Financial Literacy Impossible for the Masses

[Jeremy]

My wife is one of these people who isn't lacking in the intelligence department, but it is impossible for her to understand anything about finances. She might be a great attorney, but even though she spends money every day, she has the faintest idea about the most basic concepts.

We were flipping channels on Saturday night and I came across the Millionaire Inside on CNBC and saw David Bach talking, so I stopped on the channel for a minute. He was preaching the pay yourself first idea, and my wife actually laughed and called him an idiot. She said, "What is this guy smoking? If you pay yourself before you pay your bills, you'll just end up not having enough money to pay your bills!"

I tried to explain how it works, but it was just a deer in the headlights stare. She eventually got frustrated and told me to turn the channel. I told her I had a copy of his book and she could probably read it in about an hour and have a complete new understanding of how easy it is to create wealth, but she told me to shove the book somewhere that would be quite painful.

She is like a lot of people. Some just can't understand it, others just don't want to.

 

[Spanky]

It appears to me that math phobia has intellectually crippled a significant fraction of women, in particular.

This may be true. My daughter is finishing up her differential equation class. She says math is easy but physics is harder to grasp.

 

[Bestwifeever]

Do monkeys pick stocks? All the time, apparently:

The stock-picking monkey strikes again - BloggingStocks
and
Primal picks :: CHICAGO SUN-TIMES :: David Roeder

And presumably Mr. Monk is also financially illiterate....

Now that "Flip This House" on tv seems to have changed its focus from "Look what you could to too!" to "Look at what these fools are doing!" it probably is time to have a show featuring real live people starting their nest eggs. "My First 401K" or something....

 

[W2R]

This may be true. My daughter is finishing up her differential equation class. She says math is easy but physics is harder to grasp.

Mine too!! Women in my family always make straight A's in calculus/diff eq. (Men too!)

But at least in my generation, math phobia is apparently a problem for a significant fraction of American women in the general population (not all). I don't have a link to back up that statement, though I suspect it may be common knowledge. I have known several women that I would classify as "math phobic" so I have anecdotal evidence. I think it has to do with their upbringing, though I am not sure. My family always expects both boys and girls to excel in math, so I never had any doubt that I would. Some other women my age were not so lucky.

 

[Walt34]

Most students simply develop a permanent dislike of mathematics, and a vague sense of inadequacy in financial matters.

Boy, that was me!

OTOH, one of the two most useful classes I took in high school was a basic financial class; the difference between a savings & checking account, what compound interest is, rudimentary investment stuff, and some basic business law issues aimed at the consumer level. Stuff everybody needs to know, but no one had ever told me.

The other most useful class was typing, but I only took that one because I knew it would be full of girls.

 

[Fireup2020]

Interesting thread. My math & physics instructors in high school were all female. There were several fellow female engineering geeks in the Engineering Club. I am in the camp of "I really do not care to learn the finite nuts and bolts of detailed personal finance"... I don't even balance a checkbook! (don't understand the concept!) I can tell you exactly how much is there - where everything comes from and goes to...but that sit down, number crunch - add "this" - subtract "that" until a majic number appears like my grandfather and father did? Not a clue! Nor do I automatically know my ROR's without checking the statements and playing with a calculator. People tell me I am financially savvy! Go figure!

Another eye opener? Many folks I meet who work in accounting/finance only know their little niche in the corporate financial section - and very little about personal finance. fascinating!

 

[headingout]

I think math is secondary. First comes a simple rule that fortunately my wife and I were raised with: "spend less than you make." (Also known as LBYM.) This requires being in control of your desires for material things. Add to that consistency and the ability to make important decisions without emotionalism. Then, perhaps, comes math as your savings increase and you seek to optimize your investments. Unfortunately, even from this viewpoint, less than 10% of the population is qualified to manage their own money. The sad truth is that money management is intensely personal: everybody is going to do it their own way, even if that means ignoring it or delegating the authority to a high-fee "professional." I'm fairly conservative politically but a firm believer in social security: Most of the population genuinely needs a safety net. Unfortunately it's a fairly weak net these days....

 

[FinanceDude]

The point is this: In many cases, the people teaching it will have an interest in promoting investment choices with high fees, and what they teach will be biased.

I did a fair number of seminars in my career as an FA, and never did a product-push seminar.

One of them was "Smart Women Finish Rich" by David Bach........I got some good clients from that one..........

 

[armor99]

I really don't think it is as bleak as you portray. Honestly, if someone can read "The Wealthy Barber", they're about 80% there.

