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John Lynch: Rethinking Financial Education

A noted researcher and consumer advocate discusses why so many financial literacy efforts don't improve outcomes--and what they could do better.

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Our guest this week is Professor John Lynch, senior associate dean for faculty and research at the Leeds School of Business and University of Colorado distinguished professor. Professor Lynch's research focuses on the cognitive psychology of consumer decision making, including consumer financial decision making. Together with his Leeds School colleagues, he founded the Center for Research on Consumer Financial Decision Making to bring social science to bear on understanding how people save, invest, budget, and take on debt. He has published numerous research papers and has received many awards for his work, including the Society for Consumer Psychology's Distinguished Scientific Achievement Award. Professor Lynch received his B.A. in Economics, his M.A. in Psychology, and his Ph.D. in Psychology all from the University of Illinois at Urbana–Champaign.

Background
John Lynch bio 

John Lynch research 

Center for Research on Consumer Financial Decision Making 

Academic Research Council, Consumer Financial Protection Bureau 

Financial Education
Fernandes, Lynch, J.G., & Netemeyer, R.G. 2013. Financial Literacy, Financial Education, and Downstream Financial Behaviors.” forthcoming in Management Science.

Examining Financial Education: How Literacy and Interventions Affect Financial Behaviors,” National Endowment for Financial Education, 2014. 

Financial Literacy: Just-in-Time Is the Ticket,” Christine Benz and John Lynch, Morningstar.com, March 12, 2016. 

Thaler, R. 2013. Financial Literacy: Beyond the Classroom.” The New York Times, Oct. 5, 2013. 

Kitces, M. 2016. “Financial Literacy Effectiveness and Providing Just-in-Time Training by Financial Advisors.” Nerd’s Eye View, Sept. 21, 2016. 

Ward, A.F. & Lynch, J.G. 2019. “On a Need-to-Know Basis: How the Distribution of Responsibility Between Couples Shapes Financial Literacy and Financial Outcomes.” Journal of Consumer Research, Vol. 45, No. 5, P. 1013. 

Retirement Planning and Financial Outcomes
Sammer, J. “Retirement Plans Are Leaking Money. Here’s Why Employers Should Care.” Society of Human Resources Management, Oct. 17, 2017. 

Nudge theory definition 

Thaler, R. & Sunstein C. 2008. “Nudge: Improving Decisions About Health, Wealth, and Happiness" (New Haven: Yale University Press).

Wright, O. 2013. How Organ Donation Is Getting Nudge in the Right Direction.” The Independent, Dec. 24, 2013. 

How America Saves,” Vanguard, 2019. 

Financial Decision-Making and Well-Being
Four-Year Myth,” Lumina Foundation.

Hunter, W.G., Zhang, C.Z., Hesson, A., et al. 2016. What Strategies Do Physicians and Patients Discuss to Reduce Out-of-Pocket Costs? Analysis of Cost-Saving Strategies in 1,755 Outpatient Clinic Visits.” Society for Medical Decision Making, Vol. 36, No. 7, P. 900. 

Netemeyer, R., Warmath, D., Fernandes, D. & Lynch. J. 2017. How Am I Doing? Financial Well-Being, Its Potential Antecedents, and Its Relation to Psychological/Emotional Well-Being.” Advances in Consumer Research, Vol. 45, P. 780. 

Complaint Snapshot: Debt Collection,” Consumer Financial Protection Bureau, May 2018. 

Nova, A. 2019. “A $1,000 Emergency Would Push Many Americans Into Debt,” CNBC.com, Jan. 23, 2019. 

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Christine Benz: Hi, and welcome to The Long View. I'm Christine Benz, director of personal finance for Morningstar, Inc.

Jeff Ptak: And I'm Jeff Ptak, global director of manager research for Morningstar Research Services.

