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Why Financial Literacy Alone Will Always Fail

Why Financial Literacy Alone Will Always Fail

April is financial literacy month, and it’s dedicated to educating people on basic money concepts such as budgeting, saving, debt, compound interest and investing, just to name a few. Given that only 57{1b90e59fe8a6c14b55fbbae1d9373c165823754d058ebf80beecafc6dee5063a} of adults in the United States are deemed to be financially literate, it’s certainly something we need to address. Improving the financial literacy of all people is a noble cause, but many questions remain surrounding how to do it.

Google financial literacy and you will find that there is no agreed upon definition, no standardized way to measure it, and no consistent process to ensure people are learning the right skills and how best to apply them in real-life situations. If you can’t define financial literacy, you can’t teach it. If you can’t measure it, you certainly can’t manage it or even judge whether financial literacy programs are improving financial health and wellness.

The one thing we do know is that the lack of personal financial knowledge costs U.S. households over $350 billion per year. Financial literacy is critically important to making healthier financial decisions, but financial literacy alone will fail because it’s only one piece of a much bigger puzzle that’s part psychology, part life and part money.

Here are the three reasons why financial literacy, by itself, will fail.

1. Financial literacy is the wrong starting point

While there is no commonly agreed upon definition of financial literacy, there is one common theme among all of them: Poor financial health is due to a lack of education. It’s considered a knowledge problem. Proper education is important, but financial literacy programs focus on the facts and figures and ignore our feelings (our emotions), which ultimately drive our behaviors. It’s a mindset problem and not only  a money and math problem.

For many, money is a cause of stress, worry, fear and even shame and embarrassment. Deeply rooted emotional issues and limiting beliefs about money will keep most people from making healthier decisions with it. More often than not, financial literacy programs address the technical aspects of money (the thinking and financial parts) and ignore the attitudes, beliefs and values (the emotional and psychological parts) around it. When 90{1b90e59fe8a6c14b55fbbae1d9373c165823754d058ebf80beecafc6dee5063a}+ of the decisions we make are driven by emotions and not by logic, existing programs are starting from the wrong point.

2. Financial literacy doesn’t lead to behavior change

Tony Robbins has been quoted as saying, “Knowledge is not power. Knowledge is only potential power. Action is power.” It’s not what you know, it’s what you do with it that matters. Financial literacy and the programs that teach it focus on potential power (financial knowledge) and fail to provide real power (changes to behavior and actions) that can put people in control of the lives they want to live. In fact, studies have shown that improved financial literacy can explain just 0.1{1b90e59fe8a6c14b55fbbae1d9373c165823754d058ebf80beecafc6dee5063a} of behavior changes that occur.

Our behaviors are driven by a complex web of emotions, attitudes, beliefs and values, and, without a clear understanding of how they drive our behaviors, more financial information will fail to produce real change. In short, information does not equal transformation. Financial literacy programs today are hacking at the leaves of change when they need to focus on the root of the problem and better integrate knowledge with healthier behavior.

If you don’t change your mindset (how you think), your habits (what you do), your systems (how you do them) or your environment (what shapes your choices), all the information in the world won’t lead to better financial outcomes. All of that being said, it’s important to note that in some cases there are greater systemic issues that limit one’s ability to choose or to change circumstances, so the push for greater financial literacy is just the tip of the iceberg.

3. It’s only one aspect of a much bigger financial (and life) picture 

There is a continuum of care with financial advice that can lead to improved financial health and wellness, and financial literacy is only one piece of it. Improved financial well-being occurs when all the pieces of the puzzle are put together (or integrated) to support the bigger picture, and these include:

  • An understanding of beliefs and attitudes, cultural and community values, and behaviors and sentiment.
  • Appropriate levels of literacy, education and knowledge on various money-related topics.
  • Access to the tools, resources and money management systems through which this knowledge can be applied.
  • The right environment to help develop healthier habits and support ongoing behavior change.
  • Ongoing financial planning to adapt to a dynamic, increasingly complex, and constantly evolving life – personally, professionally and financially.

Financial literacy and the programs that support it fail because they focus on one aspect of this continuum of care. It mirrors a problem in the financial services industry where advice tends to focus on one aspect of our financial lives: our investments. We need advice and guidance in all aspects of our lives and ongoing support, and often course corrections and adjustments, to achieve true financial health, wellness, security and independence.

The greatest challenge surrounding financial literacy

The biggest challenge facing not just financial literacy but improved financial health and wellness comes down to three words: access, inclusion and integration. Greater access to financial tools, resources and expert advice unlocks the door to opportunity. Greater inclusion brings all people and communities through the door to participate in better education and economic ecosystems (lack of inclusion is a broader systemic issue). Greater integration takes the individual pieces of the continuum of care, threads them together and truly drives greater financial health and prosperity.

Financial literacy alone will always fail to improve overall health and wellness, just as advice limited to investments will fail to help people eliminate financial stress, make smarter, more informed decisions in all aspects of life, and put them in control of the lives they want to live.

If we want to create real change, we need to create greater access to financial advice and ensure the inclusion of all people and communities. The key is to focus on the integration of all parts and not just any one of them, such as financial literacy, in isolation.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Co-Founder, Facet Wealth

Brent Weiss is a co-founder and CFP® Professional at Facet. He helps guide the company vision and informs Facet’s innovative, next-generation planning solutions, technology and investment strategy. He is a 2x entrepreneur and business owner who’s been featured in Fortune, The Wall Street Journal, Fast Company, U.S. News & World Report, and Cheddar News, and is a regular on CBS Radio’s “Jill on Money.” He’s also been named to the Forbes “30 under 30” list.

