Financial literacy is a big deal. Dozens of states are offering financial education, and many analysts see teaching financial literacy as the final solution to the money woes of Americans. But for all the attention we pay to teaching financial literacy, we seldom discuss financial illiteracy education: the way we teach bad financial habits.

If we look closely, we find that financial illiteracy education is everywhere in our society. It starts at a much earlier age and is much better funded than financial literacy education. Is it really a surprise that so many Americans are financially illiterate?

How Big Is the Problem?

These problems are often blamed on a lack of financial literacy. There is evidence to support that claim. The S&P financial literacy survey says that 57% of American adults can give correct answers to five basic financial literacy questions. That’s high by world standards but still leaves 43% unable to answer.

A FINRA survey indicates that 80% of Americans aged 18 to 34 failed a basic financial literacy quiz.

Those figures do indicate a problem, but the source of the problem is less clear.

What Is Financial Literacy?

What Is Financial Literacy?

The dictionary definition of financial literacy is pretty simple:

Financial literacy is the possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.

The Financial Educators Council has a broader definition:

Possessing the financial knowledge, behaviors, systems, team, and plan to confidently take effective action that best fulfills an individual’s personal, family, and global community goals.

National Financial Educators Council

So, we see that there are two basic components to financial literacy: knowledge and action. The traditional approach to financial literacy education focuses on the premise that action comes from knowledge: that if people understand money and the difference between good and bad financial habits, they will abandon bad financial habits and adopt good ones.

This premise, in turn, is based on the assumption that the people we are teaching are essentially a blank slate, an empty void that has to be filled with knowledge to replace ignorance and lead us to the promised land of good financial management.

Recently, we’ve begun to recognize that this assumption isn’t accurate. There is no blank slate: we all have attitudes and habits that we have learned, often unconsciously.

The discipline of financial therapy has evolved because we are increasingly recognizing that confronting and managing existing habits and attitudes is just as important as building new knowledge. Extensive research has been done, for example, on the way that financial attitudes can be passed along through families.

Inherited attitudes are important, but financial literacy education has another hurdle to overcome that often isn’t recognized: our society actively teaches bad financial habits. We call this process financial illiteracy education.

What Is Financial Illiteracy Education?

What Is Financial Illiteracy Education?

Any deliberate attempt to teach bad financial habits can be considered financial illiteracy education. We don’t deliberately teach bad financial habits in school, but school isn’t the only place we learn.

Parents and teachers can teach and preach about living within your means, controlling impulse spending, not basing your self-image on what you own, not spending money before you have it, and much more. The reality is that there are other people making a ton of money by promoting the same habits that financial literacy education seeks to control.

It Starts Early

The American Psychological Association estimates that children view an average of 40,000 advertisements each year and that advertisers spend over $12 billion per year on youth-targeted ads[1].

Advertisers design their messages with great care, hiring professionals in design, psychology, production, and other disciplines to trigger precisely the impulses that financial literacy educators are trying to help people control.

If financial literacy education starts in high school, there’s a good chance that students have been molded by close to half a million deliberate, professionally crafted messages delivering the exact opposite message before they get their first lesson. That’s a huge obstacle for financial literacy educators to overcome.

Peer Pressure Chimes In

The attitudes created by the tsunami of advertising aimed at children are reinforced by peer pressure. Children quickly learn that clothes, shoes, accessories, phones, and other objects are not just tools, they are status symbols that define their place in the social hierarchy.

These messages are not as sophisticated as the financial illiteracy education delivered through advertising, but they can be even more compelling because they are delivered so close to home, and they appeal so directly to the desire for social acceptance.

Adults Aren’t Immune

As we grow to adulthood, the barrage of advertising designed to make us want more continues. Peer pressure doesn’t stop, either. On top of that, another layer of financial illiteracy education comes into play: the promotion of credit as an “easy” answer to the problem of wanting more than you can afford to buy.

Lending is a large and highly profitable business, and lenders are always looking for ways to bring in new customers or persuade old customers to borrow even more. Sellers join the chorus: “What do you mean you can’t afford it? We can finance it. Don’t look at the price, look at this low monthly payment”.

Adults face an incessant barrage of credit offers, from pre-approved credit cards to in-store financing to buy now pay later plans to payday advance apps to storefront payday lenders, there’s a huge industry – hundreds of billions of dollars huge – built on convincing us that whatever we want is affordable. All we have to do is kick the cost down the road a bit.

