Financial Literacy versus Financial Life Building Skills: Part Two

Financial Literacy Blog Post Image 2 1024x681 Financial Literacy versus Financial Life Building Skills: Part Two

In a recent article for Southern California Public Radio online titled States to consider financial literacy requirements for K-12 students, Education Reporter Vanessa Romo wrote about how schools have long tried to impart money management skills to students through a variety of programs such as elective classes in partnership with banks and nonprofit groups, after-school programs that teach economic basics and “life-skills” to round out a student’s academic education.

She wrote that The Council for Economic Education, a nonprofit promoting financial education, recently developed new standards at the request of and with input from educators at all levels. Supposedly they establish benchmarks for what kids should know about money by the end of 4th, 8th and 12th grade and are broken into six personal finance categories:

  1. Earning income: This includes collecting rent, stock dividends and interest on bonds. It also includes a discussion of the labor market and how education may lead to higher wages.
  2. Buying goods and services: This includes planning, comparing, budgeting and making choices.
  3. Saving: This includes near- and long-term goals and how time, interest rates and inflation affect savings.
  4. Using credit: This includes borrowing options and how credit history helps determine availability of credit and the rate of interest that you pay.
  5. Investing: This includes risk, rates of return and diversification.
  6. Protecting and insuring: This includes potential loss of health, assets, income and identity, and how behavior affects the cost of insurance.

In another article titled Coming Soon: New Standards for Teaching Kids about Money, Dan Kadlec – Business and Money writer for Time.com quoted Nan Morrison, CEO of the council as saying “Financial literacy should be treated as a discipline, not a set of rules to follow” and “A systematic approach to decision making acquired in economics permeates virtually all aspects of life.”

What’s The Purpose?

While I agree that financial literacy should be treated as a discipline and that a systematic approach to decision making acquired in economics permeates virtually all aspects of life (well I almost I agree), I disagree with the benchmarks and what they are teaching.  Everything on that list, with maybe the exception of buying goods and services, falls under a category I call Financial Functionality; Allow me to explain….

When I look at financial literacy today as presented by many non-profits, banks, and educators, I simply ask myself this question; what’s the purpose?  When I look at the list of 6 benchmarks, my answer is also simple; the purpose is to teach you to participate well.   And If functionality is defined as the quality of being suited to serve a purpose well then these benchmarks will train you to serve the purpose of consumerism and how to participate in our ever increasingly dependent on credit economy!

Just Financial Literacy Isn’t the Answer

According to Kadlec’s article, the section on saving, for example, the standards state that by the end of 4th grade a student should know that “income is saved, spent on goods and services, or used to pay taxes,” and that students can use this knowledge to “explain the differences between saving and spending and give examples of each.”

And so I ask; what’s the purpose?  The article states that by the end of high school they should be able to “identify instances in their lives where they decided to buy something immediately and then wish they had instead saved the money for future purposes.”  So they should learn to recognize buyer’s remorse? What’s the purpose?

Why Financial Literacy Fails

In an excellent post written by J.D. Roth of the Get Rich Slowly blog titled Why Financial Literacy Fails, J.D. writes, “When I was in high school, every senior was required to take a class in personal finance. We learned how to write checks, how to prepare a budget, and the history of the Federal Reserve. After learning some basic financial literacy, you might think my classmates and I were better prepared to make and save money. You’d be wrong. Now, 25 years later, we’re no better with money than those who were never given this sort of instruction.”

He goes on to write “Instead of teaching Americans about credit cards and rates of return (included in the benchmarks), we need to be teaching them about behavioral finance. We need to be showing them how to break free from the ubiquitous marketing messages. We need to be showing them how to set (and achieve) personal goals, especially financial goals.”  To which I say “Amen Brother!”

Financial Life Building Skills The Answer

It is said that the number one cause of divorce is financial problems.  There can be little doubt that few things can equal the levels of stress brought about losing a job, getting a large pay cut, not having enough money to pay the bills, and perhaps worst of all, losing a home in foreclosure.  I know because they have all happened to me!

Now I’m not an economist, nor have I been on any non-profit boards advocating for financial literacy.  But much like J.D., I have traveled a personal journey through credit and financial hell; all as a financially literate individual as graded by the Benchmarks being set by The Council for Economic Education.  What I was missing and what no one taught me were financial life building skills!

