It's Financial Ill-literacy Month

April is Financial Literacy Month. If you're at all interested in the world of personal finance, I'm sure that's not news to you. I believe personal finance is an important topic but, unfortunately, I also think it's apt that the month chosen to promote awareness and learning is also the month that includes "April Fool's Day". Why?

It's a classic case of the fox guarding the hen house.

Somehow, governments have found it appropriate to team up with financial institutions to prepare materials to help parents, guardians and teachers teach money principles to our children. How does this make sense? It's the equivalent of seeking nutrition education from Coke or Pepsi. The mere presence of their brands defeats the purpose and financial institutions are banking on it.

[H]ow did we arrive at the point where we think it’s OK for the companies who profit by our ignorance to teach us how to manage our money?
— p. 199, Pound Foolish by Helaine Olen

So why do we think it's a good idea for the contents of a financial literacy curriculum to be produced by—or my personal favourite "in collaboration with"—companies who make money by getting you and keeping you in debt throughout your lifetime? 

There is clearly very little upside for consumers, other than gaining access to free biased educational materials. For banks however, it's a whole different story.

What's In It For The Banks?

Plenty. Partnering with government and non-profits offers financial institutions nothing but upside along five dimensions, all of which either save or make them money:

  1. Advertising
  2. Industry Messaging
  3. Market Growth
  4. Focusing On Personal Responsibility
  5. Staving Off Regulation

1. Advertising

By three,...children start to believe that brands communicate their personal qualities, for example, that they’re cool, or strong, or smart.
— p. 19, Born to Buy by Juliet B. Schor

The opportunity for advertising is obvious but it matters greatly. Though we're increasingly immune to logos and advertisements, children and young adults are not. Not only are they receptive to advertising, but they give them more symbolic significance than we do.

Brand awareness is likely to lead students to seek out financial institutions they recognize when they want financial services. And worse, they're far more likely to trust their advice. That's why there are regulations against branding in schools. But apparently that doesn't always apply to financial literacy and that has to change. 

2. Industry Messaging

When you influence or, worse, control the messaging, you can influence what people believe, how they think, and ultimately, how they behave. The financial industry influences us with two key messages: 

‘The consumer is simply an income stream and exploiting that is the purpose of the banking organization.’ - David Mooney, a former JPMorgan Chase banker
— p. 109, Pound Foolish by Helaine Olen
Even tellers are often under pressure to sell customers on everything from car loans and certificates of deposit to complicated and illiquid investment vehicles.
— p. 109, Pound Foolish by Helaine Olen
  • Credit = Opportunity: The "enjoy it now" message is powerful. It speaks to our lizard-brain impulses, encouraging us to mortgage our future. Subtle messaging by learning material authors—included in discussions on purchasing decisions such as "deciding how to pay for things"—introduces the use of credit as a normal, even expected, option for paying for goods and services. Making the use of credit normal easily leads students to believe, and not question, its acceptability.
  • Banks Are There To Help: Increasingly, we're learning that we're helpless in managing our lives. We need help with everything, and this includes help making credit decisions. When banks are able to position themselves as trusted advisors, they can easily and knowingly sell the naive consumer debt vehicles and investments that are not in the customer's best interest either because the loan is too large, the interest rate, terms and fees too high, or both. The recent housing bubble is a perfect example of corporate greed leading to consumer usury.

As long as educational materials can insinuate that credit vehicles are "good" and that problems only occur when people behave "badly" our collective use of credit won't improve. Indeed it's likely to further deteriorate.

3. Market Growth

Just as the pharmaceutical industry profits when more people are chronically sick at an increasingly young age, financial institutions profit most when people are deeply in debt, and the sooner the better. Educating the next generation in the area of personal finance is a great way to ensure it has at least as much of a taste for credit as its predecessors.

The sooner a young person learns about credit, the sooner they're likely to see it as a source of freedom, an expected step into adulthood. As soon as that awareness and curiosity is awakened, the industry is ready to serve by offering branded prepaid cards, credit cards, store cards, car loans, and student loans. Needless to say, these products offer anything but freedom. 

If we cut off the people who are least likely to be able to repay...those who have the most difficulty paying, that’s where we make all of our profits and we won’t make nearly as much money.
— Elizabeth Warren quoting a high ranking banking executive (minute 28 of Maxed Out documentary)

The lifetime cascade is predictable: the greater the taste for credit, the greater the personal debt load and, the greater the debt load, the higher the interest rate an individual will pay. And these payments are likely to occur in perpetuity, with each carving out its portion of the borrower's monthly income and leaving little if anything for short or long-term savings.

