Financial Literacy Alone Will Not Solve Your Money Problems
If you weren’t born into wealth, you’ve probably dealt with money problems. Financial problems can be a problem, and “financial literacy” is the best solution to building good money habits. Create a budget, learn some ground rules – and fluff ! Our financial problems have been healed. However, this is not all it takes to improve your financial situation. Not at all.
In a nutshell, financial literacy is about understanding how money works. This is very important and easy to learn. In fact, there are several free resources out there to help you learn all about money. These tutorials can be helpful tools. However, if it were as easy as learning the basics of math and the rules, we would all be great at money. The fewer of us will struggle with debt , live paycheck to paycheck, or overspend on things we don’t need.
However, many people believe that financial literacy is the key to solving these problems. For example, we recently wrote about the first thing to do to get your money in order (find out why you want to put it in order). Many of you had other ideas, for example:
- Figure out how to budget
- Pay off your debt
- Record all your transactions
- Learn about compound interest
These are the basics, and it is absolutely essential that you have this knowledge in your arsenal. But these answers miss the point. Personal finance goes beyond this knowledge: it is personal. And it’s important to understand why money is such a problem for so many people. Thus, we can solve this problem in full force and learn how to use these tools.
Money is more behavior than ground rules
Whether it’s basic budgeting, negotiating wages or price cuts, or investing in the future, people often ask, “Why don’t they teach this in schools?” Well, that’s what they teach in schools. The problem is that it is not easy to teach it.
Several years ago, I interviewed Laura Levin, president of the Jump $ tart Coalition , an organization dedicated to promoting financial literacy in the classroom. She told me that one of the biggest challenges they face is deciding exactly who should be teaching financial literacy lessons:
It is impossible to determine where all the finance teachers are. If you teach algebra, there is very little controversy in the math department. But personal finance can be related to public research, consumer science, or business. There are many more variables … Personal finance and financial education are very complex and nuanced. We want to make sure we are truly evaluating and seeing what makes it effective . But we are not waiting for the perfect solution to get started.
In other words, money isn’t just math. This is also behavior. Here are some behavioral lessons that have helped me get my finances in order more than any rules:
Some of the financial decisions are really quite simple, but overall, if you assume that money is as easy as making a budget, you are likely to be really frustrated and disappointed later when you have trouble keeping up with that simple budget. However, this is not hopeless. When you acknowledge how much money in money management is dependent on habits, willpower, and other behaviors, you can better focus your energy and efforts.
Rules don’t always work
There is another reason why basic financial rules (like “ spend less than you earn ”) don’t solve everything: they don’t always work .
For example, when I was in arrears on a student loan, I broke the “save 3-6 months on incidental expenses” rule. Instead, I saved several hundred dollars for the emergency and instead focused on paying off the debt. I wanted to pay off my loans as soon as possible so that I could properly set aside money for the future, and I had a safety net (back to my parents) to count on if times got really tough. I took a risk and broke the rules, and it gave me confidence that I was able to take control of my finances. Plus I saved a lot of money on interest. It’s not a smart move for everyone, and not everyone agrees with it, but it worked for me.
It’s not about breaking the rules for the sake of breaking the rules. The point is that life is difficult, and rules are often simplified to the point that they become ineffective, just so that they can be easily taught to others. They are so simplistic that financial experts rarely agree with them .
Don’t get me wrong – education is important, whether it’s history, grammar, sex education, or financial literacy. However, unlike grammar rules, personal finances are not limited. Much depends on your individual situation, which complicates it.
You must consider your financial situation and mindset and do what works for you. Sometimes it means breaking the rules. For example, suppose you start paying off debts using the stack method (paying off debts with high interest first). On paper, this makes the most sense because of the compound interest, but let’s say your debt is so big that you get frustrated and give it up completely. Snowballing debt (paying off smaller debts first) may work better. The snowball method goes against the basic rule of compound interest, but research shows it works better for most people because psychology is more important than mathematics. In short, humans are not computers.
What is better to focus on
Okay, you get the idea. Money management is more about behavior than rules. How, then, do you learn to be good with money? Like most habits and behaviors, it all comes down to practice.
I was on the soccer team in high school and I sucked. My trainer, bless her heart, explained how it all works. I had to kick the ball at right angles. I had to explain my position when I passed. I followed these rules meticulously, but it still sucks. Finally, my coach told me, “Forget the rules. Practice your skills. ” She introduced me to more games. She made me train longer and harder. In the end, I got better (not much, but better).
I think the same can be said for money. Rules are useful and necessary, but without practicing your real-world skills, they will take you far.
Like many habits and behaviors, the sooner you start, the better. This is why it’s so important to get kids into solid money habits from the start (another thing Jump $ tart is trying to do). For example, you can:
- Include them in family financial plans.
- Use the what-if game to teach them how to measure the value of money over time.
- Set up a system of four piggy banks to save for different purposes
However, many of us don’t grow up learning money skills. Our parents were just as poor at managing money as we are. If you haven’t learned these basics yourself, then yes, you need to learn budgeting mechanisms, but more importantly, you need a good reason to motivate yourself. If you don’t see the need to worry about money, what’s the point in learning skills or rules?
Above all, it’s important to be clear about why you want to get your money in order , whether it’s traveling more or supporting your family. Without motivation, you are simply learning the rules for the sake of learning them, and it will not be as effective as learning the rules to achieve an important goal.
From there, you will develop better habits as you overcome your weaknesses and challenges. For instance:
- If you have trouble keeping to a budget , choose the one that best suits your budget.
- If you find it difficult to stick to your debt plan, set small, recurring goals.
- If you’re having trouble saving, get in the habit of paying yourself first.
- Learn to do your best to control your finances when the system is working against you.
- Consider your lack of willpower to keep it from holding you back.
It is impossible to develop the exact habits required to improve your financial situation, because, again, a lot depends on your own situation and personality. The general message is that when you are ready to fix your finances, it helps you prepare for the work involved. When we understand that money is more than a way of thinking and behaving, we have a better place to solve real problems, so we can use these rules to our advantage.