For years, we have been told that the solution to America’s financial literacy challenge was to teach people about money at a young age and hope it sticks.
The general thought was that if we all understood budgeting, investing, credit, debit and saving early on, we would be more naturally inclined to make better financial decisions down the road.
That has not proven to be true.
Decades of research have revealed that reality is much more complicated. The traditional form of financial education is not ineffective because people cannot learn these financial concepts at a young age, it is ineffective because we are being taught these concepts years before they are actually applicable in our lives.
Research increasingly shows that financial education is most powerful when it is delivered immediately before someone faces an important decision. In other words, the future of financial education is not simply providing more information. It is providing the right information at exactly the right moment.
Another misconception about financial education is that increasing knowledge will automatically create better financial outcomes. The relationship between general knowledge and behavior is much weaker than most would assume.
A major meta-analysis reviewed 168 studies involving more than 200 individual research samples, and it found that financial education interventions explained only about 0.1% of the variability in actual financial behavior (2014). To put that into perspective, if you observed 1,000 differences in people’s financial behavior, only one of those differences would be explained by traditional financial education programs.
However, the issue is not that financial education doesn’t increase overall knowledge. It is that obtaining knowledge and actual behavior are different things. Someone may understand that carrying credit card debt is expensive, yet continue to make minimum payments. Financial decisions are not made in the classrooms; they are made when in the real world when you are receiving paychecks and have bills to pay.
This gap between knowing and doing is where traditional education has failed.
Another major way in which the traditional financial education model has failed so many people is its timing problem: it is typically delivered far too early.
A student may learn about credit scores in high school but not have the need for a credit card until years later. Even in college, many students are taught about investing before they have consistent income to invest. By the time those decisions need to be made, much, if not all of that information may no longer influence behavior.
Just like any other form of education, if you don’t use it, you lose it. Even large educational programs with many hours of instruction have shown negligible effects on behavior ~20 months or more after they were administered (2014). This creates a fundamental challenge: financial education is not just about remembering information. It is about applying specific information during moments when choices are being made.
Just-in-time financial education takes an approach that eliminates all of the issues that the traditional model creates. Instead of teaching financial concepts long before they are relevant it provides guidance immediately before a person needs to make a decision. The information becomes more valuable and is much easier to apply to real world decisions because of its immediate relevance.
Research shows that the timing of education can dramatically change its effectiveness. Financial education delivered close to the point of decision can produce effects that are two to three times larger than education delivered earlier (2014). Additionally, these lessons are much more likely to stick with you throughout your life because you actually applied and benefited from them.
Even financially knowledgeable individuals can make mistakes when faced with complex choices. Research in behavioral economics shows that complexity can create significant decision errors because people rely on mental shortcuts when choices become overwhelming (2014). Understanding financial principles is different from being able to evaluate dozens of pages of loan terms or investment options in a correct and timely fashion.
The purpose of financial education should not simply be to create people who understand financial vocabulary. It should help people make better decisions when those decisions have real consequences.
The future of financial education is not simply more information. It is better timing.
References
Fernandes, D., Lynch, J. G., & Netemeyer, R. G. (2014). Financial Literacy, Financial Education, and Downstream Financial Behaviors. Management Science, 60(8), 1861–1883.
Fernandes, D., Lynch, J. G., & Netemeyer, R. G. (2014). Meta-analysis of 168 papers covering 201 studies on financial literacy and financial education outcomes.