Everywhere you turn these days, some bigwig policymaker is talking about the importance of financial literacy education. Here’s Ben Bernanke doing it. And there’s Tim Geithner and Arne Duncan. Even the President. It’s easy to understand why we feel like we need this, what with all the bad financial decision-making of recent years. The only problem is, there’s a fair amount of evidence that a lot of what we do to teach better financial habits, like courses in high school, doesn’t work. Some research has shown that financial education is more likely to stick if it’s focused on one topic and comes right before a person makes a related decision—learning about mortgages as you’re house shopping, say, or getting a lesson in compounding interest along with your credit card.
But maybe there’s a simpler approach. Maybe we should ignore real-world complexity altogether and just teach people financial rules of thumb.
A presentation at that microfinance conference last week got me going on this train of thought (although I’m by no means the first to ride it). In this experiment, researchers taught one group of small-time entrepreneurs in the Dominican Republic formal accounting, including double-entry bookkeeping, cash and working capital management and investment decision-making. Another group was taught simple rules of thumb, like “keep personal and business accounts separate” and “write everything down.” The results:
People who were offered rule-of-thumb based training showed significant improvements in the way they managed their finances as a result of the training relative to the control group which was not offered training. They were more likely to keep accounting records, calculate monthly revenues and separate their books for the business and the home. Improvements along these dimensions are on the order of a 10% increase. In contrast, we did not find any significant changes for the people in the basic accounting training. It appears that in this context, the rule-of-thumb training is more likely to be implemented by the clients than the basic accounting training.
When I caught up with Greg Fischer to ask what the U.S. consumer-class take-away might be, he was appropriately modest about his findings and hesitated to draw any universal conclusions. I lack such compunction, so let me say that I think this result contains a very important piece of wisdom. People live complicated, busy lives and the learning they are most likely to put to use is that which is simple to remember and implement. In Fischer’s study, some microentrepreneurs received follow-up training at their place of business: an educator stopped by to reinforce concepts and to answer questions. Once this happened, the group that received the formal accounting training applied what they had learned. But unless we want to set up a system in which your high school consumer finance teacher pops back up just in time for your first mortgage, rules of thumb might be the way to go.
And, actually, we already have many them. We just need to dig them out of the dustbin we tossed them into during the free-money euphoria. For example, don’t spend more than 2 1/2 times your annual salary on a house. And don’t take out more student loan debt than you expect to earn in your first year on the job (assuming you have the option). As Jack Bogle once said: ”Your bond position should equal your age. I won’t tell you this is the best investment advice you’ll ever get, but the number of pieces of advice that are worse is infinite.” It’s not terribly complicated to figure out what we need to teach. We just need to jump to it.
A survey released today by Javelin Strategy & Research, which serves financial institutions, found in August that nearly one in five Americans doesn't monitor or manage their personal finances. That rate is double what it was just a year ago. Despite the fact the recession has made it more important than ever to carefully track our money, when it comes to personal finances, 19% of Americans stuck their head in the sand. A year before, another survey had the figure at just 8%.
More anxiety-induced news: The percentage of Americans who say they sometimes log onto their checking account balances with their banks' websites dropped to 46%, down 13 points from 59% a year ago. Even those who track their money by pen and paper dropped, from 50% to 46%.
"It's a natural human reaction to stress: 'Maybe if I don't look at it, it will go away.'" explains the study's co-author, senior analyst Mark Schwanhausser. "I think you have fewer people checking their finances online because they don't like what they're seeing. 'I'm going to be a financial sleepwalker. I'm not going to look.'"
Schwanhausser's prescription for the problem involves convincing America's major financial institutions that they're doing a lousy job helping make it easier and less stressful for their customers to track their money. "It's not enough to tell you how to fix the toilet," he says. "You've got to have the wrench."
Yet despite the fact that most Americans' money resides at a bank, few banks are interested in furnishing financial planning tools. Right now, Schwanhausser argues, most people are required to log into a wide variety of websites to track their money. For example, 75% of Americans who have a credit card get it from somewhere other than their primary bank, meaning their finances are scattered across many websites, unreconciled.
When people do turn to their bank's websites, he argues, the financial planning tools are nearly non-existent despite the fact our society increasingly demands greater personal control through technology. "Today's online banking is like having avocado green appliances from the 1970s. It just doesn't cut it," says Schwanhausser.
Schwanhausser is using the survey to convince banks that it will actually endear customers to them if they put personal finance tools front and center on their sites, helping customers paint a clear picture of their own financial habits. He's pressing them to develop systems, both on the Web and through mobile apps, that can draw in customers' information from other sites, such as credit cards and mortgage lenders, so financial care-taking can be a one-stop process.
So far, banks and lenders have been slow to use existing technology to make money management a less daunting chore. Part of the issue is that many banks don't want to acknowledge competitors by drawing in account balances from elsewhere. Banks also stand to make money off poor financial planning through penalties and fees. Like a doctor who makes money off treating disease, promoting financial good health does not on the surface appear to be in a bank's best interest.
"You can't manage what you don't measure," says Schwanhausser. "And if the bank's not going to provide it for you, you have to go get it in other places."
He recommends existing aggregators such as Mint.com, which pulls your data from multiple sources and lays it out in spreadsheets and in spending plans, as a model for what all the banks should be doing for their customers.
He also notes that Bank of America's "My Portfolio" and Wells Fargo's "My Savings Plan" are two fledgling, if little-known, bank-created features that are slowly reaching toward the sort of comprehensive personal finance planning features he advocates.
As long as it remains difficult or scary, though, when it comes to their finances, Americans will remain more likely to use the Ostrich Method.
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