Does financial literacy actually make you better with money? Critics say 'it's not the salve that people think it is.'

By Hannah Erin Lang

More high schools are requiring financial-literacy coursework, but some experts say it misses the point

Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, if you left the money to grow, would you have more or less than $102?

That's one of three questions designed by researchers Annamaria Lusardi and Olivia Mitchell to quickly measure a person's financial literacy. Got the wrong answer? You're more likely to be "financially fragile," the researchers found in their 2021 survey.

Those who scored higher on the three-question test, they found, were more likely to say they could come up with $2,000 in an emergency.

Researchers and other experts have long drawn this kind of link between financial literacy and financial well-being. In the wake of the pandemic, focus on the role of financial education increased: Companies invested more in financial-wellness programs to help employees weather economic challenges. More high schools started requiring personal-finance classes. Meanwhile, social-media accounts explaining basic financial concepts like budgeting or 401(k)s have won millions of followers.

But some say efforts to build consumers' financial know-how are shortsighted and, by design, limited. They point to research questioning the effectiveness of financial-literacy programs and note how education offers little help to struggling Americans in the absence of wider-reaching policy, regulatory or economic changes.

Some argue that designing financial products that are easier to understand or making professional financial advice easier to access would be more effective than teaching people foundational principles of personal finance.

"I don't think there's any particular harm in teaching [financial literacy], but it's not the salve that people think it is," said Helaine Olen, the author of "Pound Foolish: Exposing the Dark Side of the Personal Finance Industry," adding, "Its role is extremely limited by definition."

As National Financial Literacy Month wrapped up, MarketWatch took a closer look at those arguments. Here's why some experts view financial-literacy efforts with skepticism.

Do financial-literacy programs work?

One frequent critique of financial-literacy programs is that they're simply not all that effective.

An often-cited 2014 paper published in the journal Management Science analyzed the results of 201 studies and found that financial education had little effect on financial behavior, and that even "large interventions" had a negligible impact 20 months later.

Another working paper, distributed by Harvard Business School and published around the same time, found that traditional personal-finance courses taught in high school had no effect on financial outcomes.

From the archives (October 2018): Teaching people about money doesn't seem to make them any smarter about money. Here's what might.

Those findings jibe with what we know about the brain and how learning works, said Philip Fernbach, a marketing professor at the University of Colorado Boulder and co-director of the university's Center for Research on Consumer Financial Decision Making.

"It's pretty hard to get people to master the details of things in a way that's actually useful for them," he said. "If you take a class in high school which gives you specific information ... the idea that you would still have mastery of that in a way that would help you make better financial decisions a couple years down the line is definitely debatable."

Lusardi, a senior fellow at the Stanford Institute for Economic Policy Research and a leading financial-literacy researcher who has advocated for personal finance to be taught in more schools, said that more recent research offers evidence that financial literacy has benefits when implemented effectively.

She pointed to a recent meta-analysis she co-authored, which analyzed the rapidly expanding body of research on the subject. More recent studies have shown that financial literacy affects retirement saving and that it's positively associated with stock-market participation.

As financial-literacy programs have improved, so have results, said Billy Hensley, the president and CEO of the National Endowment for Financial Education.

"It's a young discipline," he said. "The research in the last five years alone gives significant evidence for the measurable change and outcomes that are attainable when [financial education] is done well."

Lusardi said she viewed those earlier studies not as proof that financial education wasn't worth the investment, but as a sign that more research has helped financial educators build more effective programs.

"I don't think we can let young people not have this knowledge," she said.

Does financial literacy help low-income people?

But others say that for people who are struggling the most, financial literacy will always be a partial solution at best.

"Financial literacy is ultimately a way around the fact that even as the financial world became more complicated, there were not adequate protections for people within it," Olen said. "This is very much promoted as a way around regulation."

In the wake of the 2008 housing crisis, Olen noted, financial professionals were quick to pin the blame on consumers for taking out mortgages they couldn't afford.

But some of the financial institutions that promoted financial-literacy efforts during that time were the same lenders that issued predatory subprime loans to consumers, she said.

A similar dynamic is playing out in the aftermath of the pandemic, Olen said, with average Americans taking the blame for their lack of preparedness during the economic shock of COVID-19.

Read more: More high schools are requiring financial-literacy classes. The pandemic may have played a key role.

"Can you save your way around the fact that millions of Americans got thrown out of work with no notice?" she said. "There's no world in which people are going to be prepared for something like that. ... It's not people's behavior that is responsible for it."

She isn't the only one to notice this. Agata Soroko, now a postdoctoral scholar with the Civic Engagement Research Group at the University of California, Riverside, predicted the same pattern a few years ago.

Her 2020 research reviewing high school financial-literacy standards in the U.S. and Canada found the curriculum was rooted in "ideologies of merit," perpetuating the myth that financial security is entirely self-determined.

"Overall, financial literacy standards framed financial wellbeing as a personal doing while neglecting to consider the broader social, economic, and political forces influencing financial outcomes," the paper's abstract said.

Others contend that a focus on education can downplay the role that systemic inequalities like the racial wealth gap can play in an individual's financial life. Limited means often lead members of marginalized groups to make harmful financial choices - not the other way around, economists Darrick Hamilton and William "Sandy" Darity argued in their 2017 research, which was published in the Federal Reserve Bank of St. Louis Review.

"Much of the framing around wealth disparity ... focuses on the poor financial choices and decision making on the part of largely Black, Latino, and poor borrowers, which is often tied to a culture of poverty thesis regarding an undervaluing and low acquisition of education," the economists wrote. "That framing is wrong."

"It is more likely that meager economic circumstance - not poor decision making or deficient knowledge - constrains choice itself and leaves borrowers with little to no other option but to use predatory and abusive alternative financial services," they said.

From the archives (January 2023): Reparations for Black Americans will cost up to $14 trillion and 'could finally lead to closure,' economist Sandy Darity says

Brent Weiss, co-founder of the financial-planning business Facet, says he supports financial-education efforts. But he knows they won't succeed in a vacuum.

Equipping consumers with financial knowledge and skills won't be much help if that education doesn't also teach them how to handle the complex emotions that can come up when we talk about money, he said. Weiss also thinks more Americans should have access to professional financial advice, even though these advisers target mostly higher-net-worth clients.

"This isn't just about telling someone what to do. ... It's about asking, 'What else do you need?'" he said. "Literacy is great, but we have to then tailor it and meet people where they are."

More from the archives (April 2023): 'Bootstraps' mentality doesn't work without tackling systemic inequality first, 'The Black Agenda' editor says

There are some educational interventions that could help those at the lower end of the income-distribution spectrum. Educating consumers on certain kinds of fraud or teaching them how to negotiate or dispute debts are examples of some effective interventions, said J. Michael Collins, a professor at the University of Wisconsin-Madison and faculty director of the school's Center for Financial Security.

But education and regulation are "complements, not substitutes," he said.

"If you don't have enough money to get by, you still won't have enough money to get by, even if you are able to fix credit problems and those kinds of things," Collins said.

'Part of an ecosystem'

Many educators and advocates of financial literacy are aware that it's not a singular solution for improving people's financial health, Hensley said.

"I have never once in 14 years heard one of those people say financial literacy is the only thing you need," he said. But there's a reason, he added, that 80% of Americans surveyed by NEFE in 2022 said they wished they had taken a personal-finance course in high school.

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