In a recent Q & A over at money.cnn.com Law professor Lauren Willis suggested that personal finance education in schools is a waste of time and can even be counterproductive.
“Financial literacy classes give people the illusion that they can successfully manage their finances. So rather than seek help, they end up making worse decisions.”
“(We should) stop trying to turn everyone into a financial planner.”
She suggests that we should instead focus on greater governmental regulation of financial products – the events in the sub-prime mortgage market might suggest she has a point. However, I can’t help but feel that saying we shouldn’t teach classes on finance education because people are better off taking financial guidance from experts is like saying we shouldn’t teach kids about health because they should leave it to the doctors.
A doctor can provide overall guidance about what kinds of foods we should be eating and the exercise we should be taking but when it comes to the daily decision about what to eat or when to exercise, you need enough knowledge about health to make your own decisions on a daily basis. We should be viewing financial planners in the same way; utilizing them for our yearly financial check-up but taking responsibility for our own daily fiscal health.
Anna Lusardi of the Financial Literacy Initiative suggests that in these days of uncertainty, greater financial education is more important than ever.
“In the past, the average worker did not have to make any decisions about his or her pension. Pensions were mostly defined benefit plans entirely overseen by the employer, so there was little incentive or rationale for individuals to learn about saving and investment. Today, the average worker needs to decide how much and how best to save for retirement—a decision that can be daunting and, if implemented poorly, that can result in inadequate preparation for retirement.”
She also argues that the sheer complexity of the investment and wealth planning options out there means that finance education needs to be more sophisticated.
Lusardi also poses the following three questions to help assess your financial literacy. Getting all three correct is the watershed for being financially literate. Have a go! Answers are on her blog.
1) Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
a) More than $102
b) Exactly $102
c) Less than $102
d) Do not know
2) Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy more than, exactly the same as, or less than today with the money in this account?
a) More than today
b) Exactly the same as today
c) Less than today
d) Do not know
3) Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”
c) Do not know