Why Financial Knowledge Isn’t Enough
February 04, 2011I was reviewing my notes on the last 10 people that I have talked to about debt levels that they feel are overwhelming enough for them to contemplate filing bankruptcy. Along with having high levels of debt, there is something else each of these 10 individuals have in common. Knowledge. They all knew that they were spending more than they were making. They all knew that credit card interest rates are high. They knew they should save for retirement and create a household budget. They all had knowledge, lots of it; these are smart people. We’ve all been taught that “knowledge is power,” but knowledge alone isn’t enough. This article, Financial Literacy Won’t Fix Everything, talks about the limitations of financial literacy programs and how lots of knowledge doesn’t always equal sound financial behavior.
The question I keep asking myself, and those around me, is how to get all of the knowledge that is out there in the area of personal finance into an absolutely sure-fire way to help people change their behavior around money. One of my friends is a personal trainer and he shares the same concern about nutrition and exercise. There is certainly no shortage of readily available information on the topics of diet and exercise, yet every week he meets people who are in the same physical condition as the financial condition of the people I am thinking about. Go to any book store and you will always find that the best seller’s lists include books on how to improve your financial health and books on how to improve your physical health. I go into a lot of book stores and I see books on those topics prominently displayed in almost every store.
I know that I started paying more attention to the diet and exercise piece of my life when I saw my friend, the trainer, at a local coffee shop for the first time in about 5 years. He made a few jokes at my expense about my level of fitness in the past and wondered if I could complete a run we used to do in warm-ups before practice. That weekend, I tried. And failed. It got my attention. Here I was, not able to complete a run I used to do as a way to warm up before a 90 minute sports practice. Surely I KNEW that I needed to exercise regularly. Surely I KNEW that I had to eat a balanced and healthy diet. But I didn’t. I had the knowledge but didn’t use it.
What will it take to help turn all of this knowledge we have into action steps that everyone can and will take? Financial education content is everywhere. Books, courses, TV and radio programs, online education….it would be hard to go a few weeks without seeing or hearing personal financial advice somewhere. Yet, here I am looking at conversation notes from 10 people who are seriously contemplating bankruptcy.
How do we solve this on a large scale? The field of behavioral finance has made some major discoveries in this area, and we have found some key practices that work for people, but there’s still a lot of work to be done to solve this problem. Next week, I’ll share some tips on how you can make your financial New Year’s resolutions stick. In the meantime, I’d love to hear ideas you have on this.