Updated: Nov 23
We need to teach and practice personal finance more in line with how people naturally learn and make decisions. The common approach today is clearly not working. This article explores personal finance challenges, their root causes, and discusses a reimagined approach to make dramatic personal finance education and practice improvements. This journey is already underway. This reimagined approach is already being implemented at progressive universities and advocacy organizations. It should be implemented widely.
The root causes are:
Personal finance is taught and practiced in the wrong order - instead - teach the decision process first.
Math learners are taught to be computers - instead - teach practical math intuition first.
About the author: Jeff Hulett is a career banker, data scientist, behavioral economist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM. Today, Jeff is an executive with the Definitive Companies. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his new book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions -- at jeffhulett.com.
Financial Literacy and financial success in the United States is challenging and it does not seem to be getting better.
Personal Finance Challenges
Two root causes underlie these core challenges. This article addresses these root causes in the service of accelerating Personal Finance success in our society.
1) Personal finance is taught and practiced in the wrong order - instead - teach the decision process first.
Go to almost any personal finance book or seminar. You will find well-meaning educators or practitioners describing specific financial products. This can be credit cards, home buying, deposit products, investments, retirement, tax, and many others.
This approach is in the wrong order. Teaching people the details of decisions they only make every few years or decades is not going to create ongoing personal finance competence or confidence. By the time they need to make the next financial product decision, they forget how they made the last financial product decision. We only buy or rent a house every ten years or so, a car every 5 years or so, and a college education only once. We simply do not have enough practice to make individual financial products or related decisions confidently. We must recreate the wheel every time. Those with family or social support may be able to offset this decision challenge. Those without decision support are more likely to struggle.
Alternatively, please consider highly practiced occupations - like a firefighter, a bond trader, a doctor, or similar - they make many related decisions EVERY DAY. Their practice creates an intuition because of the frequency and consistency of that practice. A fire captain, with thousands of fire experiences, intuitively knows when to recall their firefighting team BEFORE the building collapses. Ask him or her how they knew to make an almost instantaneous decision, they will likely just shrug and say... "Because I felt it." In truth, regular practice rewires our brains with intuitive habits. These decision skills are committed to a fast-acting, present part of our brain. Our intuition is actually a highly tuned habit able to quickly process a great volume of information and act without conscious awareness. Also, these intuitive decision skills are ALWAYS complimented with tools and technology to assist the decision-maker. Intuitive man and machine work well together.
Personal Finance CAN be the same way. We frequently make decisions impacting our financial well-being - most are small but all added together have an impact and use a similar decision process. The decision and behavioral sciences teach us that there is a single-threaded approach to decision-making. The following graphic shows a high-level view of the same process used in all complex decisions.
The good news is, with the help of straightforward choice architecture tools, we CAN create intuition and practice with our personal finance decision process. By creating a consistent, repeatable decision process, anyone can build financial confidence and success. The individual personal finance cases become the googled -- or chatbotted -- details of that single, practiced decision process. The process helps decision-makers curate decision data - that is - it helps us decide what is important and where to look for specific information. It helps us connect with our decision advisory team. It helps focus the decision-maker on a modest number of important details they need to know to make the best, confidence-inspiring decision. In today's information-abundant age, the need for appropriate attention guidance to the best decision information cannot be overstated.
2) Math learners are taught to be computers - instead - teach practical math intuition first.
This challenge is broader than personal finance, but certainly impacts one's desire to learn personal finance. How math is taught today remains out of step with the demands of the Information Age. It is taught as a difficult-to-access, highly technical discipline. Math education is incredibly incremental. One false step in the education process, which could include a poor teacher, and students lose confidence and often lose their way. Essentially, traditional high school math classes teach us to be computers. This is known as the 'Math Sandwich' of Algebra 1, Geometry, Algebra 2, and Calculus. In the 1940s and 1950s, the math needed to fight a World War or put astronauts on the moon needed to be calculated by hand. Back then, it was necessary to teach people to be computers. Fast forward to today, the math curriculum has not evolved to match the changes of the Information Age. The economist side of me suspects the incentives for curriculum planners and school districts to evolve math curricula are pretty low.
