Does Financial Literacy Make Financial Sense?

I read the study. We were both a little wrong.

Earlier this week I told you about a study that showed up in my life like a parking ticket.

I had a comfortable belief: financial literacy classes for the masses don’t really work. I didn’t pull that out of the air. A big 2014 review of 201 studies found the classes barely changed what people actually did. Then I ran into a 2020 paper that pooled 76 experiments and more than 160,000 people and said they do. I promised I’d go read it and not just get pissed off.

So I read it. All of it. I even paid $37 for the journal copy, which tells you how my week went.

You don’t need to reach for your shocked face when I tell you the facts paint a different story when you dive deeper. The results don’t show what the headlines and people are saying they do.

But hold on. Before anybody gets comfortable, including me, it’s not what I said either.

Here’s the short version. The study people point to as support for financial literacy says the classes helped, on average. If you line up 100 people by how well they handle money, the class moved the person in the middle from number 50 to about number 54. That’s real. It isn’t nothing. What’s less clear is how long the benefit lasts. And that matters if we’re counting on a class at 16 to help someone make money decisions at 36.

Half of the effectiveness measurements were taken within about six months of the class. On whether it lasts, the authors called it “inconclusive.” Their word, not mine.

That 2014 review is worth a closer look. It came from a different team, six years earlier, and it found the classes explained only 0.1% of the difference in how people handle money. In their words, even big programs with many hours of teaching had “negligible effects on behavior 20 months or more” later. That’s the study I leaned on in March.

But most of those 201 studies weren’t true experiments, and the 2020 team says it found coding errors in the older numbers. So the older study isn’t the last word either.

And me? Back in March, I wrote that the benefits fade away in under two years, as if that were settled. The 2020 authors say nobody has shown the fade either. One study in Brazil followed 16,000 students for nine years and still found a small effect, about one percentage point.

Okay, a small benefit nine years later deserves a seat at this conversation. Especially after I said the benefits disappear. I still want to know how much the classes cost, and whether that was a good use of the money.

So the people quoting this study as proof were a little wrong. And I was a little wrong. That’s the least satisfying ending there is, and I called it last week. I put all the numbers and links here and fixed my March piece with a note at the top.

Those are the facts. Now here’s what I’ve actually been chewing on.

How do you tell someone that something they believe in might help, but might not do nearly as much as they hope?

Because nobody believes in these classes out of stupidity. It’s a lovely idea. Teach kids about money while they’re young, and they’ll be set. I think a lot of people support it because they hope it will inoculate kids against money trouble for life. I understand the hope. I’d like it to be true.

But hoping a financial literacy class will inoculate our kids against money trouble is like assuming every kid who takes high school English will be a literary whiz. We all took English. Look around. Read some emails.

I still find the promises hyped around that study to be dubious. Dubious is a nicer word than bullshit. And when I say bullshit, I get crazy looks.

Here’s a question I’d ask gently. If someone you know struggles with hoarding or gambling, what high school class would have prevented that?

So if someone struggles with overspending due to self-esteem, stress reduction, or financial codependency, what financial literacy class is going to change that?

Knowing how interest works doesn’t necessarily stop someone from spending money to feel better, keep a relationship together, or keep up with the damn Joneses.

After more than 30 years of talking with people about money, I find it hard to treat this mainly as a knowledge problem. The 2014 study pointed the same way. It said the effects of financial literacy “diminish dramatically when one controls for psychological traits.” People bring different habits, worries, memories, and amounts of give-a-damn to it. You’ve met your family. Want to know what your money personality is? Take this free test.

Now, the authors say these programs are cost-effective. I’m still not persuaded, but I need to be fair: a small benefit might be worth paying for if the cost is low enough.

I think we could teach most of what we call financial literacy better by teaching critical thinking, decision-making, how to use Claude, a calculator, and how to verify facts. Because the AI can be wrong too. That’s my opinion. I don’t have a study for it.

If you loved your kid’s personal finance class, or you teach one, I’m not coming for you. A class can teach useful things. If it helped you, good. And if you took one and still ended up in a mess, you didn’t fail it. It was never going to carry that much weight.

So how do you break it to someone? Here’s the best I’ve got after this week.

You go first. You say the part where you were wrong before you get to the part where they were. You say what’s true about their side out loud. You leave them a door to walk through that doesn’t have a sign over it reading “idiot.” And then you stop talking, which I’m still working on.

And here’s the uncomfortable question: if current financial literacy classes are ineffective, what will work? Maybe something else, but maybe nothing will fundamentally change the unconscious things that drive us. Worth pondering.

Getting it a little wrong and saying so didn’t kill me. It mostly cost me a journal article.

You’re welcome to check my work. That’s sort of the point.

— Steve