How we teach bad financial habits

Financial literacy is a big issue. Dozens of states offer financial education, and many analysts see financial literacy education as the ultimate solution to Americans’ money woes. But for all the attention we pay to teaching financial literacy, we rarely discuss financial literacy education: the way we teach bad financial habits.

If we look closely, we find that financial literacy education is everywhere in our society. It starts at a much earlier age and is much better funded than financial literacy education. Is it really a surprise that so many Americans are financially illiterate?

How big is the problem?

These problems are often blamed on scarcity financial literacy. There is evidence to support this claim. The S&P Financial Literacy Survey says 57% of American adults can correctly answer five basic financial literacy questions. This is high by world standards, but still 43% cannot answer.

A FINRA survey shows that 80% of Americans between the ages of 18 and 34 fail a basic financial literacy quiz.

These numbers suggest a problem, but the source of the problem is less clear.

What is financial literacy?

What is financial literacy?

The dictionary definition of financial literacy is very simple:

Financial literacy is the possession of a set of skills and knowledge that enables an individual to make informed and effective decisions with all of their financial resources.

The Council of Financial Educators has a broader definition:

Have the financial knowledge, behaviors, systems, team, and plan to confidently take effective action that best fulfills an individual’s personal, family, and global goals.

National Council of Financial Educators

So we see that financial literacy has two basic components: knowledge and action. The traditional approach to financial literacy education focuses on the premise that action is informed by knowledge: that if people understand money and the difference between good and bad financial habits, they will abandon bad financial habits and adopt good ones.

This premise, in turn, is based on the assumption that the people we teach are essentially a blank slate, an empty void that needs to be filled with knowledge to replace ignorance and lead us to the promised land of good financial management.

We have recently begun to realize that this assumption is not accurate. There is no such thing as a blank slate: we all have attitudes and habits that we have learned, often unconsciously.

Discipline of financial therapy has evolved as we increasingly recognize that confronting and managing existing habits and attitudes is as important as building new knowledge. Extensive research has been done, for example, on how financial attitudes can be passed through families.

Inherited attitudes are important, but financial literacy education must overcome another obstacle that is often unacknowledged: our society actively teaches bad financial habits. We call this process financial illiteracy education.

What is financial literacy education?

What is financial literacy education?

Any deliberate attempt to teach bad financial habits can be considered financial illiteracy. We don’t intentionally teach bad financial habits in school, but school isn’t the only place we learn.

Parents and teachers can teach and preach about living within your means, controlling impulsive spending, not basing your self-image on what you own, not spending money before you have it, and much more. The reality is that there are other people out there who are making a lot of money promoting the same habits that try to master financial literacy education.

It starts soon

The American Psychological Association estimates that children see an average of 40,000 ads each year, and that advertisers spend more than $12 billion a year on ads targeted at young people.(1).

Advertisers craft their messages with great care, hiring professionals in design, psychology, production and more to trigger the very impulses that financial literacy teachers are trying to help people control.

If financial literacy instruction begins as early as high school, there’s a good chance that students have been exposed to nearly half a million intentional, professionally crafted messages that deliver the exact opposite message before they receive their first lesson. This is a huge hurdle for financial literacy teachers to overcome.

Peer pressure sets in

Attitudes created by the tsunami of advertising aimed at children are reinforced by peer pressure. Children quickly learn that clothes, shoes, accessories, phones and other objects are not just tools, they are status symbols that define their place in the social hierarchy.

These messages are not as sophisticated as financial literacy education delivered through advertising, but they can be even more persuasive because they are delivered so close to home and directly appeal to the desire for social acceptance.

Adults are not immune

As we grow into adulthood, the barrage of advertising designed to keep us wanting more continues. Peer pressure won’t stop either. In addition, another layer of financial illiteracy education comes into play: the promotion of credit as the “easy” answer to the problem of wanting more than you can afford.

Lending is a big and highly profitable business, and lenders are always looking for ways to bring in new customers or convince old customers to borrow even more. Sellers joins the chorus: “What do you mean you can’t afford it? We can finance it. Don’t look at the price, look at this low monthly payment.”

