We don’t need no education

I’m spending the summer in England -hence the Pink Floyd-inspired title- and reading the English newspapers for a change. Yesterday I came across an article in The Guardian which touched on an issue I feel very strongly about: financial education.

Talking about Bernard Madoff’s victims, Hadley Freeman writes: “The root problem here, as with the other current financial disasters, is that most people don’t know how to read financial records and are easily cowed by supposed experts’ obfuscation”.

“There was an acronym on 80s Wall Street that investment banks used to put next to names of certain investors -WDIS, standing for the only question these clients would ask: “Where do I sign?””. [Read the whole article here]

Freedman is not alone in denouncing this lack of financial preparation. I often hear from people working in banks how they meet clients who will fight endlessly for a 0.05 percentage-point reduction in their mortgage interest rate, but will then fail to read the small print, where they could have seen that the mortgage they have chosen comes with enough hidden commissions to more than compensate the savings on the interest rate.

Why don’t we spend some time learning about financial products before we get a credit card or a mortgage? My theory is that our everyday life is sufficiently complicated with work, kids, etc., for anybody to be willing to learn about dull financial concepts. This is why I believe that financial education is a subject we should be exposed to much earlier, optimally before leaving high-school.

Think about it: high-school kids are about to enter the real world of taxes, credit cards, bank accounts, and car insurance. Most of them won’t have come across any financial product yet, which means theirs is the perfect age to get this type of knowledge, which will certainly save them money in the long run.

Indeed, people who don’t have a basic grasp of financial concepts are at a significant disadvantage in life: they end up paying more in interest and insurance premiums, are more likely to have credit card debt and to fall prey to scams, and less likely to contribute into their 401(k)s or keep a rainy-day fund with enough cash to get them through a couple of months.

I’m recommending the teaching of financial education at schools as a young woman who would have liked to have learnt basic financial skills herself early on. It took 10 years after I left high school until I read David Bach’s The Automatic Millionaire and discovered such elementary concepts as the power of compound interest.

I found it immensely empowering to discover that any one of us, no matter how low our monthly wage, can reach middle age with a comfortable money cushion, provided that we understand the basic rules of saving and avoid spending money needlessly on things such as credit card interest, pay-day loans, or excessive bank- and insurance-related commissions and fees.

So why aren’t more people campaining for a financial education for the young? I suspect that this partly has to do with the perception that financial concepts are difficult, dry, and boring. But I don’t agree they need be so. Students may actually find basic finances more interesting than other more theoretical subjects, if they’re shown their close connection to “the real world”.

I don’t suppose we’ll see a sea-change in attitudes towards early financial education any time soon, but I remain hopeful. One day it will be obvious that understanding personal finance is as important as reading and writing. Until then, we’ll have to continue to learn about such important topics on our own and, very often, when it’s already too late.

More on the importance of financial education:

  • Federal Reserve chairman Ben Bernanke’s speech

  • Economist Annamaria Lusardi’s report to the National Bureau of Economic Research

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