3 Pillars of Financial Life Building Skills

Here’s what I was never taught, is not currently being incorporated into learning what I call comprehensive financial literacy, and was cemented in my journey through financial devastation.

  • Pillar Number One: The Psychology of Consumerism: What’s the purpose?  Every day you’re being marketed to and the psychology of consumerism, if you don’t know how to combat it, will provide you with the necessary motivation and drive to make you think you have a problem that can only be solved by making a purchase or by the spending of money!  Not learning what’s at work will leave you an Amateur Consumer.
  • Pillar Number Two: Critical Decision Making Skills: What’s the purpose?  Here’s the undeniable truth; making a good decision and avoiding a bad one is not a chance act. It’s a skill— and one that can be learned, honed, and perfected. When you understand the components of a smart decision, you can examine mistakes you might have made in the past and sidestep potential mistakes in the future. You can then make sounder choices that produce better results for you and now you become an Empowered Consumer.
  • Pillar Number Three: The Art of Frugality: What’s the purpose? Frugality is the quality of being frugal, sparing, thrifty, prudent or economical in the use of consumable resources such as food, time or money, and avoiding waste, lavishness or extravagance.  In behavioral science, frugality has been defined as the tendency to acquire goods and services in a restrained manner, and resourceful use of already owned economic goods and services, to achieve a longer term goal and this is where the rubber meets the road.  By mastering all 3 pillars of financial life building skills, in conjunction with learning financial functionality, you will become a liberated consumer!

The Liberated Consumer

As a liberated consumer, you practice need recognition as your modus operandi!  No decision, whether low-level or high level, is made without it and it becomes second nature to you!  As a liberated consumer you ask yourself the necessary questions in order to use critical decision making skills to decide on any purchase or spending of any money – period!  You reconcile all choices with consensus, with a budget, and your core values – dictated by the direction you want your life to go!

This is how our children should be graduating high school; as liberated consumers! If we prepare our children properly as they graduate to the secondary stage of their lives, whatever that may entail, then truly they will be free to pursue their dreams unencumbered!  That should be the only purpose of teaching comprehensive financial literacy!

If you agree, then get some by sharing this post with your friends!  If you don’t agree, then let me have some by leaving a comment below!  Either way, this is an important conversation we need to have as parents and society in general!



Comments

  1. Nancy says:

    Lou, I also believe the emotional behavioural side of financial skills must be addressed to see improvement in the results of financial education. We learn our money attitudes and beliefs from our parents through observation of their money actions when we’re young, this is our fundamental training. This training may or may not be ideal when it comes to making effective decisions in today’s world. Thus we need to help our youth learn good money habits – that comes through experience and practice. The functional training needs to be combined with personally relevant hands-on repetition. Dale’s Cone of Learning states it clearly, “we remember 10% of what we read and 90% of what we do.”

    We also need to provide information that will encourage our youth to believe they can be financially independent and personally successful no matter what their current situation is. Without hope and optimism, they may just feel it can’t happen to them, and that is a far bigger obstacle to overcome.

    • I completely agree Nancy. For sure this is not just a school issue, it’s also a parenting issue. As an engaged parent of a Kindergartener and a second grader, I know that not all parents have the resources nor the capacity to teach comprehensive financial literacy which is why I love your Zela Wela Kids Book Series for teaching http://www.zelawelakids.com/default.aspx

      When I said I partially agreed with Morrison’s quote “A systematic approach to decision making acquired in economics permeates virtually all aspects of life.” it’s because learning the 3 pillars of financial life building skills does permeate all aspects of life, but more importantly, it leads to living an “advanced life”. Thanks for the comment Nancy :)

  2. Jerry says:

    Lou, I wish I knew where to start about this post. There is so much good information. I do think that whatever is taught in school, parents must be the front-runner in teaching children financial skills that include coping with being flat broke and flush. Either situation can cause poor financial decisions that can have a long-term impact.

    • I agree Jerry. The only issue is; what if the parents aren’t financially literate? Unfortunately, many need to learn these lessons as well. At school, they are a captive audience and if the purpose of education is to empower our children to be good productive members of society and to create a better life for themselves, then comprehensive financial literacy must be a part of that education.

      Thanks for leaving a comment Jerry :)

  3. Nancy Phillips says:

    Thank you for the “shout out” for the Zela Wela Kids financial book series Lou, I’m glad you’re finding the information helpful!