The temptation is severe enough already. With a range of ready-made “solutions” being thrust on you at every turn, it can easily become overwhelming.

How Does This Affect Financial Literacy Education?

We are not going to stop financial illiteracy education: there’s just too much money in it. It may be possible to seek some controls on what advertisers can say and promise, but people will be urging us to spend and borrow for a long time.

Awareness of financial illiteracy education can affect the way we approach teaching financial literacy. That means recognizing two brought realities.

There Is No Blank Slate

Financial literacy educators often approach their work as a simple problem of replacing ignorance with knowledge as if we were filling an empty glass. The assumption is that once the knowledge is there, the behavior will change, and all will be well.

The problem with this assumption is that the glass isn’t empty. It’s overflowing with desires, impulses, and behavior patterns that have been carefully and deliberately cultivated over many years. Before we can fill the glass with knowledge we have to dump those pre-programmed habits out, and it’s not easy.

Seen through this lens, teaching financial literacy is as much deprogramming as it is education. An essential part of this process is helping the learners understand that they have been programmed and look honestly at where their attitudes and spending habits come from.

There Is No Place for Condescension

The personal finance community is, naturally, committed to personal finance. We tend to think of personal finance knowledge as a basic, normal competency that any adult should have.

That often leads to a subtle but noticeable negative attitude toward people who lack this knowledge or – even worse – those who have the knowledge but still make bad decisions. That attitude often expresses itself as barely repressed condescension.

Of course, there are people – lots of people – who don’t know the basics of personal finance. There are also people who “know” things that they should but still fall into the traps of overspending and abusing credit.

It’s easy to see this as being their fault or evidence of some kind of a character flaw: why else would people keep making bad, self-destructive choices? It’s frustrating to watch, especially in people that we’re close to.

That frustration can easily creep into the personal finance conversation, leading us to talk down to our audience and come across as condescending even when we don’t intend to. This can actively harm efforts to build personal finance knowledge.

It helps if we recognize that bad decisions are not necessarily the result of poor discipline, ignorance, or weakness. They are often caused by decades of lavishly funded, professionally executed manipulation. Average people who are not aware that they are being deliberately taught bad habits have little chance of standing up to the manipulation without help.

Around 60% of American households live paycheck to paycheck. Instead of seeing this as evidence that Americans are really bad at managing money, we should see it as evidence that the people who are actively promoting overspending and abuse of credit are very good at what they do.

Is Personal Finance Education the Solution?

Personal finance education is a popular solution to the crisis facing American households. 30 US states now offer personal finance courses to high school students, and 14 of those states require them for graduation. More states are considering introducing these courses.

This is a popular solution because it’s non-controversial. It may not be a total response, but it’s hard to argue against it. What harm can learning about personal finance do?

The answer, of course, is “none.” Learning about personal finance is not going to hurt anyone, and it may help many people. It’s still not enough, and the emphasis on education can trigger a backlash.

Many younger Americans burdened by low incomes, soaring costs for housing and basic necessities, and student debt are not happy with the lectures. They are understandably tired of being told to cut back on lattes and avocado toast, save money they haven’t got, and plan for retirement when they can’t pay rent.

They have a point. You can’t personal finance your way out of a gross imbalance between income and expenses. We have to recognize that there are real structural issues in the way of financial success and that public policy needs to adapt. Like it or not, personal finance is political.

Still, financial knowledge is always going to help, even if it’s not the sole solution, and surveys consistently show that even families earning six-figure annual incomes are living paycheck to paycheck and struggling with excessive debt.

So How Does This Help?

Financial illiteracy and bad financial habits are not just the result of sloppiness, carelessness, or lack of discipline. They are actively, energetically, and very effectively taught.

Recognizing that fact can help both personal finance educators and individuals struggling with destructive financial habits.

  • Personal finance educators can recognize that their job is not merely to teach good money habits but to help learners recognize and break free from years of potent mental conditioning.
  • Consumers can understand that their problems are not entirely their own fault: they have been professionally manipulated. Recognizing that manipulation is the first and most important step toward breaking free from it.

Understanding the impact of financial illiteracy education won’t make it go away, and it won’t magically transform the personal finance landscape. It does give us one more tool to help us, and others recognize how bad financial habits form and what we can do to reverse them.

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