Financial literacy - a bunch of hooey?

Today, I chanced upon a blogpost in the Guardian entitled 'Why 'financial literacy' is a bunch of hooey - and why the banks promote it'.

In it, the blog author Helaine Olen discusses how the financial literacy movement is ineffective, and how it basically puts the blame of the recent financial crisis not just on the financial services sector but also on those who have become victims of the crisis - individuals themselves.

In other words, by highlighting the need for financial literacy, we are basically saying that individuals are equally to blame for the crisis as we did not educate ourselves about the financial products we were buying, when the blame should solely lie at the door of these purveyors of personal financial products and services; the banks, the financial institutions that got us into this trouble in the first place.

Olen draws this conclusion from the research she did for her book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, and she is quite strident about how financial literacy is being promoted by these same institutions who continue to churn out financial products that are hard to understand.

My initial reaction to the blog was 'whoa - hang on there'. As an advocate of financial literacy myself, having spent years building up a magazine on the premise that financial education empowers us to make better decisions about our money, it made me feel a bit defensive.

You can't just dismiss financial literacy like that, I thought. I believe it is important to teach children and young people about money and how it works, and to have an understanding of financial products and services. They need to know that money doesn't just automatically shoot out of a machine from the wall whenever they need it. They also need to know how investments, mortgages and debt work so that they know what they are getting themselves into when they become working adults and start making use of these products.

But this blogpost really got me thinking.

For one, I can't argue with Olen's point about how the financial services industy is quite two-faced in the way they promote financial literacy on one hand, while continuing to sell products that are not necessarily in the best interests of the customer.

For the industry, advocating financial literacy is a savvy PR/CSR (corporate social responsibility) exercise. Not only does it help deflect some of the blame of the financial crisis, it also promotes the perception that by helping you understand how money and finance works, we have your best interests at heart.

But do they really? One can't help thinking what a brilliant branding exercise this is; the next time I decide on a financial product, am I more likely to go to the bank or company that is trying to teach me to make better decisions about my money? (Ironically, Olen's blog on the Guardian website is sponsored by HSBC Premier - wonder what they thought of her comments).

Certainly, the financial services industry has a lot to answer for in terms of churning out opaque financial products (structured products anyone?) that stumps the average consumer. This is Olen's point I believe - that no amount of financial education can help us make better decisions about our money because the industry creates complex products that are not transparent which makes it hard for us to understand them.

Olen cites 'survey after survey' which shows that high school students who attended financial literacy seminars do not necessarily have a better grasp of basic financial concepts compared to those who didn't. That these classes "no impact on credit management outcomes, including: credit scores, credit card delinquencies, or the probability of declaring bankruptcy or experiencing foreclosure."

This makes me wonder if another reason that people are failing to make better decisions about their money is because they fail to consider their own behaviour about money.

Take credit card usage for example. We've all read the reports - credit card debt and defaults have been on the rise over the years. This has largely been attributed to the fact that banks and finance companies have made debt easily available - this happened in the UK and US during pre-financial crisis days, and it has been a growing trend in Asia as well.

With easy access to money, people overspend and grow accustomed to a lifestyle that they can hardly afford to maintain on their income alone. And then it all comes tumbling down when they can no longer service the mountain of debt that they have accumulated. Hence the defaults and delinquencies.

The financial literacy approach would be to educate them about the risks of building debt, teach them how dangerously high credit card interest is and how to avoid it and be smart in your debt management. Educate them about the importance of credit card scores and the impact of a bad credit rating. That would be the rational approach.

But what about addressing the irrational behaviour that overshadows the rational side? For instance, credit card usage takes away the pain of paying; I feel less pain using my card to buy the latest It designer handbag than if I were to dish out the actual cash, so I am more likely to buy it now and worry about the bills and credit score later.

Managing our spending - and credit card usage - has as much to do with understanding our behaviour (why some of us feel compelled to use up a month's salary for a handbag or refuse to see that debt mountain we have built while continuing to spend - on our credit cards) as with understanding how credit works.

Of course, the financial services industry needs to shape up and become more responsible with their actions beyond paying lip service with financial literacy PR exercises. Consumers deserve transparent, straightforward products that they can understand. They deserve to be treated fairly and honestly. And they deserve to be put first instead of the industry's bottomline.

And I say don't ditch financial literacy altogether. But instead of just teaching people about how finance and money works, they should also be taught to understand how and why they behave the way they do with money.

With these three elements in place, perhaps we will stand a good chance of making better decisions with our money and our lives.