Managing your money can get so complicated, it can feel like learning a new language. Will higher interest rates affect FHA loans? Should you listen to your fantasy baseball buddy about NFTs? What on earth is infinite banking life insurance??
In recent remarks to the Treasury Department’s Financial Literacy and Education Commission, Rohit Chopra, director of the Consumer Financial Protection Bureau, highlighted how hard it can be to find out about personal finance — and how some forms of financial education can be harmful. “Having outdated, hard-to-find financial resources causes consumer frustration, discourages engagement, and drives people to illegitimate resources that play to their biases,” Chopra said.
We talked to experts about where financial education falls short and how you can increase your financial knowledge.
Origins of the U.S. financial knowledge gap
Levels of financial knowledge are low in the United States. In a nationally representative survey, the percentage of people who could answer four out of six financial knowledge questions correctly was 44% in 2015 and 40% in 2018.
But there are also racial, ethnic, and gender gaps in financial knowledge. A Pepperdine University review of 33 research papers published since 2010 finds that white people score 19% higher on average than Black people in measures of financial knowledge, and men score 12% higher than women.
“Financial education as it is now, it perhaps doesn’t address the financial knowledge needs of minorities,” says Luisa Blanco, a professor of public policy and economics at Pepperdine University, and one of the authors of the review, along with Cruz Garcia and Rosemary Gutierrez, graduate students at Pepperdine.
Education explains only part of someone’s level of knowledge and behavior, Blanco says. Social and economic factors have a big influence. Education without taking those factors into account can increase financial knowledge gaps.
For example, you might hear that payday loans are bad. But if your neighborhood doesn’t have a traditional lender or you don’t make enough money to qualify for other forms of credit, that information won’t help you much. Blanco works with Latino immigrants as part of her research and has found that Spanish-language resources are limited for financial products.
Many states are requiring personal finance education in schools, but that could also lead to unequal outcomes, says Abdullah Al Bahrani, interim associate dean of graduate studies and research at Northern Kentucky University’s Haile College of Business. “We already know from the literature in education that resources vary by ZIP code level,” says Al Bahrani, whose work was cited in Blanco’s review.
A school-based personal finance course might not consider differences in how different cultures or income levels handle money. With many forms of education, Al Bahrani says, “The assumption is already made that you’re not using your resources efficiently,” without considering that some people might already be maxing out their financial resources.
“We’re not saying that financial education does not work,” Al Bahrani says. “We’re saying that it works by varying degrees and we have to ask why that might be the case.”
How to close the American financial knowledge gap
While more states are requiring personal finance education in schools, many of these mandates don’t come with extra funding, Al Bahrani says. As a result, schools with fewer resources might not be able to adequately train teachers to teach personal finance. Any required personal finance education should come with extra funding, or it won’t be effective in closing the gaps, he says.
People need to learn more than how to budget or file their taxes, Al Bahrani says — they need to learn how to make decisions with their limited resources. That requires an understanding of the broader economy and how it affects your financial resources. For example, a recession might not be the best time to look for a job, but it might be a good time to buy stocks since prices are low.
“You exist within the overall economy,” Al Bahrani says. “If you want to maximize your well-being, you need to learn how the economy works.”
Financial resources need to go beyond a one-size-fits all approach, Blanco says. You might need differing forms of information depending on your age, income level, or gender. You can teach a high school kid about retirement, but if they won’t need the information until years later, it probably won’t be very helpful.
“We need to think about financial education with a more targeted approach,” Blanco says.
Better financial education is only part of the equation, she says. Regulators also need to hold financial companies accountable for making sure their offerings are equitable. “We need to think about whether the financial sector is offering financial products that meet the needs of minorities,” she says. (Blanco has worked for the Consumer Financial Protection Bureau, but says her views don’t necessarily represent the agency’s.)
How to improve your own financial knowledge
There are plenty of places to turn when it comes to financial advice, from your local bank to TikTok. The most reliable source might be a professional financial advisor who can help you navigate your personal financial situation, Al Bahrani says. While in the past, financial advisors were exclusively for rich people, fee-only models have made them more affordable for more people. You can find an accredited fee-only financial advisor on a service like the Garrett Planning Network or XY Planning Network.
Al Bahrani also suggested checking with your local university for financial education programs. Many states have centers for economic education staffed by unbiased educators. For example, Al Bahrani directs the Center for Economic Education at Northern Kentucky University.
“We do a lot of programming at the K-12 level, but we also host seminars for participants to understand specific problems,” Al Bahrani says.
If you’re lost when it comes to money, you’re not alone. Finances are really complicated, and all the decisions you have to make can be overwhelming. Step one to taking charge is making sure you’re getting the best information.
“With choice, there’s power,” Al Bahrani says. “But to use that power, you have to be informed.”
Image: Marko Geber / Getty