The Psychology of Money

We speak with Brent Weiss, CFP, ChFC, co-founder at Facet Wealth, about the biggest gaps in current financial literacy programs and why it is important for the next generation to be financially literate. Weiss also gives his biggest advice for people looking to get started in investing or improve their approach. 
 
What is the current state of financial literacy in the U.S.?
 
Despite an increasing number of states that offer personal finance education in schools over the last 20 years, financial literacy rates in the U.S. are decreasing. The FINRA Foundation’s National Financial Capability Study (NFCS) showed that 58% of Americans could not pass a five-question quiz on basic money concepts back in 2008. The more shocking figure is that the percentage of Americans that cannot pass a basic money concepts quiz stands at 66% today. More people are less literate.
 
Add to this that the U.S. is the wealthiest nation in the world and yet it ranks 14th when it comes to financial literacy, and a pretty poor picture of the financial health of our country starts to emerge. And this poor financial health cost Americans more than $350 billion in 2021 alone which is down from $415 billion in 2020, and these are just the monetary costs.
 
The bottom line is that money has been and remains the number one cause of stress in America, and that stress is adversely affecting all aspects of our lives from our physical health to our careers to our personal relationships. Financial literacy programs are failing, and it’s impacting so much more than just our money.
 
Some states are now requiring a financial literacy course for high school students – how are you evaluating this progress? 
 
I track progress in three ways: initiation, execution and transformation. Initiation refers to the number of states that have initiated some form of personal finance curriculum as part of their coursework. Execution goes a step further and looks at how well each state and the schools that execute on the educational programs are effectively implementing financial education. Transformation measures the real change that these programs are driving. It answers the question, “Are financial literacy programs actually improving financial decisions and, more importantly, the lives of Americans?”
 
Starting with initiation, there is certainly progress in adding personal finance education as part of the overall curriculum. Forty-seven states, as of 2022, have personal finance in their education standards which is up from 21 in 1998. So states are taking action in an attempt to improve financial literacy, but this is the only good news that we can see.
 
If we look at the execution of financial literacy programs, we start to see a lot of problems. While 47 states include personal finance in their educational standards, financial literacy efforts are a patchwork of individual state laws and programs. If we dig deeper, we find that the curriculum is inconsistent within and across states. The quality of the education is quite poor. The educators themselves may not be getting the training they need to properly teach the topics. And there are no testing requirements or ongoing evaluations that gauge the outcomes of such programs.
 
Arguably the only thing that really matters is whether or not we are improving financial behavior and financial health. The short answer is that financial literacy programs are failing Americans. As shared in the point above, we are less literate as a country today than a decade ago, and every age group tested as part of FINRA’s financial capability study showed a drop in financial literacy rates. We certainly aren’t headed in the right direction.

Where and when should foundational financial literacy and education work start? And why?

This may be a bit controversial, but financial literacy and education needs to start by the time we are three-years-old. In fact, many of our money habits and patterns are set by the age of seven. If we wait to teach financial literacy in high school, we are missing the most formative years of our lives. While we cannot grasp some of the more complex concepts related to money at such a young age, we are developing the beliefs, attitudes and behavior patterns around money that we will carry with us our entire lives.

Financial literacy programs need to provide parents with the tools and resources they need to manage their own finances effectively and to understand how to relay healthier money habits to their children. As Mahatma Ghandi once said, “Every home is a university and the parents are the teachers.”

From an institutional perspective (referring to formal public or private schooling), financial literacy programs likely make the most sense when kids are able to apply it in their lives. Studies have shown that personal finance education fails to change behavior when it cannot be applied to real life situations. High school seems to be a reasonable age at which most students are either working part-time or frequently engaging in financial decisions.

The bottom line is that we need to teach money concepts like a language. Full immersion into a new financial language is the only true way to learn it. Just think about the foreign language class you took for a semester or two and you can envision how one or two classes will fail to drive real knowledge related to a broad array of financial concepts. If we get it right, more people will become fluent in the language of money, improve their ability to make smarter financial decisions, and improve their overall financial health.

