What Do Financial Literacy and Belly Buttons Have in Common?

A new paper from the National Bureau of Economic research says “fewer than one-third of young adults possess basic knowledge of interest rates, inflation, and risk diversification.”

Two reactions:

First, my guess is that the same thing could pretty much be said about not-so-yong adults.

Second, the problem isn’t that there aren’t opportunities for people to get financially literate. The problem is that few take advantage of the information that’s available to become better informed and, like dieting, most efforts to get individuals to learn what they need to know about managing money fail miserably.

Financial literacy programs aren’t hard to find. In fact, they are much like belly buttons: every financial institutions and organization has one of its own or links to one. I know. I’ve helped design or promote these program for clients.

But the problem is always how do you make an individual look at and absorb the information. Requiring it, that is, forcing anyone about to buy a house or undertake a significant financial transaction of some kind to get some sort of literacy training before the deal can be completed, impinges on personal freedom and raises a whole host of extremely controversial issues including discrimination and profiling. And allowing people to opt out means that only a very small number of those who need the information and insight will get it. After all, how many people who complete a financial literacy program when they are desperate to close on a home or buy a stock? Much easier to check the box and say you don’t need or want the literacy training.

Requiring financial literacy proficiency could also affect a seller’s decision about who gets to buy. If a home seller today can reject a contract because it is contingent on the buyer selling her or his existing home, wouldn’t they also be able to reject a proposal from someone if it’s contingent on them completing a financial literacy class?

There will always be the question about who should pay for increased financial literacy. Yes, the individual benefits greatly. But as the last 18 months has shown and then some, not having a financially literate populace means that the economy as a whole and probably taxpayers will have to pay for the mess that results. But you can just imagine the political firestorm when someone proposes that it be paid for with federal funds even if there’s a Congressional Budget Office analysis showing definitively that it will be less expensive than a mortgage modification plan.

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