Adults face a constant barrage of credit offers, from pre-approved credit cards to store financing to buy now pay later is planning payday advance application for payday loan merchants, there is a huge industry – a huge hundreds of billions of dollars – built on convincing us that whatever we want is available. All we have to do is cut costs a bit.

The temptation is already strong enough. With an array of ready-made “solutions” thrown at you at every turn, it can easily become overwhelming.

How will this affect financial literacy education?

We will not stop financial literacy education: there is simply too much money in it. It may be possible to push for some controls on what advertisers can say and promise, but people will be encouraging us to spend and borrow for a long time.

Awareness of financial literacy education can influence the way we approach financial literacy education. This means recognizing the two realities brought about.

There is no blank slate

Financial literacy teachers often approach their work as a simple matter of replacing ignorance with knowledge, as if we were filling an empty glass. The assumption is that once knowledge is available, behavior will change and all will be well.

The problem with this assumption is that the glass is not empty. It overflows with desires, impulses, and patterns of behavior that have been carefully and deliberately cultivated over many years. Before we can fill the glass with knowledge, we have to let go of these pre-programmed habits and that is not easy.

Seen through this lens, teaching financial literacy is as deprogramming as education. Helping students understand that they have been programmed and honestly look at where their attitudes and spending come from is an essential part of this process.

There is no place for condescension

The personal finance community is naturally committed personal finance. We tend to think knowledge of personal finance as a basic, normal ability that every adult should have.

This often leads to a subtle but noticeable negative attitude towards people who lack this knowledge, or – even worse – towards those who have the knowledge but still make bad decisions. This attitude often comes across as barely suppressed condescension.

Of course, there are people—a lot of people—who don’t know the basics of personal finance. There are also people who “know” things they should, but still fall into the trap of overspending and credit abuse.

It’s easy to see this as their fault or evidence of some character flaw: why else would people make bad, self-destructive choices? It’s frustrating to watch, especially with people we’re close to.

This frustration can easily creep into a conversation about personal finance, leading us to talk down to our audience and appear condescending, even when we don’t mean to. This can actively harm efforts to build personal finance knowledge.

It helps to realize that bad decisions are not necessarily the result of bad discipline, ignorance, or weakness. They are often the result of decades of lavishly funded, professionally executed manipulation. Average people who don’t realize they are being deliberately taught bad habits have little chance of resisting the manipulation without help.

Approximately 60% of American households live paycheck to paycheck. Instead of seeing this as proof that Americans are really bad at managing money, we should see it as proof that the people who actively encourage excessive spending and credit abuse are very good at what they do.

Is personal finance education the answer?

Personal finance education is a popular solution to the crisis facing American households. Personal finance courses are now offered to high school students in 30 US states, and 14 of them require it for graduation. More states are considering introducing these courses.

This is a popular solution because it is non-controversial. It may not be a complete reaction, but it’s hard to argue against it. What damage can you learn about personal finances?

The answer, of course, is “none”. Learning about personal finance never hurt anyone and can help a lot of people. It is still not enough, and the emphasis on education can create resistance.

Many younger Americans burdened by low incomes, soaring costs of housing and basic needsand student debt they are not satisfied with reading. They understandably get tired of being told to cut back on the lattes and avocado toast, save money they don’t have, and plan for retirement when they can’t pay the rent.

They’re right. You can’t get out of a big imbalance between income and expenses with personal finance. We need to recognize that there are real structural challenges to financial success and that public policy needs to adapt. Like it or not, personal finance is political.

Still, financial literacy will always help, even if it’s not the only solution, and surveys consistently show that even families with six-figure annual incomes are living paycheck to paycheck and struggling with excessive debt.

So how does it help?

Financial illiteracy and bad financial habits are not just the result of laziness, carelessness or lack of discipline. He learns actively, energetically and very efficiently.

Awareness of this fact can help both personal finance educators and individuals struggling with destructive financial habits.

  • Personal financial educators they can recognize that their job is not just to teach good money habits, but to help students recognize and break free from years of strong mental conditioning.
  • Consumers he can understand that their problems are not entirely their own fault: they have been professionally manipulated. Realize that manipulation is the first and most important step to freeing yourself from it.

Understanding the impact of education on financial illiteracy will not make it go away or magically change the landscape of personal finance. It gives us one more tool to help us and others learn how bad financial habits are formed and what we can do to reverse them.

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