Financial literacy courses can do more harm than good

Saving for retirement, making a budget, taking out a mortgage — these are big financial decisions that require knowledge.

But ethics professor Daniel Munro says many of the existing programs that aim to teach people how to be financially literate are not very effective, and can even be damaging.

In some cases, even "old-fashioned math class" may serve people better, he says.

"If you look at the literature, financial literacy programs just really don't seem to work," says Munro, who teaches ethics in the Graduate School of Public and International Affairs at the University of Ottawa.

One of their major flaws is that people quickly forget the little they've learned — whatever gains participants achieve are "relatively small, and they tend to disappear within one or two years," he says.

Another issue he sees is that these programs give people a false sense of confidence in their abilities to make sound financial decisions, which Munro says can be "very risky."

When you should be getting advice about your RRSPs  or a mortgage, you just think, 'Hey, I know a lot, I don't really need this, I don't need to pay for this extra advice, so let me just make the decision on my own.'- Daniel Munro

Organizations running these kinds of programs — such as schools in Ontario, where financial literacy will soon become a mandatory part of the grade 10 curriculum — could counteract these negatives through a few measures that have been proven to work, Munro says.

One is having students start financial literacy early in their schooling, and then do a unit every year or every few years up until they graduate, so that the learning is reinforced.

The other is incorporating general mathematical and numerical literacy, which can help improve financial literacy in the long term, Munro says.

"Put financial literacy stuff into math classes along with the other pieces of math that people need to learn, but make it real for them, give them practice investment accounts, and again reinforce it over a number of years so that it really sticks and stays."

Choice vs. circumstance

Another major flaw that Munro sees with many financial literacy programs is that they are structured around "choice": one's financial situation is related to choices people make about their money.

However a person's financial well-being, Munro explains, is affected by "circumstances that are often out of their control," such as their health, a disability, the family they're born into, and the neighbourhoods (and cost of living) in which they reside.

Most programs ignore those circumstances and focus on personal choices, he says.

For example, a course might teach people to buy grocery store items in bulk rather than in individual units, because that means a lower price per unit, Munro says.

So buy the 12-pack of toilet paper for $10, rather than buying 12 individual rolls at a $1.30, and the idea is that if you don't buy things in bulk then you're somehow making an irrational decision. But if you only have $2 then it's actually perfectly rational to buy just the one roll. Knowing whether or not that is rational or irrational depends on knowing much more about a person's financial situation.- Daniel Munro

He says financial literacy programs could incorporate a discussion of these factors, and teach an awareness that though one's financial state does depend on choices, there are people who face circumstances that may make those choices difficult or even possible to make.

This, he says, would have the added benefit of making people better citizens.

"At the policy level they'd be thinking about not just how do we get people, individuals, to make responsible choices, but how do we as a society begin to structure things in responsible ways that are fair or enable better choices for everybody."