About a year or so ago I noticed a cliche spreading among a certain set of prominent investors and money managers: that a key obstacle to success among young people today is a lack of personal finance erudition. Today’s entry in the genre came from Ben Carlson at Ritholtz Wealth Management, who wrote:
“I wish high schools and colleges would teach personal finance. They could show young people things like how to do their taxes, which it seems like maybe 3-4% of the population knows how to do (and that’s being generous).
“The U.S. federal tax code is around 4 million words and almost 75,000 page long. To say it can be confusing would be an understatement. Changes from the latest tax overhaul throw another wrench into this equation because now people must figure out how it affects them.”
This is an unusually clear example of the role “personal finance education” plays in this ideology. You can clearly identify a problem (people can’t do their own taxes), you can clearly identify the cause of the problem (the tax code is too complicated), but instead of demanding that the cause of problem be solved, and the tax code simplified, you demand that teenagers receive specialized education in tax preparation!
“Personal finance education” dodges all the hard problems we face
The beauty of the personal finance education meme is that it allows you to acknowledge real-world problems, without having to undertake any of the effort required to solve them:
- wages are too low;
- housing is too expensive;
- health insurance is too expensive, and leaves even insured individuals vulnerable to catastrophic medical expenses;
- Social Security’s current financing stream is inadequate to pay out its present benefits, let alone the benefits that would be needed to permanently eliminate elder poverty;
- the Family and Medical Leave Act covers too few workers, with too few protections, for too little time;
- occupational licensing regimes pose too many obstacles to entry for too many professions.
These are problems with solutions. But a higher minimum wage, more housing construction, single payer health insurance, higher and uncapped FICA taxes, comprehensive family leave, and occupational licensing reform are hard.
There are interests on the other side who will do everything in their power to fight against efforts to solve these problems. Businesses want to pay low wages, homeowners want to keep housing scarce, insurance companies want to keep earning record profits, high-income individuals want their FICA taxes low and capped, and every licensed occupation wants to minimize the number of new entrants.
So why would a genteel financial advisor, money manager, or financier want to take on those fights? High-income homeowners with occupational licenses are the bread and butter of the upper-middle-class economy! They already have workplace retirement plans, gold-plated health insurance, and generous family leave.
“Personal finance education,” on the other hand, is easy. Sure, it might take a few classroom hours away from actual education, but that’s the teacher’s problem, not your problem. Plus, once it’s up and running you might even be able to sell your consulting services on the side to school districts that, for obvious reasons, don’t want to hire a full-time “personal finance educator,” because there’s no such thing.
Let me be clear about one thing: ignorance is also a problem. Educating people about how things really work is an important and valuable service, indeed one I try to perform here to the best of my limited abilities.
The fact that IRA’s, for example, are privately marketed means there’s an incredible scope for abuse by savvy marketers, with both the victims and the government ultimately paying the price. An education campaign about what to look for in an IRA would be at least as good a public service as the “National Responsible Fatherhood Clearinghouse.” Even better would be strict limits on the kinds of assets eligible to be held within IRA’s.
But “personal finance education” is just a savvy marketing technique for inaction, insisting that we need do nothing to fix the actual problems we face, because the problems were inside us all along.
You are right about need for political change on all those issues. However I am appalled by the financial ignorance of most Americans, not just the you. I don’t think it is realistic to expect support for change without an electorate that can under stand the issues. A few hours in high school won’t make much difference but surely a college graduate should be able to figure his tax liability , esp if on salary. Or negotiate loans and payments.
I’d just prefer it if a high school dropout could figure his tax liability, because the tax code were simple enough that anyone can do it!
In this example, I think Ben Carlson is giving better advice. You are correct that the cause of the problem is due to the complexity of the tax code. However, I can’t see anything in the foreseeable future that will significantly reduce the complexity of the tax code. Both political parties have added to the complexity. If you agree that it is likely that the tax code will remain complex, then there is nothing wrong with wishing that schools would teach high school seniors how to use TurboTax or something similar.
