Here Is the Most Effective Way to Learn about Personal Finance
It turns out, the tried and true methods still work
The purpose of this publication is to review the research that can help you make better decisions with your money.
But, for me to be successful in that goal requires a better understanding of a fundamental question:
What is the most effective way to teach people to make smart financial decisions?
There are generally two schools of thought on the issue:
Traditional learning methods like a classroom setting, reading, or video lectures discussing the theory of personal finance and investing
Learning ‘to do by doing’, where you get people to learn about making financial decisions by simulating what it would be like to make important decisions with your money.
Let’s review some research that provides evidence that, actually, the tried-and-true methods of learning are most effective.
Financial education or learn to do by doing?
A recent paper from researchers at the University of Kaiserslautern studied undergraduate students in Germany and tested which form of education helped improve financial literacy:
Traditional education—which in this case involved watching a video lecture.
Learning-by-doing—where they offered students a voucher to invest in ETFs.
The central question they wanted to answer was whether these two approaches worked better together, separately, or not at all.
To test this, they randomly divided students into four groups:
Group 1: Watched the videos
Group 2: Got a €50 voucher to invest
Group 3: Got both,
Group 4: Was the control group that didn’t get either.
They then measured the students' financial knowledge right after the intervention and again three months later, looking at things like their understanding of risk, investing, and other basics of managing money.
The goal was to see if people learned better through traditional education or hands-on experience with investing—or if the two methods combined would offer the best results.
A win for traditional learning
The results from the study showed that digital financial education through videos significantly improved students’ financial knowledge, particularly when it came to more advanced topics like investing.
Students who watched the videos saw an increase in their financial literacy by 0.5 to 0.6 standard deviations three months after the intervention, especially in areas like understanding risk diversification and the basics of investing in exchange-traded funds (ETFs).
A less econ-wonk way of saying that would be that students in group 1 who just watched the videos were in about the 70th percentile of financial knowledge at the end of the experiment.
This is important because it shows that even a relatively simple and low-cost method, like watching educational videos (like these), can have a big impact on how people learn about managing their money.
Interestingly, the voucher approach—where students were given €50 to invest in ETFs—didn’t improve their financial knowledge.
Only 12.4% of the students even used the voucher, and those who did didn’t show any meaningful improvement in financial understanding.
This suggests that just giving people the opportunity to invest doesn’t necessarily teach them how to make better financial decisions.
In fact, without the right knowledge, people may not even take advantage of the tools they’re given. The implication here is clear: people need a foundational understanding of financial concepts before they can effectively apply them, even when they’re given financial incentives.
The best way to get better with money? Learn right before doing
This is a perfect opportunity to tie all this into another important topic I’ve written about in the past, which is that if you want to make smart financial decisions, the best time to learn about it is right before you have to make an important decision.
The simple explanation is that people tend to forget what they learn pretty quickly, so learning about money—or brushing up on a particular topic right before making an important decision leads to the best outcomes.
If you have a meeting at the bank tomorrow about taking out a loan, today would be a really good time to brush up on how loans work and what you can afford, given the current state of your finances.
This research provides evidence that formal education works and financial incentives alone don’t necessarily lead to learning.
It suggests that the best way to start making smarter money choices is by focusing on educational resources that break down financial concepts clearly and simply.
This is great news as it validates the approach I take with MOAM, which is focused on reviewing the research on behavioral finance and investing and breaking it down into simpler terms that everyone can understand.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
Nice
Learning by doing is the way. I was surprised, however, that the voucher method didn't improve their financial knowledge.