Is there a particular area or tool of financial literacy that you think is most important to focus on this year?
 
The biggest gap in financial literacy programs has to do with the psychology of money. When it comes to making smarter, healthier decisions with money, there are two things that drive our behaviors: how we think and how we feel. Traditional financial literacy programs have focused on the thinking part. It’s the idea that more education or more information will automatically lead to better decisions. However, this approach misses the biggest factor driving our behaviors and actions which is our emotions. In fact, one study shows that 90%+ of our decisions and behaviors are being influenced by our emotions.
 
Even when we succeed at providing the right level of education around basic money concepts, we are seeing no real changes in the decisions people make with money. Studies have shown that improved financial literacy can explain just 0.1% of behavior changes that occur. In short, we are improving our ability to think about money, but our brains are hijacked by our feelings and our emotions, and we are failing to make real, positive behavior change stick.
 
How we feel about money is a very personal matter. For some, it’s fear, shame, or embarrassment that creates the anxiety which leads to poor decisions. For others, it’s uncertainty or feeling overwhelmed by financial choices that drives the anxiety that leads to poor behaviors. Financial literacy programs need to be tailored to the individual based upon their beliefs, values and experiences with and around money. Generic, cookie-cutter programs will not work.
 
To show the importance of this evolving field of study, the CFP Board recently added The Psychology of Financial Planning to their required coursework for CFP® Professionals. It speaks to the need for planners and consumers to understand how beliefs, values, and attitudes around money drive our healthy or unhealthy behaviors.
 
Why is it important for the next generation to be financially literate?
 
It’s important to reiterate that financial literacy is just one piece of a much broader continuum of financial health care. Being well educated and understanding basic money concepts is essential to making smarter, more informed decisions, to navigating life events with greater confidence, and to putting us in control of the lives we want to live. However, improved financial health and wellness will take more than just better education.
 
We need to reimagine how the financial services industry supports all people through a new integrated ecosystem. One that is inclusive and welcoming to all. One that is personalized based upon our unique beliefs and attitudes. One that provides greater access to the tools, resources and expert advice that can create real opportunities for all people. And lastly, one that integrates the entire continuum of care to drive real behavior change.
 
The bottom line is that money-related anxiety can affect every part of our lives. Constant anxiety can lead to feeling stressed. And stress, especially when it becomes chronic, can have a negative impact on other areas of our lives and our overall health – emotionally, physically and spiritually, among others. In short, our financial health is quite literally essential to living healthier, more productive and happier lives.
 
What is your biggest investing advice or lesson?
 
The biggest piece of advice I can give to people looking to either get started with investing or improve their approach to investing is this: define the game you are playing. And I am not talking about making your investments a game. I am referring to getting crystal clear as to why you are investing in the first place and how your investment strategy fits into your broader financial plan.
 
The biggest mistake I have seen in my career is when people create what I call the Frankenstein portfolio. It’s an investment strategy with no clear direction. It’s a collection of individual investments with no overarching purpose as opposed to a well-constructed portfolio with an appropriate level of diversification, the right level of risk, and a tax strategy to keep more money working for you over time.
 
To me, the point of the game is to keep playing it for as long as possible. To participate in the returns that the markets will give you. To participate in the power of compounding returns. I invest in low cost, passive index funds. Some people prefer active management. To me, it’s about finding an investment solution that will work for my life and my plan. I invest broadly, keep my fees and taxes low, regularly contribute, and stay disciplined. I spend my time building my human capital, building my business, and spending time in ways that bring me joy and fulfillment and that doesn’t include actively trading, watching stock market news or trying to time the market.

This interview originally appeared in our TradeTalks newsletter. Sign up here to access exclusive market analysis by a new industry expert each week. We also spotlight must-see TradeTalks videos from the past week. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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