Think about what you’re saying: instead of simplifying the tax code, public schools should train students to operate private, for-profit tax preparation software that is only necessary because of the complexity of the tax code!
Ultimately, your framing is a kind of rephrasing of my point: treating efforts to change the system as hopeless puts the responsibility to accommodate and adjust to that system on individuals, which makes the failure of individuals to accommodate that system the fault of individuals, instead of the fault of the system for its unnecessary complexity.
Once you’ve placed that responsibility on individuals, then the smart, well-educated, and wealthy individuals who “took responsibility” to get good grades in “personal finance class” can blame the poor, the dumb, and the instudious for the failure of the system to serve them. But I don’t buy it: a system that is designed to fail a substantial number of its users is a bad system, and we ought to change it.
Thank you for the thoughtful response.
In your very first blog post you stated, “…low-income renters need good personal finance advice much more than salaried homeowners..” Arguing persuasively for a simplified tax code might be good social advocacy, but I don’t think it qualifies as good financial advice.
You have written many posts about the importance of lowering fees for financial services (e.g. low-cost index funds vs. actively-managed funds), no-cost ETF trades, etc.). Why shouldn’t tax filing be another opportunity for you (or our high schools) to teach the current and future “low-income renters” that they don’t have to pay expensive fees to the walk-in tax filing services?
There are no fewer than 7 free online services for tax filing. Explaining the types of questions that will be encountered, the paperwork and information needed, etc. would take less than an hour in a high school classroom. It probably would take you 3 blog posts. This would save people $100 or more in fees per year. Sounds like good financial advice to me!
I think you’re missing the bigger role of personal finance education. The United States is one of the richest countries in the world especially when considering its purchasing power. Yet the average American is drowning in debt with no real savings to speak of.
Assuming people are making a decent amount of money (say $30k+) their being poor is largely the result of decisions- mostly decisions to buy crap they don’t need and can’t afford that piles on more and more debt.
You could double everyone’s salary but you wouldn’t dent most people’s debt long-term. Bad financial habits sap wealth and long term success no matter what people make. A basic financial education that taught people about the real costs of not saving and the benefits of compound interest could share things
Let me start by saying that if you’re right, then the logical response would be MUCH more radical change than the modest reforms I suggested in this post. I think more housing will make housing more affordable, reducing occupational licensing will make it easier to enter and change professions, universal comprehensive health insurance will protect people from health-related financial emergencies, etc. In other words, I think people’s financial outcomes are basically a result of their incomes and expenses, not their “financial literacy.” Improving people’s incomes and reducing their expenses will improve their financial situation.
You’re saying that people simply cannot be trusted with money at all. That “you could double everyone’s salary but you wouldn’t dent most people’s debt long-term.” If that’s true, then protecting people requires not an academic quarter in high school of personal finance education, which would have no effect, but a wholesale revamping of the economy in order to protect people from their own catastrophic mistakes.
I don’t believe that; I believe capitalism can be saved through modest, thorough reforms. But if you believe people’s financial well-being is totally unrelated to their income, you should support something much closer to Soviet-style comprehensive control of the economy than I do. After all, the Soviet Union didn’t have consumer debt, and consequently didn’t have any victims of consumer debt.
Andy Shuman says
If we take “teaching taxes” out of the equation, I’m totally for PF classes in high school. Forget taxes: people don’t know how to budget, how to shop for student loans (let alone scholarships), how to build a credit history, how to pay off their credit cards — most of all, how to start investing, Young and even not so young people get stuck when they encounter the simplest financial issues. So, yes, PF101 education is long overdue.
I think a lot of the subjects you mention are a lot more like “teaching taxes” than you do.
How can you “teach” someone to pay off their credit cards? What exactly do they need to know: how to write a check? How to enter their routing information on a website? How to stand in line at Walmart? If you just mean “telling them they should,” well, trust me, they know they should. They just don’t have the money.
