Financial Literacy Can’t Solve Systemic Issues

Systemic issues can't be ignored in personal finance.

Outside of financial professionals, you probably won’t find a group more knowledgeable about investing, retirement accounts, taxes, budgeting or any other financial topic than the financial independence (FI) community. As such, we’re fixated on financial literacy. We lament the lack of financial literacy courses in schools and how it hurts students as they go into the world without a basic understanding of financial topics. If only more people understood compound interest, they wouldn’t be poor.

The upshot is that the FI community tends to ignore systemic economic issues that hurt the poor, racial minorities and other marginalized groups. It’s easy to believe that we all start from the same place, or if not, then at least we all have equal capacity for financial success. It’s much harder, particularly if you’re part of a group that has traditionally received the lion’s share of benefits in society, to admit that there are systemic issues at play. Too often we perpetuate the bootstrap narrative — the idea that if you just assume personal responsibility and work hard, success will come.

In a recent Bloomberg column, personal finance writer Erin Lowry calls this “a longstanding fallacy.”

Sure, this rhetoric is powerful because in some ways it’s empowering to believe that you can get rich all on your own. But it obscures the important role of external factors in shaping our finances. Crucially, it fails to reckon with the country’s legacy of systematically marginalizing certain groups, making it difficult, or even illegal, for many to access opportunities and build wealth.

There are endless examples of how various marginalized groups have been harmed and continue to be harmed economically, but we can see a glaring example in how black Americans have suffered due to the legacy of slavery, a discriminatory economic system and racial violence. Lowry describes some of this history in her piece.

In one of the most horrific acts of racial terror of the 20th century, a white mob extinguished hard-earned black wealth when they destroyed the Greenwood District in Tulsa, Oklahoma, a neighborhood known as the “Black Wall Street” in 1921. The attack killed more than 30 people, left thousands homeless and caused more than $30 million in property damage.

Black Americans were denied wealth on a much wider scale during the Great Depression. Even as the New Deal created social safety net programs during a time of great economic pain, black Americans were largely excluded from the benefits due to the fact that domestic and farm laborers, which accounted for 60% of black workers, did not qualify.

The policy of redlining by mortgage lenders actively prevented black Americans from securing mortgages and owning homes by marking black neighborhoods as unsafe on their maps. This maintained racial segregation and robbed black families of homeownership for generations. The practice continued even after the Fair Housing Act outlawed it in 1968.

And if history isn’t enough, there’s evidence that the wealth gap between black and white Americans has grown over the past two decades. Black students graduate with more student loan debt and are more likely to borrow money for education in the first place. The tax code provides benefits to white Americans that black Americans are less likely to receive. And higher incarceration rates mean black Americans struggle much more than white Americans when it comes to building wealth.

As Lowry concludes,

Too often, our narratives around financial and socioeconomic achievements are pegged to radical self-responsibility. That’s because, as Francis points out, it’s easier to tell individuals to change their behavior than to challenge the structures in our economy and society that enable some to succeed while limiting others. It’s time the personal finance industry stop taking the easy way out.

Facing the idea that individuals don’t have perfect control over their outcomes, that there are systemic issues working against many marginalized groups in society, isn’t always easy, especially for highly educated professional classes (overrepresented in the FI community) that genuinely feel their success was the sole product of their own effort. But we need to recognize that the economic system we live under makes building wealth easy for some while others are denied it entirely. Those who already have wealth are likely to keep it and pass it down to their children. Those who don’t struggle to build a stable life for themselves, let alone ensure future generations succeed.

So where does financial education fit into all this?

I think we all ought to learn about financial topics much earlier and often. Almost everything I know about personal finance I had to learn myself. While I vaguely remember stock market projects in a math class in middle school, I never took a true personal finance course. I never learned about compound interest or Roth IRAs. I feel like I could have benefited from knowing this stuff earlier. And I think there’s a severe lack of financial literacy in society. But it isn’t a panacea. Not every financial problem can be fixed with financial literacy. We can teach people how to invest, how to save, how to budget, how to stay out of debt, but at the end of the day, you still have to consider factors outside of one's control.

