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Financial education doesn’t work

‘Everybody has a plan until they get punched in the mouth’.

“Everybody has a plan until they get punched in the mouth.”

This quote from Mike Tyson has always stuck because I see a lot of people who do a lot of planning but very little executing and this is very relevant when it comes to their financial well-being.

I have an acquaintance who is obsessed with money. He doesn’t have much of it, but he loves to talk about it and every time we reconnect, he goes through a predictable cycle of saying his new resolution is to get his spending under control, kill his debt and start investing. Having heard this story for the last couple of years, I am sceptical.

But every time I leave a discussion with him, I sit there wondering why he has never been able to take control of his finances. He earns a decent salary, is on a mission to educate himself about money and has a variety of tools at his disposal to help him get in control.

Two pieces of research which have recently begun circulating might explain the reasons for this:

First up, economist Shawn Cole from Harvard Business School, Anna Paulson at the Federal Reserve Bank of Chicago, and Gauri Kartini Shastry at Wellesley College, wrote a paper on whether financial education courses at school level actually work. Their conclusion: “State mandates requiring high school students to take personal finance courses have no effect on savings or investment behavior.”

“Why” you might ask? Let’s think back to the Mike Tyson quote.

Researcher Lewis Mandell handled a study in 2009 and his overarching conclusion: “Financial education doesn’t work when it’s given in advance of when the consumer needs it.”

You might plan what you might do if you ever bumped into Tyson in a dark alley but until you’re actually faced with his pearly whites and nowhere to run, you’re not really going to give serious thought as to how to get out of that situation.

Which brings me back to my acquaintance who doesn’t seriously give his personal finance habits much attention. This is simply because he doesn’t have to – because it’s not staring him in the face just yet. Without question, his life will get turned upside down if for instance his girlfriend were to fall pregnant or he were to lose his job, but right now he is comfortable.

For me, this has been one of the most interesting learnings about using the 22Seven (www.22seven.co.za) app in the last few months. Everytime I have logged into the app, I have been faced with a big part of my financial position. I am faced with the fact that I spend too much and could be more diligent with my credit cards and eating out. But you have to make the decision to take control of your finances and make it a critical issue – we all know the basics of spending less than you earn, and yet we very rarely live these values.

We can all make plans but if you’re not prepared to apply them to real-world situations,, then you are probably never going to know how well they work.

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