How can you teach someone how to build a credit history? Not only are the algorithms 100% proprietary — they also change all the time! Which calculation would you include in a personal finance textbook?
How can you teach someone to shop for student loans? I personally believe no one should ever, under any circumstances, take out a private student loan, but do you think the private student loan industry is going to let Texas or California adopt a “personal finance” textbook telling their students never to take out a private student loan?
These are, fundamentally, not questions of “personal finance education.” They’re questions of social organization, and we need to organize our society better!
Andy Shuman says
Sorry, I disagree. Teaching kids compound interest and how it can be used (for them or against them) is not something out of wack. It can be done. That would introduce them to the world of investing on one hand and avoiding credit card debt on another. No one is claiming that it would resolve all the issues or cure all the ills, but when people are only focused on resolving the monstrous fundamental problems of our seriously sick society, nothing gets done.
One day, we will have free healthcare system and free or heavily subsidized higher education like many countries around the world, but it won’t happen overnight or even in the next 10 to 20 years.
No need to apologize! If I got offended when people disagreed with me I wouldn’t write public blog posts expressing my opinions!
To be clear, I am not arguing ignorance is better than knowledge. I try to share knowledge all over the internet because I think knowledge is better than ignorance! I am very specifically arguing that the specific people in the finance industry promoting personal finance education are doing so in order to distract attention from the real causes of our problems and their real solutions, because those solutions would make those people worse off financially. In other words, the ideology of “personal finance education” is not a harmless attempt to help people manage their money better, it’s an actively harmful attempt to prevent our real problems from being solved.
Interesting article, Indy. I think you’ve hit the nail on the head that we need real solutions to some of these problems, but I DO think that we are also woefully behind on “personal finance education” in our country. Teaching kids to do their taxes is a really stupid idea though, and not the example Ben Carlson should be offering. How about we teach kids how to balance a check book, what saving for retirement looks like, the power of compounding, how to build a diversified portfolio, what a stock is, what a bond is, etc. The list could go on and on. Many college grads have no idea what some of these things are, which is shocking.
Thanks for reading. In my opinion the things you’re describing are just as specialized training as tax preparation, and I don’t see any way for “personal finance education” to bridge that gap. Finance and economics are perfectly legitimate academic subjects and I don’t mean to discourage them being taught; I took economics during high school at my local university and I think I benefited greatly from it. But “personal finance” is not an academic subject and never has been, rather it’s a way to shift blame from a broken social and economic system onto that system’s victims.
I think you are letting your personal political views take this discussion off the rails. Teaching someone to balance a checkbook, or how the power of compounding works, or the basics of saving and investing is not about “shifting blame from a broken social and economic system onto the system’s victims.” It’s real life, practical knowledge people would need EVEN IF we lived in an idyllic socio-economic paradise. I agree with a lot of your political leanings, but quit trying to contort them to apply to everything, all the time.
I’m sorry you interpreted it that way. Let me try to put it a different way: how many classroom hours do you want to spend, for students of which age, practicing “balancing checkbooks?” How many classroom hours, for students of which age, do you want to spend showing a graph going up and to the right to demonstrate compound interest? There really are interesting and important things to learn about stocks and bonds, but the interesting and important things have nothing to do with personal finance, and the things that have to do with personal finance have nothing to do with stocks and bonds!
In this case I don’t think it’s my “personal political views” getting in the way (although they do always seem to be in the way). In this case, I think it’s my unfortunate literal tendency: if you want to “teach” “personal finance” in public high schools, you’ve got to identify who is going to write the textbook (my guess is the finance industry) and who’s going to do the teaching (my guess is “guest lecturers” from local brokerage houses).
When I was in high school, many long years ago, everybody took a semester of “senior problems” which was very useful. Although everyone claimed to hate it. Checkbooks, resumes,….of course people took typing and home Econ (girls) and shop (boys).