Money is 80% behaviour, 20% head knowledge. It’s what you do, not what you know, that makes the difference.” – Dave Ramsey
November is Financial Literacy Month; that time of the year where the financial services industry tries to do its part to raise the financial consciousness of the nation. While the idea itself isn’t a bad one, I think it’s fair to say that dedicating four weeks right before the Holiday season to building awareness of the importance of saving and debt management might not be optimal timing!
Aside from the timing issue, for me, the whole idea of financial literacy feels like a very vague concept. When you talk to people, they seem to agree that financial literacy is important; they feel that it should be an integral part of a child’s education; they blame a lack of financial literacy for falling savings rate and the mounting levels of household debt and yet when you ask people to define what financial literacy is, they falter. Usually after thinking for a bit, they will offer a definition along the lines of “understanding how money works” or “knowing how to manage money” but there’s usually a questioning tone in their voice that suggests they’re not 100% sure.
When you look online, the same uncertainty and vagueness is evident, even among sites dedicated to promoting financial literacy. The general consensus seems to be that being financially literate means having a basic understanding of how much you earn, how much you spend, how much you owe, how much you own and what you need to do in order to maximize your assets and minimize your debts. The assumption is that the main reason people struggle with debt and money is because basic financial skills such as budgeting and money management aren’t taught in schools. This goes hand in hand with the belief that raising our level of financial literacy will lead to more saving and less debt. However, I’m not convinced this is actually the case.
Arming people with information doesn't necessarily lead to action and, unless you can find a way to teach money basics that inspires people to want to put their money to work for them more than they want gadgets, luxuries and “stuff”, I don’t think making personal finance part of the curriculum will actually make enough of a difference. That's not to say that I think teaching money sense in schools is a bad idea; I'm a big supporter of teaching kids about money. However, having talked to many people over the years about finances and their own understanding of money I’m becoming more and more convinced that it’s not a lack of financial literacy that’s the problem; it’s a lack of motivation.
Just Do It… Or not.
Decades ago, when it was considered bad manners to discuss money matters with others and many people didn’t even finish elementary school, people didn’t seem to have trouble grasping the basics of money management. People understood very clearly the need to live within their means and save for the future; not just because they lived in a cash-based society where solvency was admired and debt was frowned upon, but also because they had no real alternatives. When you’re paid in cash and you have no credit options available to you, the choice is pretty simple: you either live within your means or you go without.
Fear is a powerful motivator and, while I’m sure that there were plenty of people living paycheque to paycheque, I’m willing to bet that there were plenty more living within their means and building solid financial foundations in order to make sure they didn’t run out of cash. Then, in the 1980’s and 90’s, with the introduction of credit cards, an alternative approach to money emerged. Credit gave people the option of an easier path that removed the need to save and live within their means and offered them the opportunity to purchase experiences and products that might otherwise have been out of reach. It’s a tempting offer, and one that proved hard to resist. Human beings are hard-wired for pleasure and it takes a greater degree of willpower and motivation to take the fiscally responsible path rather than the fun and easy one. Not surprisingly, as credit became more readily available and more socially acceptable, there was a steep decline in the amount people were saving and a sharp increase in the amount of debt they were carrying.
As debt levels continue to rise and the struggle many people have with basic money management has become more obvious, there has been an increase in the volume of people calling for education and more promotion of financial literacy. These voices assume that if people were more educated they would make different choices, but I'm not convinced this is the case.
Over the years, I’ve met a lot of people who were in varying states of financial difficulty. While they came from a variety of backgrounds and education levels, not one of them had no idea they were in trouble and not one of them was under the impression that debt was a good thing. It’s ridiculous to suggest that someone who is behind with their mortgage or rent payments is unaware of the fact they’re living beyond their means just as it’s ridiculous to say that someone who is up to their eyes in debt doesn't know they’re walking on a financial knife edge. However, knowing and acting are two very different things. One thing that many people in financial difficulty are guilty of, is deliberately ignoring their situation; they consciously avoid taking on board any information that might mean they have to change their habits or compromise their lifestyle in any way.
People can be very good at convincing themselves that things are ok when they know that they’re not. There’s a big gap between suspecting you’re off track and being willing to ask for directions, and an even bigger gap between asking for directions and acting on them. With all the information that’s available online for free as well as all the books, audiobooks and other materials that you can buy (or borrow from the library) the only reason why anybody should be lacking information on finances and money management is because they haven’t looked for it. We need to create an expectation that part of being an adult is being fiscally responsible rather than giving people the impression that it will all be ok in the end because some one else will fix it. Taking away the expectation of personal responsibility is dangerous because it creates an expectation that people will be spoon fed all the information they need and that there will be a safety net in place for those who decide not to do anything with it.
If we want people to manage their money more effectively; to increase their savings levels and decrease their debt levels then we have to create an expectation in our homes, our schools and our social circles that taking control of our money is something important. We need to teach our kids that money has to be earned before it can be spent; we need to take the mystery out of personal finance so people feel more confident handling their own money and we need to hold the financial services industry accountable for making sure that people understand how credit works before they’re approved to carry it. More than anything else, we need to shift our way of sharing information so that financial literacy becomes less about teaching theory and more about promoting action. We need to teach people in practical ways how to take control of their money and we need to listen to their questions in order to fill the knowledge gaps.
I spent some time recently talking to college students about money in an effort to understand what their misconceptions and confusions are about finance and managing money. What they seem to be lacking more than anything, isn’t an understanding of core concepts, it’s understanding the “how’s” that bring those concepts to life: How do I save? How do credit cards work? How do I buy a house? How are credit scores calculated? They're looking for information but they're also looking for strategies to help them apply that information to their own lives.
Perhaps, if we want to get people engaged in managing their money, we should start by setting an expectation that taking care of your money is something we should pay attention to and follow that up with a more practical approach to sharing knowledge and a more collaborative approach to implementing it? What do you think?