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Financial Education Is Not Enough

November 16, 2020

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How is learning to drive similar to learning to use money?

Looking back on your teenage years, you probably have some clear memories of driver’s education: anxiously taking your turn behind the wheel while your peers sat in the backseat, your teacher’s foot ready to brake if you made a wrong move, practicing after school with your parents or older siblings, and learning the “rules of the road” for your driver’s test—what the different road signs mean, who has the right-of-way at a four-way stop, and what to do if you get in an accident.

In the years since, you’ve almost certainly learned a lot more about driving. You’ve gotten better at changing lanes in traffic. You instinctively feel when someone at a four-way stop is taking the right-of-way. You’ve learned new “rules of the road” as you’ve moved states or seen laws change. And, most likely, you’ve had some first- or second-hand experience with the aftermath of an accident. All of that experience has shaped you as a driver, for better or for worse, but the initial practice and learning you did as a teenager undeniably set the stage. In many ways, gaining the skills needed to drive is similar to gaining financial literacy.

Good financial education is important. It can provide an essential foundation of knowledge and decision-making practice on which to build better financial behaviors over a lifetime. But financial education, like driver’s education, isn’t enough. Other financial experiences throughout your life will shape your financial behaviors and outcomes, arguably much more than that initial education. While quality financial learning is valuable, it is also not enough. Although we are big believers in comprehensive financial education at the K–12 level, we also believe that such education is only just the beginning.

Financial education should be complemented by five key experiences and supports.

(1) Improved access to financial institutions. A good financial education program encourages students to practice decision-making through realistic scenarios. But, just like in driving, such simulated experiences are no substitute for the real thing. This is why many community-based financial education programs should help people—particularly those who may use alternative financial services or struggle to meet the requirements of traditional banks—gain access to financial services such as checking and savings accounts. These programs should also provide incentives to participants who engage in positive financial behaviors, like providing a bonus if a person saves money in an account over a certain period.

(2) Just-in-time information. No matter how comprehensive, financial education cannot prepare learners for every possible decision they will confront. People forget things they’ve learned over time, especially if a long period passes before using the information. And financial services, like driving laws, change. People need additional information and support as they make important financial decisions. That’s why “just-in-time” financial education is so vitally important. Many workplaces provide such education when employees make decisions about insurance or retirement savings. Community-based groups may provide education on taxes or employment. Such in-the-moment experiences, especially when they build on a solid foundation of financial education, can support people in making productive financial decisions when they most matter.

(3) Attention to individual differences and biases. Even an excellent driver may make a bad decision in traffic or succumb to road rage. Similarly, even people with high financial literacy don’t always make sound decisions, especially when they’re under stress or emotions run high. Some people’s risk disposition may change when they’re feeling stressed. Some people make impulsive financial decisions based on anger, fear, or sadness. Self-improvement programs and even therapy can help people become more patient, centered, and aware of their emotions. These personal, psychological qualities can, over time, have a big impact on one’s ability to make sound financial (and other) decisions over time.

(4) Awareness of historical inequities and barriers. Financial education can help people take control of their financial decisions, but it should not be confused for a “great equalizer.” Not everyone starts life on the same financial playing field. Centuries of disproportionate inherited wealth, discriminatory policies in housing and lending, and differential job opportunities and pay have created a situation in which people of color—particularly African Americans—and many women are in an uphill battle for financial stability. It’s important to be aware of and understand these inequities. Research indicates that students who are more aware of the inequities they face have better outcomes. This is perhaps because they are less likely to blame their financial outcomes on individual failures and thus feel more empowered to act (Godfrey et al., 2017).

(5) Policy changes. Many popular debates about financial literacy tend to paint supporting financial education as somehow opposing necessary policy change in the financial world (see Cohen, 2019). Indeed, it is important that a lack of financial literacy not be cynically used to blame people for financial outcomes outside of their control. No amount of financial education can overcome a lack of adequate income, poor employment benefits, or few quality healthcare options. Where opportunity is lacking and inequality prevails, policy change is essential. But we argue that financial education can be a lever towards policy change—when people are more informed about financial systems and decision-making, they are better prepared to advocate for more beneficial financial policies and appropriate rules for financial players and institutions.

Ideally, financial education involves some attention to all five of these elements. But where the reach of education ends, these supports must continue.