  4. GKathy says:

    This article gets at why, despite a glut of financial literacy education, the needle hasn’t moved very much two decades into the Financial Literacy movement. So far.

    The current term of art is “Financial Capability” or “Financial Competence” not “Financial Literacy”.

    This reflects the general education movement from knowledge-based instruction towards competency-based instruction; beyond Knowledge to Know-How. After all, it’s not enough to know that credit cards can get you into trouble: learners need to know HOW to stage their bill-paying to never EVER be late and to always pay more than the minimum.

    Competency-based instruction, when done right, is faster and stickier for the learner and simultaneously empirically measures what skills the learner acquired from instruction. Way better than reading or listening to lecture as preparation for a multiple-choice test.

    One might even say that Financial Capability instruction succeeds where Financial Literacy instruction fails.

    This is why well-developed online instruction is superior to traditional classroom delivery for many – maybe all – subjects, but certainly for Personal Finance.

    Kathy Griffin
    MoneyU.com
    MoneyU.com/course

    • I haven’t had sufficient time to review your information Kathy but I definitely understand where you’re going with this. And yes, the article does explain why the needle hasn’t moved where financial literacy is involved. But as I say in this post as well as the first one in the series; we are still talking about financial functionality.

      As far as that aspect of it, your method of teaching may very well be better. But what I am advocating for is cognitive dissonance. Children and adults alike must learn the financial life building skills necessary in order to live an advanced life!

      This starts with decision making which is one of the basic cognitive processes of human behaviors by which a preferred option or a course of actions is chosen from among a set of alternatives based on certain criteria – an information processing model if you will.

      Sounds difficult but like anything else in life, the earlier you start to master it, the easier it becomes and the direct beneficiary is you by living your plan and not the dream!

      Thank you very much for commenting Kathy. It is greatly appreciated :)

  5. I love the energy behind your writing Lou! I read the SoCal article you referenced, and have been following the work the Council for Economic Education (CEE) in this space. I think the cause is noble and the spirit is right. The idea that ‘financial literacy’ should be taught as a fundamental skill in school – just like reading and writing makes total sense. Where all of this ‘financial literacy’ talk falls short is in execution, action and let’s face it, funding. What it will take to reform our educational system and integrate ‘financial fundamentals’ into school curriculum and re-train teachers, would be very expensive. I have yet to see any real plan that includes a budget proposal that would actually allow any of it to come to fruition in the near future. I am afraid that these efforts will be lost, but I am a big believer that we MUST keep talking about it. The entire educational system in this country is so broken. One day the issue will be tackled, and hopefully when it is, the basics of financial life will be included. It should be REQUIRED, tested and perfected. Nobody should be allowed to get a credit card or a student loan or any credit or debt burden until they have received their financial ‘drivers license’, confirming they know the rules of the road. Many children today are seeing financial struggle of their parents/family as a way of life. Someone needs to teach them a different way, so that bad patterns and behaviors are not repeated, be it non-profits (like Operation Hope), CEE, Church, or school programs. Something is better than nothing, but our children deserve more. Let’s keep this discussion going. And keep pushing for ACTION!

    Follow me on Twitter @myhomematters

    • Thank you for this insightful comment! Yes; something is better than nothing but as I say in my about section; if financial literacy is so important, why isn’t it improving?

      We are talking about decades that these non-profits, banks, educational counselors and politician have been at it without much success to brag about!

      I am making it my mission to help as many people as I can learn the 3 pillars of financial life building skills I was sorely lacking which led to my financial ‘crash and burn’ even though by the ‘systems’ definition, I was completely financially literate!

      Please continue to check back in or subscribe to the blog to be updated on my progress!

      • I would just add that things have improved, its just not been fully socialized or institutionalized or politicized, or capitalizes, etc. There are great programs in pockets of the country that have seen strides. Its not going to get beyond this stage without a real commitment, policy and funding. Period. Right now its a one student/one household at a time proposition. And that means slooooow. Keep pushing – your mission is absolutely the right one, and this movement is needed. Good luck!

        • Thank you…and that’s exactly what I’m about to embark on; a mission to build an army of liberated consumers free to pursue their economic future unencumbered by the chains of debt and consumerism. :)

Speak Your Mind

*


*