There’s more than one way to get a good education. There is, of course, the lauded university education – the kind of schooling we grew up hearing would one day make us successful. And there’s “real life” education, the important skills we learn by doing. The debate over which is more valuable is endless. After all, they each have their advantages.
Isn’t it funny though how someone can be educated by a top-tier school or simply by living in the real world and still not understand the first thing about personal finance? A lack of financial savvy is not related to age, ethnicity, income, or educational achievement. Americans seem to simply be sliding by when it comes to financial concerns.
There is no need to look further than 2018 statistics to understand how casual we are with money. Last year alone, Americans paid banks $113 billion in credit card interest (that’s 12 percent more than was paid the year before). If expected hikes in the federal interest rate come through, we’re on track to pay more than $122 billion in interest on those cards next year.
It’s sobering to realize that many of us have become like Wimpy of Popeye fame, “I’d gladly pay you Tuesday for a hamburger today.” Whether the “hamburger” in question is a vacation or wedding we didn’t save for, new furnishings for our home that just couldn’t wait, or simply due to job insecurity, we are a nation that does not appear to understand the trap of credit card debt.
In fact, some of don’t seem to understand personal finances at all. That fact, and the suffocating student loan debt that faces many students following graduation, are two of the reasons Ivy League schools like Harvard have begun offering classes in personal finance.
What’s on the Syllabus?
Each class is slightly different, but among the basic materials taught are things like learning to discern the difference between a “want” and a “need,” monitoring your checking account to avoid fraud and keep track of finances, and the value of compounded interest as it applies to investments.
Whether students take the class believing it will be an easy A or because they truly want to learn more about how to manage their finances is a mystery to everyone but the student in question. Another question, posed recently by The Washington Post, is whether taking a personal finance class is actually worth the time.
A Change in Behavior?
Such classes come from a good place, given the fact that the savings rate in the country has taken a nosedive while consumer credit has soared. In addition to the Ivy League efforts, 19 states require that high school students study personal finances as a condition for graduation. It seems that such classes are considered a “fix” for financial illiteracy.
According to the Post’s article though, studies indicate that financial literacy courses don’t alter our behavior with money. Giving people information about how finances work does not change how they manage money. Actually, giving people information about anything does not, by itself, alter their actions. Whether it’s the danger of illicit drugs, health benefits of being vaccinated, or what fatty foods do to the cardiovascular system, social science has firmly established that people will do what they want in the moment, regardless of what they’ve been taught. A class full of students can learn all about how to make a budget, price shop, save for a rainy day, or calculate interest, and still stop on the way home for a $6 cup of coffee.
While university and high school students are learning more about how finances work, classes are also being held for adults in bank branches, libraries, and community centers. Again, the goal is noble, but the outcome questionable. The fact that it can take time to discover how students applied what they learned blurs how effective finance classes are. For example, if you ask a room full of students questions about personal finance prior to teaching a class and then again after the class is over you will likely find that they know far more about finances after sitting through the class. Unfortunately, if you measure how the same people treat their personal finances after taking the course you will find that what they know versus what they actually do are two different things. Just like eating a cheeseburger on the way to an appointment with a cardiologist, understanding what you should do does not necessarily translate into doing that thing.
The Psychology of Knowing vs. Doing
A Gallup poll found that two out of three Americans do not create a financial budget. It’s no secret that a realistic budget can help us achieve our financial goals, but creating one requires motivation that most people simply do not possess. It’s easy to understand why. Anyone who has ever created a family (or business) budget knows the frustration of missing the mark, of spending more than they planned or not bringing in as much money as they hoped. Budgets feel like a failure waiting to happen. They also remind us of other unpleasant activities, like dieting.
Brad Klontz has combined two interesting careers, psychology and financial planning. As he explained to Science of Us, our emotional brains respond to the word budget the same way we respond to the word diet. We immediately think of going without, physical discomfort, depression, and let’s face it, suffering.
Unless a person is into deprivation, there’s not a lot about living by a strict budget that sounds appealing, even if it’s the smartest thing to do.
How to Overcome the Psychology of Budgeting
If we hope to live with the kind of budgets being taught around the U.S., we must learn to reframe the way we think of budgeting. If right now, we consider a budget something we need to do in order to stave off living on the streets, we’re sure to be anxious about it. If, however, we learn to think of budgeting as a way to achieve our dreams, it’s another story entirely. For example, rather than thinking, “If I don’t meet my budget this month I will be evicted,” try thinking, “I’m sticking to a budget this month because I want to save for a trip to see friends.
Stop thinking of a budget as the enemy. Rather, consider it another tool in your financial arsenal, a way to make your life better. It’s difficult to forego a trip to the lake that will set you back $100, particularly if you’re not trading that trip for something more important. By concentrating on what you’re working toward rather than what you’re giving up, you’re able to see how your personal budget is working for you.
One Final Note About Budgets
As we mentioned, one of the reasons people don’t want to budget is that it feels like failure in the making. Most of us spend more than we planned to and end up feeling bad about it.
There was an interesting study published in the Journal of Consumer Research that can shed light on why that happens and help prevent it from happening to you. A group of people were asked to estimate their spending for two periods of time – the next month and the next year. When asked about the next month, participants were surprisingly off. When asked to predict how much they would spend over the next year they were much more accurate.
Researchers found that participants were less confident about how much they would spend over the course of a year and tended to “pad” their guess by adding extra. One way to minimize the pain of being wrong next time you budget is to err on the side of overspending. In other words, if you think you’re going to spend $2,500 next month, pad it by budgeting for $2,700. If you need the extra money, you have it in your budget. If not, you have money that can be earmarked for whatever special event, experience, or item you’re saving up for.
A padded budget is likely to be more realistic and the more realistic a budget is, the less frustrated you’re going to be. Fortunately, you don’t have to be a Harvard grad to know that.
Dana George-Berberich is a freelance reporter and novelist. She has written finance articles for newspapers across the country and for companies like Dun & Bradstreet and Bankrate.