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How MPs’ second jobs fail to gain them experience of the UK economy

How MPs’ second jobs fail to gain them experience of the UK economy

Almost three times more British MPs declared earnings from financial services companies than from manufacturing, FT analysis has revealed — one of many imbalances that may complicate Tory efforts to defend legislators’ right to pursue part-time careers.

MPs’ right to hold second jobs, which spurred a political row this month, has been defended by Jacob Rees-Mogg, leader of the House of Commons. He told Parliament that it was “a historic strength . . . that MPs should have a wider focus than the Westminster bubble”.

The government has now proposed changes to the rules to bar MPs from doing too many hours of outside work or acting as political consultants — but to preserve their right to have other income. A report on how the new rules might operate is set to be published by a cross-party committee next week.

In declarations made since the last election in 2019, some of which relate to the year before the vote, 37 MPs have registered income of various kinds from financial services companies — the largest such bloc of corporate income. The sector accounts for 8.1 per cent of UK GDP.

These include longstanding contractual relationships as well as one-off payments — such as the £160,000 paid to Theresa May, the former prime minister, by JPMorgan Chase in April 2020. The sum was an “advance payment” for two speeches that were postponed by the pandemic; she has yet to give one of them.

By contrast, just 13 MPs have received income from manufacturers, which contribute 9.9 per cent of GDP. Just 8 MPs have financial links to retailers, which contribute 4.9 per cent. Public relations or lobbying companies have employed 30 MPs.

Hannah White, deputy director of the Institute for Government who previously ran the independent Committee on Standards in Public Life, said: “If the point of second jobs is to ensure that MPs can bring real life experience to parliament, then it is deeply problematic that the experience MPs are actually getting is so unrepresentative of the UK economy”.

This has become a partisan issue because of an imbalance in who holds these posts: the positions listed above were held by 68 Tory MPs and just 18 legislators from all the other parties combined.

The issue was also brought to public attention by the actions of Owen Paterson, a Conservative former minister, who was found by a bipartisan committee to have “repeatedly used his position as a member to promote the companies by whom he was paid” in a manner not permitted by the rules. The government whipped its MPs to save him from proposed sanctions — only to be forced to retreat in the face of a public backlash.

Some forms of outside income are more bipartisan: 155 MPs received additional funds from filling in surveys for pollsters — receiving between £30 and £275 for each survey, which typically takes less than an hour.

Meanwhile 105 MPs declared earnings from the media, largely for writing articles (including for the FT Group) or TV appearances. Another 63 have held paid roles in local government. An additional 23 have declared income from book publishing.

Bar chart of number of MPs declaring income from each industry since 2019 v share of the economy showing MPs' corporate experiences do not represent economy

Westminster MPs are allowed to lobby ministers on behalf of companies that have given them money or gifts, and to advocate for them in debates so long as they do not “initiate” conversations or debates. Clients must also not “exclusively” benefit from anything they propose. They also must not use parliamentary facilities for business.

These rules are weaker than in the UK’s devolved parliaments, and markedly weaker than those in the US House of Representatives — where there is a cap on some kinds of earned income and outright bans on others.

Members of the House of Representatives are banned from practising law to prevent them from having conflicting public and private duties.

In the UK, lawyer-MPs are allowed to practise and are not required to disclose their ultimate clients. The 30 MPs declaring income from law — mostly as barristers — include some of Parliament’s biggest earners, such as Sir Geoffrey Cox, the former attorney-general. Cox, whose large volume of outside work helped fuel the outrage over MPs’ second jobs, told the FT that barristers were hired “to advise and represent . . . on a specific issue or in litigation”, not for general representation.

Lawyers are heavily represented in parliament, but together with accountancy, from which 7 MPs declared earnings, the legal sector contributes just 2.7 per cent of GDP.

In the US, members of the House are banned from accepting most gifts — with a particular prohibition on gifts from lobbyists or anyone who also engages a lobbyist. No such bar exists in the UK, where 26 MPs have registered gifts from betting companies and their lobbying body. A total of 111 MPs have taken gifts or hospitality from sports businesses.

The largest gift went to Tracey Crouch, who has just completed a review of the regulation of English football on behalf of the UK government. She declared a £4,560 hospitality package from the Football Association, the sport’s English body, to watch a football match.

“It turns out to be only a small set of businesses that are most interested in paying and entertaining MPs,” said Duncan Hames, a former MP and director of policy at Transparency International UK. “That these companies are often heavily regulated suggests more interest in their parliamentary role than prior experience they might bring.”

MPs are allowed to hold up to £70,000 of shares in a company without registering the holding, so long as the stake constitutes less than 15 per cent of the equity. They are not required to list participation in any funds. In the US, members of the House of Representatives must declare shareholdings over $1,000, as well as any other investments.

One person involved in administering the current UK system told the FT they were “very sceptical” about comparisons to the US — “not least because of [US politicians’] need to raise campaign finance”. This, they said, led to US politicians being “more in hock to big business”.

Campaigners are calling for much more sweeping reforms than are currently being considered. Hames said: “There are still too many blind spots for mischief to hide . . . It could save a lot of trouble if, like in many other workplaces, those wanting to take on second jobs or other contractual relationships first sought authorisation from an independent body, just as former ministers are expected to do.”