It’s hard to put money into a Roth IRA if you barely make enough money to pay for your essentials. And it’s hard to get a job that pays above a living wage if you lack education or skills, which come at a cost. Even if you do have the education, student loan debt prevents many from saving for retirement. If you live paycheck to paycheck, it’s harder to build an emergency fund, and therefore easier to fall into a cycle of credit card debt. If you come from a family without wealth you’re more likely to financially support them one day, which hurts your own retirement security.

There are so many things that are suddenly easier or situations that are easier to avoid when you have financial margin or your own safety net. Wealth makes it easier to avoid debt, to go to school, or quit your job to start a business. It’s much easier to invest for the future when you’re already in the middle class. None of this is to say that people who face systemic issues are completely helpless or that they can’t succeed. But poverty and marginalization require you to work even harder and often creates a cycle that’s difficult to escape.

There’s a saying that it’s expensive to be poor. Getting kicked out of your home might mean needing to stay in an expensive motel. Not having a kitchen or the time to cook might mean spending on expensive and unhealthy food. Unhealthy food leads to poorer health outcomes which can increase healthcare costs later in life. Families that don’t have the privilege of living on just one income face expensive childcare costs. Poor people are more likely to see higher borrowing costs.

Add in systemic racism and everything can feel like an uphill battle.

This doesn’t mean financial literacy is necessarily useless. For those comfortably in the middle or wealthier, financial literacy might be a benefit. Someone who earns enough to save their income can benefit from knowing how best to invest and develop the financial discipline to build wealth. Some people are simply risk-averse and lack an understanding of the stock market, so they forgo wealth building and put all of their savings into cash rather than invest.

There are people that make high six-figures that live paycheck to paycheck because they have no spending discipline. There’s the ridiculous article genre where a couple with an astronomical income claims they are “barely making it.” They buy huge houses they can’t afford, finance expensive cars and take luxurious vacations largely to keep up appearances of wealth.

But financial literacy probably won’t get you out of poverty.

A fundamental misunderstanding about the poor is that they’re bad at managing money. In reality, the opposite is true. Whereas the wealthy can get away with spending more without hurting their wallets, poor people must make every dollar count. They have a level of consciousness about what money can buy that wealthier people simply don’t. And they get really good at budgeting.

There’s a narrative that if you’re poor, it was because of your own bad decisions. There’s research to suggest, however, that being poor itself contributes to bad decision-making and that the stress of contemplating costly financial decisions causes people to make poorer decisions.

The premise behind financial literacy is that if people just knew more about finances, they could make better decisions. Unfortunately for proponents of financial education, studies seem to suggest that financial literacy might not get the results we expect.

A recent study found that at least when it comes to teaching high school students about retirement savings, financial literacy courses did not increase the likelihood of having a retirement account. Neither did it decrease stress related to retirement planning. The study did find promise in teaching about budgeting and credit-related topics, however.

There are other studies that indicate choosing to take a financial literacy course correlates with better behavior in the future, but not that the course led to that behavior.

Now maybe this is an indictment of the way financial education is taught. Maybe students are getting the wrong lessons. Maybe teachers are inadequately prepared to teach the topic. But we need to confront the idea that we can’t educate people out of poverty. For some people, no amount of financial education will dig them out of the hole they are in. Some people just need money.

Financial education might help some people, and maybe we could get it right, but it won’t save us. If we really wanted to make a bigger impact, we would focus less on financial education, less on lecturing people about hard work and personal responsibility, and more on confronting the systemic issues that stand in the way of building wealth for racial minorities, women, LGBTQ people, immigrants and other marginalized communities.

We should do away with harmful narratives about self-reliance because it’s not always that simple. While there are amazing stories out there of people who really did climb out of poverty, stories of self-reliance are more often than not concealing family support, white and/or male privilege and sometimes just luck.

As these systemic issues are remedied and people face fewer obstacles to education, jobs and wealth, it’ll be easier to put financial literacy lessons into practice.