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Financial Role Models vs. Money Classes

This article was written by in Financial Literacy. 9 comments.

Non-profit organizations and for-profit businesses promote financial literacy education as the solution to a society of citizens unskilled with managing their own money. If only we could have mandatory money management classes in high school and earlier, advocates claim, the United States would be a nation of savers, free of most debt other than mortgages, with an emergency fund in every garage.

This concept is promoted so heavily, there is even a month for it: April is Financial Literacy Month. The event is organized by Money Management International, a non-profit credit counseling organization. As an advocate for making better financial choices, how could I not support bringing awareness of financial literacy to as many people as possible?

Financial literacy: the good

Financial literacy leads to better financial decisions. A report from the TIAA-CREF Foundation, which admittedly has a vested interest in encouraging more people to invest for retirement, concludes the following:

… People with a high degree of financial literacy are more likely to plan for retirement, and that people who plan for retirement have more than double the wealth of people who don’t… Conversely, people who have a lower degree of financial literacy tend to borrow more, accumulate less wealth, and pay more in fees related to financial products. They are less likely to invest, more likely to experience difficulty with debt, and less likely to know the terms of their mortgages and other loans.

I’m so much in favor in transmitting good financial skills that I’m considering starting a non-profit organization whose mission is to do just that. There wouldn’t be much justification for starting a new non-profit organization that takes the same approach as many others.

There’s good news for those like myself interested in starting something new: The old techniques, promoted heavily by the financial industry, even Federal Reserve Chairman Ben Bernanke, simply don’t work, so there is an opportunity for breaking through with a new approach.

Financial literacy: the bad

Studies have shown — and this has been discussed here on Consumerism Commentary — that financial literacy classes in school haven’t worked. The students who take these classes perform no better on tests of financial literacy than those who do not, and in some cases, perform even worse. How is this possible? The design of a financial literacy curriculum has been carefully planned by the industry, yet those who graduate with financial literacy credits to their name have not absorbed the basic skills they need.

  • A report from the McGraw-Hill Foundation and the Financial Access Initiative at New York University says: “… New studies show that the relationship between financial literacy and the ability to make and stick with good financial choices is a complicated one. Financial literacy is necessary, but often insufficient. There’s frequently a big leap from knowing what to do in principle and actually making it happen in daily life.
  • A panel of experts at the 2011 “Future of Life-Cycle Investing” conference at Boston University School of Management concluded that financial literacy advocacy doesn’t touch the people who need it the most, and therefore isn’t successful. That’s according to financial writer Janet Bodnar, who attended the conference.

There are studies that show money management classes in high school have an effect on the improvement of financial choices, but not necessarily “literacy,” and there are studies that show that these classes do have a positive effect on literacy over the long term. There is a clear correlation between level of education overall and financial literacy, but that’s not due to money management classes, it relies on the fundamental relationship between level of education and a supportive family system with available resources for children as they develop from kids to young adults.

Financial literacy: the ugly

What we see is that regardless of the existence of money management at the high school level, children who are able to grow up in a supportive environment develop better financial skills. Children who struggle through childhood due to an unstable living condition do not have the opportunity to learn good financial behavior from their parents.

Teachers can work hard to pass knowledge onto their students, but if those students see behavior that reinforces the opposite, or if they see their role models at home not prioritizing education, and in particular, an understanding of financial skills, those school lessons will lose their efficacy. Skills and knowledge need to be constantly reinforced to stick.

It comes as no surprise that lower-income communities have a greater need for financial education, and poverty and poor choices become generational problems, which are much more difficult to reverse.

These communities do not keep up with the education levels of middle class communities. Education isn’t a priority when a family’s primary concern is putting food on the table day by day. When parents can’t plan years in advance for their children because of financial stress today, children don’t get to see the things we associate with positive financial behavior, like investing for the future, compound interest, and use of mainstream financial products like savings accounts.

Without good financial role models, any money lessons taught in high school, when some who need the skills have already dropped out of school and others are too busy prioritizing the base level of Maslow’s hierarchy of needs to care about a class like this, will be lost.