Benz: Our guest on the podcast today is Professor John Lynch, senior associate dean for faculty and research at the Leeds School of Business and University of Colorado distinguished professor. Professor Lynch's research focuses on the cognitive psychology of consumer decision-making, including consumer-financial decision-making. Together with his Leeds School colleagues, he founded the Centre for Research on Consumer Financial Decision Making to bring social science to bear on understanding how people save, invest, budget, and take on debt. He has published numerous research papers and has received many awards for his work, including the Society for Consumer Psychology's Distinguished Scientific Achievement Award. Professor Lynch received his BA in Economics, his MA in Psychology and his PhD in Psychology all from the University of Illinois at Urbana-Champaign.

Professor Lynch, welcome to The Long View.

John Lynch: Thank you so much for having me.

Benz: Thanks for being here. We were really compelled by your research on the role of financial education and its ability to help improve financial consumers' decision-making. So, let's talk about that, because it does seem that your research indicates that delivering financial education really doesn't translate necessarily into better consumer behaviors.

Lynch: Yes, so we did what's called a meta-analysis, which is a statistical summary of every paper that had been published by that point, as well as unpublished working papers, just to summarize what the data seemed to show. And there is one conclusion that people talk about a lot, which is that if you look across studies where some consumers got financial education, others didn't, on average, getting the education versus not explained 0.001% of variability among people in whether they do the so-called good or bad behaviors. And so the average effect is, it's actually statistically highly significant because there's so much data, but it's a very small effect. And then I guess another thing that's a little bit discouraging is that those effects are even weaker when you look at low-income samples, who I think we're trying especially to help, compared to studies that look at regular general-population samples. I guess the last thing that people cite a lot from this paper is the idea that the effective financial-education decays, which is not surprising—basically all education decays.

Benz: So, let's just explain what that means. It means that if I'm not using it, it just goes away, right?

Lynch: That's exactly right. So what we did is we did an analysis that looked at studies that varied in the number of contact hours of education, and also varied in the length of time that had passed from the end of the education to when we looked at the effects on behavior. And first of all, the results unsurprisingly showed that if you look at effects on behavior farther out in time, you get less effect. That's not surprising. We also found that if you look at interventions that had more contact hours, they had more effect on consumers' behavior, which is also not surprising. Then the third piece of it that I think is like the most important result in our study is those two things combined or interacted, such that it mattered quite a bit whether you had only an hour versus, say, a 24-hour intervention, if you looked at effects on immediate behavior. But if you scale that out, say a couple of years, it didn't matter whether you had an hour or 24 hours or something even longer. There was no effect when you looked that far out on financial behavior for interventions of any length on average. And so that led us to say that financial education should be narrowly targeted at changing a specific behavior "just in time." So, if you want to have influence, you should try to figure out when that behavior is going to happen and try to have your financial-education interventions like right before that.

Ptak: Maybe for the benefit of our listeners, since it's so central to your research findings, this notion of sort of good versus bad behavior—maybe to orient them to that framework and how it is you or the researchers whose work you were drawing upon, define that. Can you give maybe an example of a good behavior and contrast that with a bad behavior?

Lynch: Yeah, so, first of all, it's a great question, because I think there's almost no behavior that one can say is an unvarnished good, but the behaviors we looked at were behaviors where people take a position that one way of behaving is good, for example, saving. So, do you have…do you save? Have you done any planning for your retirement? What's the state of your debt? How are you at cash flow management? Do you invest? Are you active? If you say you have a 401(k) plan, are you active in your retirement plan? Or are you engaged in what we call inertial behaviors where you just don't pay attention after the fact. And so, across all those behaviors, or all those different types of behavior, what we found was, if you measured people's financial literacy and related it to whether they did those so-called good behaviors, there was a reasonable connection between how many questions you get right, asking questions about basic finance, and whether you did those good behaviors. But for studies that tried to intervene to change those behaviors, those all showed dramatically smaller effects. And so it looks like knowing about financial matters does matter. But the educational interventions to try to improve that and therefore change the behavior are having much weaker effects.

