, it is not.

      Ramit, correct me if I’m wrong in my assessment.

  35. there’s no one to blame, not even yourself. saving and investing is a individual thing. you just have to except the outcome and learn from it and make corrections. keep lots of cash on hand (savings,CD’s,bonds) and get a government job that still has sane pensions (if employers don’t offer it fight for it) annuities should be part of your portfolio. as far as education well i found this blog and can cross check information in minutes, ah the twenty first century ain’t it grand! so take a tip from a old white man, don’t be a weak sister, bitch!

  36. You’re right (and clear) about money management not being rocket surgery. The only obstacle (I see) is the desire for people to make that change. Wanting to change poor money habits is the real hurdle, there’s plenty of recipes once you’re head is in the right place.

    The people playing the blame game need to listen to MJ’s “Man In The Mirror”. If that don’t help the blamers, I don’t know what will… Cheers. Great site, great advice!

  37. Agree with the observation on the same old discussions around money. If you look at the number of people who buy a finance book, then the percentage of those who actually read it, versus the percentage who leave it on their night table…you get the idea. But an even bigger miss is all the people who just don’t buy finance books to begin with. Its not how they work or how they think. We are using old mediums in old ways to help people. Add that to a nation of optimistis who live by instant gratification, and here we are. Who needed help from Wall Street debacles when most of America was going to be eating cat food in retirement anyway?

  38. Ramit, great article. I tried the clicking on the (abstract here, download here) and I wasn’t able to download anything. I think the link got disconnected.

  39. Personally from my point of view it’s us. We don’t care enough to learn more about money and then use what we’ve learn to make better choices for ourselves. If we know NOT to spend that 10 extra dollars because we had planned on putting it in savings, then why DO we spend it?

    We already know not to so just don’t do it. Temptation? Yeah, there’s plenty of that but we have to take control and just quit spending.

    Having a budget is critical but following the budget is just the right thing to do.

  40. So much of our worldview is shaped by how we were raised by our parents. In many households, money was a taboo subject, and talking about money was being seen as greedy, selfish, etc. To each their own.

    I think that it is imperative for parents to teach their children about money. As a parent of a 6 year old, I of course want her to focus on being a kid and developing friendships, doing well in school, learning good habits, etc. Childhood is a special, fun time. That said, its also where perspectives are formed. Sure, they can change later, but its much easier to get it right the first time.

    Teaching kids the value of money, how money is earned, how money is saved, budgeting, compounding, and the concept of present value – all should be done early on.

  41. I can say the situation is slightly improving. Maybe ordinary people do not know much more about finance and economics as they did know 10-15 years ago, but at least they are asking more question as they used to. But still, they are in the hands of their adviser.
    @Squirrelers: good point about kids. +- 6 years is the right age to start ‘budgeting’ your kid. Give them some coins at the beginning of week and let them buy something (and pay) as you do groceries. Kids are pretty clever and soon begin to understand how they coins get lost, or not.

  42. 3. How important is widespread financial literacy to the health of a modern society?

    Financial literacy is of little use to a society if it is poor.

  43. This debate on financial education taught at earlier ages is really interesting to me – I received my first credit card when I was 16 – SIXTEEN – and then received two more during a “fundraiser” put on by Citi at my college campus. Luckily I cut up two of those cards… but not so luckily, as I still have the other, which came with a beautiful ball & chain. Now, I think there’s a lot to be said for personal responsibility in spending, but it would have been nice to get some educational training in finance beyond “this is an interest rate, now do this math problem” / Girl WTF are you doing with three credit cards and zero cash flow?!” when I was 15 – 18 years old. Sure, you can “know” about what credit cards do, how interest rates work etc., but making it relevant is and teaching before it’s too late is 50% of the job. The other half is up to us – if you stay ignorant, it’s your problem, not the rest of the world’s.

  44. Well I believe a big problem here, has to do with the lack of education of money in schools. We learn everything about being good citizens in society, but know nothing about money, grads from college get a degree nab a job and only know what their parents taught them about money. Making the same decisions they made. The different classes of society are basically perpetualting themselves because people are only becoming what their parents were before them, except now they have more toys. So I think this has allot to do why some people get rich and most people stay broke or middle class, they just don’t know any other way to do things, and its been passed down from their parents. I have an example, lets say one child grows up in a middle income household, and both parents are high income earning doctors, making 500,000 a year. They buy a house and tons of nice stuff, are they rich, or perhaps just living the American Nightmare, with big student loans and spending it as fast as they make it. Then you have the other type of person who grows up in a wealthy family and is not only encouraged to go to college but also start buisnesses as well to reduce taxes. So the second guy does everything the first does but then opens a hospital and employs many people, and earns a high cash flow, from the hospital and his own salary, with the proceeds puts the money back into his buisness. Who will become richer? So it also boils down to what we are taught at home, whether we are taught to live a life of expensive stuff cause thats all it is, or by buying assets. So I think its that, and a person also needs to learn about money, and have a desire about it and change his parents way of thinking into a way he thinks will be better for himself, then he too can become rich with assets. Good Luck bye

  45. This is a really good article, but some of this ties back into the whole idea of not judging how other people spend. In most problems or crises, there are generally several people/parties at fault, and sometimes that includes the person/party in trouble.

    Is it true that, overall, we could all be doing better? Yes. Is it true that EVERYONE can put $10/month into savings? No, it is not. There are people who live paycheck to paycheck, and there are many reasons for this. Some, people have control over, others, they don’t.

    The key is not finding whom to blame, but doing the best we can in our own situations.

    I’m going to share this post with my friends. Thanks!

    Jen M.

  46. I think that many people doesn’t seriously talk about money as Squirrelers said. This is a big problem. I read a lot about becoming rich, motivation, finances, but I still got that problem in my family. When I start a conversation about money with my wife it often ends with a fight. I think that many people have simmilar situation.

    • Marcin: Check out Chapter 9 of my book, where I talk about money and relationships and some pretty cool scripts/techniques to use. They will help you avoid fights and get constructive about money with your wife/partner.

  47. As one of my favorite finance authors, Larry Winget, says, “It’s Your Own Damn Fault” and I agree. There are all kinds of traps out there trying to get your money but ultimately you are the one making the decisions.