This is unfortunate. Much more important in the Information Age is teaching people practical skills for using math in their data-abundant, everyday life.
In personal finance, math intuitions can carry you much of the way. FinTechs and other technology have the math embedded in their programs. All you need to do is push the "I believe" button and the app will return the answer. Understanding the intuition and the implications of the answer is much more important than knowing how the mathematical sausage is made.
For example, in personal finance, understanding the time value of money and convexity concepts is critical. While the mathematical specification of these concepts is significant, that is all handled by computers today. All we need to know is that, over time:
Convex functions increase wealth at an increasing rate.
Convex functions benefit more from upside volatility than they are hurt by downside volatility.
So the math intuition demands that we invest early, often, and in diversified portfolios! Seeking situations where we are convex to time is important broadly -- whether in personal finance, personal health, or other personal risk management.
A way forward....
I teach Personal Finance at James Madison University. I wrote the book, Making Choices, Making Money: Your Guide to Making Confident Financial Decisions and the choice architecture technology provided by my book is showcased in the classroom. My book website has access to our curriculum and VidCasts. I teach the decision process first. While I do model the decision process and technology with specific financial products, it is always done in the context of the consistent, repeatable decision process I want to leave my students with for the rest of their lives. I teach math intuition. I show the students how to use the math-embedded tools. FinTech tools are becoming better at providing an intuitive user experience and providing math support.
The class projects empower students to simulate making (or remaking) a lifetime of great financial decisions, such as the college decision, getting a credit card, buying a house, getting a new job, buying a car, managing risks, deciding on an investment advisor, etc.... but all in the context of that single-threaded decision process to habituate a lifetime of great decisions.
Choice architecture has 3 big benefits called DECISION A-C-T.
A – it is accelerated because the best decision process is nimble and engaging.
C - it is confidence-inspired because the best decision process provides us with decision agency and the confidence to move forward.
T – it is transparency-enabled because it gives you recommendations, reports, and you can share them with others on your decision team.
This approach and curriculum is appropriate for high school students.
We need to change how personal finance is taught today. Clearly, it is not working as well as it should. Decision process and choice architecture have the added advantage that it helps reduce economic discrimination. Being a better decision-maker helps people avoid being taken advantage of by those attempting to extract value via economic discrimination.
An unattended decision process is the hobgoblin of economic discrimination.
The decision process helps people who may lack confidence in our banking system to achieve the necessary confidence.... and make it work for them. Choice architecture is a great social equalizer!
I write more about economic discrimination and the power of choice architecture in the article:
"A quarter of US adults have no retirement savings and only 36% feel their retirement planning is on track."
- PwC and The Federal Reserve, 2021
"The pandemic is making the retirement crisis worse"
- Forbes, 2020
"22% of adults in the U.S. have less than $5,000 saved for retirement, while another 15% have no retirement savings at all."
- Investopedia and a 2019 Northwestern Mutual survey
"...our brains make it so hard to start saving for retirement"
- CNBC, 2021
"35 percent of American households had no money saved in any type of retirement account. For those that do, the median household retirement savings was $1,100."
- The St. Louis Federal Reserve, 2018
"The student debt crisis is one that spans generations, with about 8.7 million Americans aged over 50 still paying off college loans."
"Helping students and their families avoid the pitfalls associated with financing higher education, and empowering them to make optimal financial choices, should be a priority of all institutions of higher education."
- U.S Financial Literacy and Education Commission, 2019
"Studies have shown that high school graduates who received instruction in personal finance had lower loan-default rates and higher credit scores than those from neighboring states without such classes."
- The Federal Reserve and Washington Post, 2023