You don't need any more math than what's required to tip at a restaurant. Every payday, have 20% of your money put into a savings account. When that gets to be more than 6 months living expenses, start putting it into a few Vanguard mutual funds. Which ones? Who cares, just pick a couple that sound good. Total Market Index? Perfect. Reit something or other? Cool. International thingamajig? Awesome.

When the statements come, just throw them in a big filing cabinet without opening them. What ever you do, do not turn on CNBC.

Ten years later, the person following this plan is going to be in pretty good shape.

We spend an awful lot of time on this board discussing the optimal investing strategy. We talk about asset classes, rebalancing, buckets, expense ratios, etc., but just starting is 80% of the issue. All of those things are important, but unless they are handled terribly, they will work out ok. It's not ideal if people end up in mutual funds with a 2% expense ratio, but they'll still end up great compared to doing nothing.

Note-- this is about the plan I put my wife on in 2004 when we first started dating. She was frozen by all the choices in her 401k, so I just picked four Vanguard index funds and told her to put her money in those ( 40% S&P500 index, 20% small-cap index, 20% mid-cap index, 20% REIT index). Four years later and it's become a decent amount of money. In twenty years it will be a massive amount of money. It's not perfect, but it is good enough.

A very EXCELLENT point. And one that should be pointed out a bit more intensely. Anyone that is mentally competant (and by that I mean people that can drive a car, vote for the president, and own property), can gather enough information for themselves if they truly want to, to be able to retire somewhat comfortably. To really understand the ins and outs of flight mechanics certainly does take a PHD. But the basics can be learned using plain language in harldy any time at all. It is much the same way with finances. A person may not understand all of the fancy terminology, but if broken down the ideas are not too complicated. In addition, you do not need to know every little part of finance, just the pieces that you need to use for yourself.
I believe the primary reason for financial illiteracy is a DIRECT failure of the public educational system. I had not a single class on it at either the HS or college level. I beleive that such courses should be just as mandatory as english or mathmatics. I believe that the traditional three legs of reading, writing, and arithmetic, should have finance added to it. People are often frightened of things they are not familiar with. If you start young enough talking about investment, retirement, etc, then these topics would not longer hold the fear that they do now.

 

[Milton]

One of the two most useful classes I took in high school was a basic financial class; the difference between a savings & checking account, what compound interest is, rudimentary investment stuff, and some basic business law issues aimed at the consumer level. Stuff everybody needs to know, but no one had ever told me. The other most useful class was typing.

I believe it. Such classes ought to be taken by every student. Sadly, there seems to be a prejudice that they are only for dummies, with the smart (i.e. college-bound) students taking the theoretical courses.

 

[hankster]

I've known a number of people who were highly educated and very good with numbers but their financial lives were an absolute train wreck. I finally understood that they did not have control of their behavior. They were very impulsive and/or undisciplined. There was an inability or an unwillingness to look 5, 10 or 20 years down the road and see the results of poor money decisions made today. I know others who are less educated, yet they are on their way to substantial wealth because they have common sense, LBTM, and have a long term game plan with long term goals. Simple addition and subtraction serve them well.

 

[Milton]

I've known a number of people who were highly educated and very good with numbers but their financial lives were an absolute train wreck. I finally understood that they did not have control of their behavior. They were very impulsive and/or undisciplined. There was an inability or an unwillingness to look 5, 10 or 20 years down the road and see the results of poor money decisions made today.

Sounds like a cop-out to me. "I would like to save and invest, but I just can't manage it; I have no self-control".

There are exceptions to every rule, but generally speaking, people do what they want to do. Fat people remain fat not because they are impulsive or undisciplined, but because they enjoy eating more than they want the health and lifestyle benefits of losing weight. Similarly, the people you're talking about probably understand full well the consequences of their actions, but they value keeping up with the Jones more than the freedom of financial independence.

 

[chinaco]

Some sort of rudimentary Personal Finance class should be a required High School subject for students. It should cover the basics from personal budget, loans, up to very basic investing concepts.

Seems like a no-brainer. It would not turn people into investment geniuses, but ir could outfit them with some basic concepts. It is fundamental skill that every American needs.

 

[FinanceDude]

Some sort of rudimentary Personal Finance class should be a required High School subject for students. It should cover the basics from personal budget, loans, up to very basic investing concepts.

Seems like a no-brainer. It would not turn people into investment geniuses, but ir could outfit them with some basic concepts. It is fundamental skill that every American needs.

I tried to do one with the local high school, but the School Board nixed it...........

 

[brewer12345]

I tried to do one with the local high school, but the School Board nixed it...........

Really? Why?