Benz: One thing that jumped out at me from your research is that sort of diffuse financial education about a lot of different topics like controlling debt or investing well, or you know, the broad cross section of information that people might have. If they take some sort of financial course. That's inherently not helpful because it's not just in time. Can you expand on that?

Lynch: Yeah, so that's my position. I think sometimes I get characterized when people write stories about financial education. I get characterized as having results that are against financial education. But that's a mischaracterization of what we think our results show. So, this just-in-time idea, it's completely unsurprising. It's a general principle of learning that if you learn things and you don't use them, then it decays. So if I teach an advanced statistics class, and people don't use those statistics, it will be gone if you don't use it. And so my critique is that some of the advocates of financial education, they have the intuition that if we could just set you up for a lifetime by telling you everything you need to know, you’d get in these good financial habits, and you'd have a lifetime of financial success.

So therefore, you're advocating teaching in schools, actually, both in high school and even elementary school, about this whole array of financial topics. So, you know, not just here's about what a credit card is; here's what a stock is, here's what a bond is, here's what a mortgage is, here's what insurance is, etc. And my contention is that if you want to target your financial education at people that are younger, you have to think about what behaviors are they going to have a chance to engage in, and then figure out how to have a narrowly targeted intervention on just that topic. Because you'll see, for example—I don't know if this is still true, but it was true, for example, in the state of Virginia, when they put in a high school financial-education course, freshman in high school, if I'm not mistaken—and they're truly hoping that you're going to wind up in adulthood and understand about mortgages because you took this class in high school, and it just goes against everything we know about any form of learning. It's nothing special about financial education. You got to use it, or you lose it.

Ptak: It seems like the dilemma though, is that to effectively deliver just-in-time education that's really potent in the way you described, it collides with people's tendency to be impulsive, and to maybe make a spontaneous spending decision, perhaps to their detriment. And so can you talk about an example where just-in-time delivery of financial education has been really successful in overcoming kind of that central paradox.

Lynch: So, I can give you examples of where I think it would be very timely.

Ptak: Sure.

Lynch: Let's take the issue of retirement plan leakage. We have another project with researchers at University of British Columbia and Texas State University about retirement plan leakage. And it turns out that when people change jobs, depending on how you look at the statistics, like just under 40%, drain the money in their retirement account when they do that.

Benz: They pull it out.

Lynch: They pull it out entirely. They pay the taxes on it and they pay the penalties on it. And so you have somebody who was in a job, they had a certain amount of balance. Now they're 35 years old, they change jobs, and they leak it. So, the biggest place where you get this retirement plan leakage is actually a job separation. Well, that'd be a fantastic time to have just-in-time financial education, when you’re going into the HR process and you're talking about leaving the organization—to get an intervention that explains to you at that point in time, that it would be a really bad idea to do that; you'd have to have very rare circumstances to make it a good idea. And here are ways that you can roll over; either keep what you have in your current plan or roll it over into another qualified asset. So that's an example where there's a point in time, and we can identify that a consumer is at that point in time, and so we can intervene. I think what is in Jeff's question is that there are some behaviors where it's harder to know when the person is at that point in time.

Ptak: Right.

Lynch: But then it's hard to act in a practical manner on this advice to have this just-in-time financial education if you don't know that the person's about to engage in a behavior. What do you do about it? And I would say that's a realistic point. What I would favor is if people are interested in financial education to try to look at it on a behavior-by-behavior basis. And say is that a behavior, one: where we can have a signal—somebody can have a signal—that the person is about to engage in this behavior, or have an opportunity to engage in the behavior, and then can we time our information at that time. There are a number of financial decisions that have that characteristic. With the high school kids, are you about to make a decision about where they go to college. If you are going to go to college, are you going to make a decision about where to go to college; how about the funding for that? Those are all things where we can have some general idea that people are about to have an opportunity to make a decision of a certain type. Similarly, with mortgages and so on, there's a signal when somebody is "in the market." So, I do believe that trying to think in a very rigorous way about what are the specific behaviors, and let's try to equip people for those specific behaviors. And let's try to understand the whole context of their decision process.