You could say a banker's dream is that the term "till death do us part" should apply not only to marriage, but also to debt obligations.  

[Lauren] Willis argues financial literacy cannot be empowering [due to ever-evolving offerings]. She believes this is deliberate. After all, an educated consumer is, for many firms, their worst customer.
— p. 216, Pound Foolish by Helaine Olen

4. Focusing On Personal Responsibility

Increasingly, the finance industry has pushed responsibility for financial difficulties on the consumer. This conveniently takes unwelcome attention away from the significant issue of the increasing complexity of financial instruments. By focusing on the consumer's responsibility to be well-informed in order to make good financial decisions, the industry is free to stay one step ahead of mass awareness by introducing new and increasingly confusing products and services. 

5. Staving Off Regulation

If the financial services industry were truly interested in promoting financial literacy, they would offer up products that are easy to understand.
— p. 217, Pound Foolish by Helaine Olen
p. 215 - [Lauren Willis] believes no amount of financial literacy will ever do as much good as straightforward government regulation designed to protect consumers.
— p. 215, Pound Foolish by Helaine Olen

The financial industry is using its investment in consumer education—along with the message that offering a wide variety of financial products and services is good for the consumer—as rationale for lobbying against further industry regulation or, even better, further deregulation. It's ironic that on the one hand, the organizations that suggest they're going to great efforts to educate consumers at large are also the organizations that keep creating increasingly complex financial instruments. 

What's A Teacher Or Student To Do?

Whether you're the student or the teacher, stick with the basic of basics.

Unfortunately, financial gurus are a less viable option than they once were because they increasingly either have ties to the financial industry or offer costly products and services that vary wildly in usefulness. As well, a number of government sources tend to be dry and offer less-than-user-friendly materials, such as the government of Canada's financial literacy resources.

I'd offer that financial literacy isn't overly complex when individuals follow these four principles:

  1. Pay yourself first. Save for the long term before you do anything else.
  2. Save up for what you want. It's the surest way to know what you really want and to value what you buy.
  3. Help others in need. There's no better way to feel good and to feel grateful for what you have.
  4. Never borrow money. Ever. For anything.*

These four principles cover 80% of what we need to know because debt, in its infinite variations, is the only part of personal finance that poses an imminent threat. It's scary and often predatory, as James D. Scurlock's 2006 documentary titled Maxed Out effectively illustrates. The rest is straightforward and most of what isn't should be avoided anyway.

Yes, I know. I didn't cover compounding interest and investing, nor did I address insurance and estate planning but the best part is that you really need to have money in order to worry about how fast money can grow or how to manage wealth.

Once you have a sizeable amount in a savings account, then there's plenty of time to find the best places to invest. If anything, anyone learning about money will soon discover their bank pays them interest on monthly savings account balances. That'll easily make someone curious about how having money can allow us to make more of it.

Compound interest discussions aside however, a good personal savings rate will nearly always outpace yearly investment returns, and it's virtually guaranteed because you have total control over it. 

Given the above guidance, I'll offer the following resources for more information on saving and avoiding debt & complicated investment products. They're sure to offer more context on these four important principles.

[T]he expectation that one would need a home of one’s own is a relatively recent one in American history. Prior to the Great Depression, it was more usual to rent a residence than own it. Mortgages were of a short-term duration, usually 3-5 years. They were viewed, like any other form of debt, as something shameful and embarrassing, which makes complete sense when you realize that many of the would-be homeowners who took them on in the 1920s, thinking they could roll them over in perpetuity, ended up in foreclosure after the crash of 1929, when many banks simply refused to extend the terms by another few years.
— p. 174, Pound Foolish by Helaine Olen

Think The Above Principles Are Archaic?

Fun side note: Ever notice that the acronym for "get out of debt" is "G.O.O.D."?

Not in the slightest, as anyone who survived the Great Depression will tell you. Debt only became readily available and acceptable to a majority of people in the last century. Prior to the U.S.'s New Deal reforms of the 1930s, most people wouldn't have been able to apply for a mortgage and most people made due with less than we say we need today. For only a few decades now have debt instruments been available to virtually anyone, anytime, anywhere. And this new reality is making us poorer one borrowed dollar at a time.

Bonus: The Best Financial Advice On The Internet

If you've made it this far and you're still not convinced, maybe this SNL skit will do the trick, at least when it comes to avoiding debt.


What about you? Have any thoughts about financial literacy or advice to share with for fellow readers ? 

*One could argue that a mortgage can be acceptable, assuming a sizeable down payment, but the focus should be to have no debt at all sooner than later and there's zero shame or significant loss in renting due to the hidden costs associated with home ownership.

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