 

[HFWR]

I had a few finance classes as part of the MBA curriculum. One of the classes was totally useless. It was totally mathematical. Here is an example of a similar (not the same) book that was used: Stochastic Calculus and Financial ... - Google Book Search

I took "Operations Research", a class where the primary purpose was to solve multiple equations with multiple variables, using some gee whiz matrix method that I couldn't explain then, let alone now. I was not very good at it, but the Bell Curve saved me.

A computer could undoubtedly solve these thingies instantaneously...

Anyway, psssst, Wellesley, target retirement fund or something. Let the computers do it.

 

[Milton]

A (somewhat) related article:

FT.com / Columnists / Lucy Kellaway - On monetary matters, nuttiness kicks in.

 

[TromboneAl]

They fling their poop at the stock tables and buy the smears.

That's how Warren Buffett does it.

 

[Bestwifeever]

Once I taught a semester-long high school class called Consumer Education that covered things like budgeting. It was a required class back when you had passbook savings and dinosaurs in your backyard.

FinanceDude, if I were a school offical or in a school's parent-teacher group and learned someone who made a living as a FA wanted to talk to the students about finance I would perceive it rightly or wrongly as an indirect (or direct) way for the FA to foster new clients (the kids' parents, obviously not the kids themselves, especially if there would be any contact info provided on worksheets or something like that that might make its way into their homes) and be against it. So I can see what your well-intentioned offer was not accepted.

 

[rs0460a]

My thoughts on this...

When I retired last year, I looked for volunteer opportunities. One of them was to hold "financial management" classes for the local (non-profit) comsumer credit orgination.

I did the training, and became "certified" (ok, I have a piece of paper with the word "certified" on it ).

Anyway, it's been a year, and I have yet to be called to hold any classes. Apparently, folks don't need classes in managing their money, and they are quite capable of spending it .

So, after almost a year of retirement, I deliver (through the local "meals on wheels" organization) twice a week, and give blood (every 8 weeks) as my "giveback to society".

- Ron

 

[unclemick]

1. Spend less than you make.

2. Faith and Patience. Financial intelligence has nothing to do with it.

3. 'God Looks After Drunkards, Fools and The United States of America.'

4, The rest is just hormones - do not let anybody tell ya different.

heh heh heh - how bout that Kansas team - and I hardly ever watch basketball! . A good financial education should take less than 30 seconds - if you speak slowly.

 

[FinanceDude]

FinanceDude, if I were a school offical or in a school's parent-teacher group and learned someone who made a living as a FA wanted to talk to the students about finance I would perceive it rightly or wrongly as an indirect (or direct) way for the FA to foster new clients (the kids' parents, obviously not the kids themselves, especially if there would be any contact info provided on worksheets or something like that that might make its way into their homes) and be against it. So I can see what your well-intentioned offer was not accepted.

Well, I served on the Chamber Board with the principal, who was in my corner. None of my materials contained any reference to my firm. Oh well, I tried.......... Maybe it's better that the kids get into $5,000 worth of credit card debt by the end of their first year of college...........

 

[52andout]

Interestingly, one of my DIL's who put herself through university in three years honestly said to me "I had no idea you could pay off a house early." She also said about 401K's and IRA's "No-one in my family does that."

Since she has been connected to us she has a 401K and is surprised how much the match has improved the bottom line. She is starting to pay a lot more attention since her parents have a snowballs chance to retire at any reasonable age. I don't think she actually read "The millionaire next door" but I did give her a copy.

Some of my friends have asked that I manage their money but I won't as they can see we have no debt and seem to have a nice lifestyle. Sorry, I figured it out by reading and keeping it simple and there is no way I would take on that responsibility. Like some posters have said, LBYM, basic asset allocation, paying attention to fees, no crazy investments we don't understand and not panicking. It is hard to go too wrong with those simple rules.

 

[Milton]

Well, I served on the Chamber Board with the principal, who was in my corner. None of my materials contained any reference to my firm. Oh well, I tried.......... Maybe it's better that the kids get into $5,000 worth of credit card debt by the end of their first year of college...........

I don't know what happened in your case, but your story reminded me of this extract from Early Retirement:

You were probably able to retire young because you are vastly more able than the average person. Now should be an ideal time to find a non-profit organization whose goals you share. You would expect them to be delighted at your offer to pitch in as a volunteer, bringing the skills that enabled you to start and grow a profitable enterprise....

Non-profit organizations exist to provide their staff with great jobs and the fun of making decisions and spending money. The folks who work at a non-profit organization are very interested in drawing a salary higher than their skills and working hours would command at a for-profit enterprise subject to competition. They are not especially interested in efficiency or accomplishment. If you've come from the commercial world, in which McDonald's must be ruthlessly efficient for fear of being destroyed by Burger King, working with or in the typical non-profit organization will likely drive you to insanity.