The average American doesn’t have a good understanding of personal finance. Financial literacy is abysmally low, across age groups and education levels, with a distressingly low percentage of the population understanding fundamental topics like how to create a budget, how compound interest works, and how to prepare for retirement.
Obviously, personal finance education is a good thing for both individuals and the country overall; people with better personal finance habits are better able to support themselves, and will be better contributors to the economy overall. So why does this lack of personal finance education exist, and what can we do about it?
The Lack of Mandatory Finance Education
Online resources like Money Task Force are dedicated to providing more educational materials, articles, and other resources to the general public, but these are only available to the people who go out of their way to seek it out. For an average American with low financial education, financial education isn’t a major priority.
Most of us didn’t take a “personal finance” or “economics” course in high school, and we may not have even taken one in college. That’s because the American school system doesn’t prioritize financial education the way it does basics like math, science, and social studies. Part of this is due to the system of standardized tests we have in high schools; entrance exams to colleges and state-level evaluation criteria don’t cover personal finance topics, so schools don’t bother to teach it. It’s also a problem of demand; there aren’t many parents, former students, lawmakers, or other influential individuals petitioning for schools to have more personal finance classes.
This problem is compounded in a few different ways. First, there’s a dynastic effect when it comes to personal finance education. Individuals who spend time improving their own personal finance knowledge and skills are highly likely to pass those skills down to their children and grandchildren. Individuals who have no such education can’t give their kids a personal finance education of their own. The older you get, the harder it is to learn fundamentally new concepts, so if you didn’t start with at least a bit of knowledge or experience in the personal finance field, it’s incredibly difficult to start from scratch on your own in adulthood.
The Dunning-Kruger effect may also be working against people here. This effect is a kind of cognitive bias that makes uneducated and undereducated people assess their knowledge of a given topic as being greater than it truly is. In other words, the less you know about a given topic, the more likely it is for you to overestimate your knowledge of it.
Applied to personal finance, the effect could go something like this. You don’t know much about the world of personal finance, but you feel like you have it all figured out; that’s because you aren’t even aware of topics like compound interest and retirement planning existing. If you don’t even know how much you don’t understand, of course you’ll feel like you already know everything there is to know. This effect makes it unlikely for people with minimal financial education to seek it out on their own.
So is there a solution to this problem?
Better personal finance education is a must for a better future, but where do we begin? To start, we can’t simply rely on people to get better on their own. People will either deprioritize personal finance because they don’t understand its importance, or they’ll overestimate their own abilities and refuse to learn anything new.
One solution could be to make personal finance an integral part of our baseline education system. Many parents and former students are petitioning to make these changes across the country; the underlying belief is that if kids are practically forced to learn about personal finance the same way they learn about math, they’ll be more likely to make good financial decisions in the future.
There are some problems with this, however; some studies indicate that even with better personal finance classes, personal finance habits don’t change much. In other words, having better financial knowledge doesn’t typically lead to better financial decisions, at least not on a regular basis.
Instead, the solution may be to increase our prioritization of financial decisions in American culture, or change how we think about personal finance. Learning about it is an important step of the process, but we also need to have a system that supports people applying that knowledge in a real and practical way. This is obviously a tall order; we’re talking about changing an entire cultural perspective here. But if you want to be part of the solution, you can make personal finance a more common topic of conversation, and push for its inclusion in curriculum wherever you live.
Larry Alton is a professional blogger, writer, and researcher. A graduate of Iowa State University, he's now a full-time freelance writer and business consultant.Currently, Larry writes for Entrepreneur.com, Inc.com, and Forbes.com, among others. In addition to journalism, technical writing and in-depth research, he’s also active in his community and spends weekends volunteering with a local non-profit literacy organization and rock climbing. Follow him on Twitter (@LarryAlton3), at LinkedIn.com/in/larryalton, and on his website, LarryAlton.com. To read more of his reports — Click Here Now
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