Financial Education Doesn't Work, Do This Instead

The financial world has become too complex for "financial literacy" to keep up

Photo by Charl Folscher on Unsplash

Few problems are as widely agreed upon and misunderstood as financial literacy.

Politicians, the general public, and personal finance experts agree that most people’s lives would be improved if they were taught how money works.

The point I continue to drive home through the “Money on my Mind” series is that when it comes to money, action matters more than education.

Building wealth does not require learning how to read a company’s balance sheet (education)—it requires consistently investing in a well-diversified portfolio (action).

The financial world has become insanely complex

In the 1960s, managing money and your career was simple.

Workers could compete in the labor market and earn decent wages without a college degree. Those who did go to college did not graduate with student loans the size of their mortgage.

Then you could get a job, likely with a defined benefit pension, and could realistically plan to stay with that employer your entire career. Access to a pension meant that workers did not have to learn how to invest or figure out how much to contribute to a 401k to be able to retire.

Houses were reasonably priced to the point where homeownership was a realistic and rational goal for most workers. Back then, your mortgage might have been the only form of debt you had to manage.

As for financial transactions, cash, cheques, and the occasional trip to talk to a bank teller about covered it. Hell, even ATMs were a decade away from mainstream adoption.

That simplicity led to a predictable path to financial stability.

Fast forward to today: we are drowning in financial complexity.

Careers are defined by their volatility and unpredictability. The average Gen-Z worker changes jobs every two years.¹ Simple, predictable pensions have been replaced by 401k and other "defined contribution" retirement plans, which places the burden on the worker to figure out how much to save, how to invest those savings, and how to turn a lump sum of money into a reliable cash flow in retirement.

Putting this onus on the worker has led to the rise of financial advisors who, for a fee, can help you sort all of these issues out. But even the decision of whether to use a financial advisor is complex. First, most financial advisors only want to work with people who already have money. Second, it’s difficult to know which advisors can be trusted as there is often a conflict between what’s best for the advisor and what’s best for their clients.

The result? Most people say f*ck it, do a half-ass job planning for retirement, and hope for the best.

Housing prices have been rising faster than wages for decades which turned the decision of whether to buy a home into a “dammed-if you do, dammed-if you don’t” situation for millions; overextend yourself with a jumbo-sized mortgage or cough up the majority of your paycheck to rent.

The knife twist in the homeownership decision is that competing in the knowledge economy requires a 4-year degree, the cost of which has also been rising faster than wages for a generation that has normalized the practice of starting your adult life deeply in debt.

Speaking of debt, there has been a massive amount of “innovation” in the types of debt offered by the financial services industry.

• Mortgages

• Second mortgages

• Home equity lines of credit

• Student loans

• Credit cards

• Car loans

• Car leases

• Payday loans

• 401k loans

• “buy now, pay later”

• Margin loans, where investors borrow against the value of their portfolio

It’s bad enough that the number of financial decisions we are forced to make has expanded exponentially. What’s killing people financially is that a loan is offered to help finance each of these decisions.

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It’s laughable to think “financial literacy” can solve this problem

With this increased complexity, people have predictably made many mistakes.

These financial mistakes fall into two broad categories:

1. Choosing the wrong person to receive free or paid financial advice from

2. Making mistakes while navigating the complex financial system alone

One survey found that the lack of financial literacy and unforced errors cost Americans over $352 billion in 2021.²

Except, it’s not a lack of financial education causing people to flush $352 billion down the toilet every year—It’s a lack of timely financial education.

The human brain forgets newly learned information at a shockingly fast rate. Researchers from the University of Waterloo refer to this as “the curve of forgetting.”³

Here’s how quickly students will forget what they learned in a 1-hour lecture.