Via Naked Capitalism, I’ve discovered several articles about the uselessness of ‘consumer financial education’. I’ve been to various classes on ‘personal finance’, and I agree much of it is pretty useless.
At the same time, I think that being financially literate can make a big difference in one’s financial wealth.
After thinking about this for a while, I figured it out – the kind of ‘financial literacy’ which makes a difference is the kind which includes an understanding of how systems (the financial system, the political-economic system, etc.) work.
One of my tax instructors said that he knew of cases of families putting 80% of their income towards mortgage payments (this was during the peak of the housing bubble), and that they qualified for a mortgage because they had taken a class on making a budget. He said that, no matter what class you take, if you’re paying 80% of your income towards mortgage payments, you’re financially screwed.
I took college course on housing policy. An entire class was dedicated to explaining how primary and secondary mortgage markets work. And there was no explanation of the sophistamacated mortgage markets of the housing bubble – it took just that much time to describe the vanilla mortgage markets of the 1950s. During the class, I thought ‘everybody who takes out a mortgage should understand how these markets work’. Then I thought ‘this is news to most students in this class, and most students in this university, let alone most U.S. citizens, will never understand how even a vanilla secondary market works’. That was a scary thought.
During the housing bubble, my family sold off as much of its property in South Florida as it could, and would have sold it all off if certain people (not in my family, but still involved) hadn’t acted in bad faith AND believed the property ‘boom’ in Florida would go on forever. This choice, to sell high during the bubble, made a huge difference in the collective financial wealth of my family. It was a painful choice, since some family members have deep emotional ties to South Florida, but the consequences of having that property after the housing crash would have been much more painful.
Why did my family do it? My family has been in South Florida for over a hundred years, they know about Florida’s history of ‘sleazy’ property deals, and jokes about ‘beachfront property’ are almost like nursery rhymes. Though they didn’t know what was causing the housing bubble, they could feel that something was wrong with the property market, and that scared them into getting out. In other words, my family has some understanding of how systems work in South Florida.
Financial education which focuses on guidelines and to-do lists with almost no context is not terribly helpful. But financial education which explains systems is truly valuable. It’s not just valuable financially, it’s also valuable for psychologically.
Of course, if citizens understood the system better, they might try to change it.