Mentoring from within

The answer — if there is an answer — lies somewhere between the mission of the many organizations that promote financial literacy and organizations like Big Brothers Big Sisters. The latter encourages well-adjusted adults to become role models and mentors for younger kids who may not have positive role models in their lives. When the role model comes from within the same community as the kids, it’s much easier to make the connection. If this person who grew up like me can be smart about his money and successful in life, I can be, too. This type of relationship can prove to be a powerful motivator.

Imagine if everyone was perfectly versed in the concepts of good financial behavior. Every individual or family would save money and earn interest, spend less than they earn, focus on income-generating opportunities, plan for retirement, and buy modest houses will within their range of affordability. With everyone taking the same conservative approach to spending, it could dampen the economy, which through the twentieth century increasingly relied on credit spending for growth.

But that describes a situation that will never exist, so those who do spend prudently will have a financial advantage over those who don’t, and the economy will survive. There is no economic danger to introducing financial skills to a wider community, but expensive check-cashing storefronts and payday loan services might need to adjust their business plans in order to hold onto their customers.

One of my long-term goals is to establish a non-profit organization whose goal is similar to what I have described, combining financial literacy advocacy before high school with the role models necessary for reinforcing good decisions over the long term. This is one of several projects that have been stewing in the back of my mind for the last few years, but I have not yet had a chance to move forward. One of the first steps is forming a Board of Directors. Once I have some time to move forward, I might be reaching out to a few people I have in mind, but if you’re reading this article and are interested in changing the world in what could be an effective manner, contact me.

Photo: Philip Taylor PT

Updated April 13, 2016 and originally published April 22, 2013.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 9 comments… read them below or add one }

avatar 1 Anonymous

You’re right just learning about personal finance is not enough! A good role model such as a parent is the best to support these skills.

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avatar 2 Anonymous

I also think some people choose to pretend to be financially illiterate, as if that will keep them from facing the consequences of their decisions. I have a college-educated friend who pretended to be unable to grasp ideas like unit pricing and checkbook balancing because she just wanted to buy what she wanted to buy when she wanted to buy it. It was totally fake, but she managed to lie to herself (even if she fooled no one else) quite successfully for years.

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avatar 3 Luke Landes

“Willful ignorance” is a great coping mechanism. I know that from experience. It’s easier emotionally to ignore what we know is true for as long as possible… that approach makes you feel better in the short term but snowballs downhill really fast… and that’s when people hit rock bottom. Your friend’s story reminds me of my one-time approach to speeding tickets. It got me in trouble (but it could have been much worse).

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avatar 4 Anonymous

Ack! That would have me so worked up I wouldn’t be able to sleep. I would be literally throwing up from being so upset about the situation.

I guess being wound a bit too tightly does have some advantages! :)

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avatar 5 Anonymous

As long as payday lenders thrive, we still have work to do as a society in the realm of financial literacy!

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avatar 6 qixx

Flexo, i look forward to your Financial Big Brothers, Big Sisters program. Keep us informed of the progress and anything we can do to support a great cause. It might even give me a chance to use what i learned in my Non-Profit Business Administration degree.

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avatar 7 Anonymous

Good for you for doing your part in promoting financial literacy!

You’re right about the family environment at home having a huge impact on the effectiveness of financial education at school. The teachers may try as hard as they want. But if kids don’t have good role models at home, then they just wouldn’t learn what is needed.

Ultimately, kids learn best from DOING (given the right mentoring) and not just reading about money concepts in a classroom.

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avatar 8 Ceecee

Having good financial role models seems to make a lot of sense. They have already found a “mimic” gene in people that seems to make them mimic those around them. Too bad we don’t all have Warren Buffett at our kitchen tables!

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avatar 9 wylerassociate

when I was younger, my parents stressed saving money & using money wisely but it wasn’t something I thought or cared about. Once I got older, I started reading WSJ’s introduction to personal finance & money management which really helped me understand. Now the beauty of the internet is there are plenty of personal finance websites like consumerism commentary. I think it’s a great idea for Big Brothers Big Sisters teaching about financial literacy.

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