April is financial literacy month, and it’s dedicated to educating people on basic money concepts such as budgeting, saving, debt, compound interest and investing, just to name a few. Given that only 57% of adults in the United States are deemed to be financially literate, it’s certainly something we need to address. Improving the financial literacy of all people is a noble cause, but many questions remain surrounding how to do it.
Google financial literacy and you will find that there is no agreed upon definition, no standardized way to measure it, and no consistent process to ensure people are learning the right skills and how best to apply them in real-life situations. If you can’t define financial literacy, you can’t teach it. If you can’t measure it, you certainly can’t manage it or even judge whether financial literacy programs are improving financial health and wellness.
The one thing we do know is that the lack of personal financial knowledge costs U.S. households over $350 billion per year. Financial literacy is critically important to making healthier financial decisions, but financial literacy alone will fail because it’s only one piece of a much bigger puzzle that’s part psychology, part life and part money.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Here are the three reasons why financial literacy, by itself, will fail.
1. Financial literacy is the wrong starting point
While there is no commonly agreed upon definition of financial literacy, there is one common theme among all of them: Poor financial health is due to a lack of education. It’s considered a knowledge problem. Proper education is important, but financial literacy programs focus on the facts and figures and ignore our feelings (our emotions), which ultimately drive our behaviors. It’s a mindset problem and not only a money and math problem.
For many, money is a cause of stress, worry, fear and even shame and embarrassment. Deeply rooted emotional issues and limiting beliefs about money will keep most people from making healthier decisions with it. More often than not, financial literacy programs address the technical aspects of money (the thinking and financial parts) and ignore the attitudes, beliefs and values (the emotional and psychological parts) around it. When 90%+ of the decisions we make are driven by emotions and not by logic, existing programs are starting from the wrong point.
2. Financial literacy doesn’t lead to behavior change
Tony Robbins has been quoted as saying, “Knowledge is not power. Knowledge is only potential power. Action is power.” It’s not what you know, it’s what you do with it that matters. Financial literacy and the programs that teach it focus on potential power (financial knowledge) and fail to provide real power (changes to behavior and actions) that can put people in control of the lives they want to live. In fact, studies have shown that improved financial literacy can explain just 0.1% of behavior changes that occur.
Our behaviors are driven by a complex web of emotions, attitudes, beliefs and values, and, without a clear understanding of how they drive our behaviors, more financial information will fail to produce real change. In short, information does not equal transformation. Financial literacy programs today are hacking at the leaves of change when they need to focus on the root of the problem and better integrate knowledge with healthier behavior.
If you don’t change your mindset (how you think), your habits (what you do), your systems (how you do them) or your environment (what shapes your choices), all the information in the world won’t lead to better financial outcomes. All of that being said, it’s important to note that in some cases there are greater systemic issues that limit one’s ability to choose or to change circumstances, so the push for greater financial literacy is just the tip of the iceberg.
3. It’s only one aspect of a much bigger financial (and life) picture
There is a continuum of care with financial advice that can lead to improved financial health and wellness, and financial literacy is only one piece of it. Improved financial well-being occurs when all the pieces of the puzzle are put together (or integrated) to support the bigger picture, and these include:
- An understanding of beliefs and attitudes, cultural and community values, and behaviors and sentiment.
- Appropriate levels of literacy, education and knowledge on various money-related topics.
- Access to the tools, resources and money management systems through which this knowledge can be applied.
- The right environment to help develop healthier habits and support ongoing behavior change.
- Ongoing financial planning to adapt to a dynamic, increasingly complex, and constantly evolving life – personally, professionally and financially.
Financial literacy and the programs that support it fail because they focus on one aspect of this continuum of care. It mirrors a problem in the financial services industry where advice tends to focus on one aspect of our financial lives: our investments. We need advice and guidance in all aspects of our lives and ongoing support, and often course corrections and adjustments, to achieve true financial health, wellness, security and independence.
The greatest challenge surrounding financial literacy
The biggest challenge facing not just financial literacy but improved financial health and wellness comes down to three words: access, inclusion and integration. Greater access to financial tools, resources and expert advice unlocks the door to opportunity. Greater inclusion brings all people and communities through the door to participate in better education and economic ecosystems (lack of inclusion is a broader systemic issue). Greater integration takes the individual pieces of the continuum of care, threads them together and truly drives greater financial health and prosperity.
Financial literacy alone will always fail to improve overall health and wellness, just as advice limited to investments will fail to help people eliminate financial stress, make smarter, more informed decisions in all aspects of life, and put them in control of the lives they want to live.
If we want to create real change, we need to create greater access to financial advice and ensure the inclusion of all people and communities. The key is to focus on the integration of all parts and not just any one of them, such as financial literacy, in isolation.
-
A Lesson From the School of Rock About the MarketsIt's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
I retired at 65 with $7.8 million and feel like I over-saved. My 40-something son is on the same path. Should I tell him to reconsider?We ask financial experts for advice.
-
A Lesson From the School of Rock (and a Financial Adviser) as the Markets Go Around and Around
It's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
The OBBB Ushers in a New Era of Energy Investing: What You Need to Know About Tax Breaks and MoreThe new tax law has changed the energy investing landscape with expanded incentives and permanent tax benefits for oil and gas production.
-
Ten Ways Family Offices Can Build Resilience in a Volatile WorldFamily offices are shifting their global investment priorities and goals in the face of uncertainty, volatile markets and the influence of younger generations.