Benz: So a related question to Jeff's—in addition to people being impulsive is that there aren't always benevolent actors in the mix in terms of these financial transactions. So, like the workplace plan, that would be an example of someone who wants to have the participant have a good outcome presumably. But there might be other transactions, like you're ready to take out a mortgage, where there are entities who don't necessarily have the consumer's best interest at heart. So, what do you do about that in terms of putting in place interventions at junctures like that?

Lynch: That's a really great, that’s a really great question. Because let's take the case of a mortgage, you can imagine that if there's some signal that somebody is in the market, you could provide just-in-time financial education. In fact, we had a project that we worked on for a long time trying to do something in collaboration with one of the GSEs about creating a mortgage-recommender system that would help you understand that, given what you tell me about your personal circumstance, if you took out a loan of this type of this amount, by our statistical model, here's your likelihood of defaulting, etc. And then if you change from adjustable rate to a fixed, then here's how our model says you have a less likelihood of default etc. And it never came to fruition. And one of the reasons it didn't come to fruition is the point that Christine is making, that you've got actors in the system who don't have an incentive to want you to limit the amount of money that you borrow. You know, if your commission is based on the total amount, then why would I want to tell you that you should borrow anything less than the total amount that someone will lend you. So, I do think that that is another serious issue. I am on the Academic Research Council of the U.S. Consumer Financial Protection Bureau and they have a very strong group there working on financial-education issues. And a lot of the things that they are trying to address are exactly the questions that you guys are asking about. Well, how do you know about the timing? How do you deal with the fact that you're in a market where you're not the only voice with the recommendation?

Benz: Well, you mentioned the CFPB. I wanted to talk about that because I think there's been sort of this widespread perception that things have really changed there, that perhaps its mission has changed. What's your perspective on that from having served on that board?

Lynch: You know, I just attended a meeting of the Academic Research Council in October in DC and I was pleasantly surprised. I did have some concerns. If you go from when Cordray was director and then they had Mulvaney was director. It did appear he was like trying to close down the CFPB and, you know, make them change their name and all sorts of things. So, I would just say I'm guardedly optimistic this meeting with the new director Kraninger really seemed to be a very open conversation. And so I actually think that I'm pretty optimistic. And I know a lot of people that are working there in the research group who I have a lot of regard for.

Benz: So, going back to the just-in-time concept, can you talk about any implementations of that that you've seen that have been promising to you? Are you seeing this get implemented in a real-world setting?

Lynch: The conversations that I have, for example, when I met with the Financial Education Group of the CFPB it was more how they're trying to think of applying it rather than my saying, look, they read our paper, they change their practices based on the paper, and here's the result. I don't have that I can just describe to you as I have, how they're trying to think about their different groups and what is realistic and what is not. And I guess the other that I consider to be a success is they're backing off from efforts that I think would be doomed to be impractical. So, for example, if they still have a group that's directing their efforts at younger kids. But instead of thinking they're going to teach these kids about compound interest, and here's what a bond is. Instead, they're trying to teach them more general skills that they believe are related to good financial behavior, like issues of self-control, like planning, like grid, etc. And there are things that are skills that extend beyond money. So, I personally view that to be the success of our paper that we're influencing people to back off from things that seem like they will be doomed to failure from anything I know about cognitive psychology and memory and learning.

Ptak: And what gives you confidence that imparting those sorts of more-generalized lessons you describe work better than some of the other lessons that perhaps they were originally trying to impart but which you thought had much lower odds of succeeding?

Lynch: That is a good question. I mean, in some cases, it's like basic math skills. You know, that's an example of a general thing they're doing which I think is a positive. There are some things about money that are just about math. It’s a good idea to teach kids about math. On the issue of when you get to things that are about planning and self-control, there is a little bit of experimental stuff on that, but not anything that I know of its large-scale field experiments. So again, it's pretty experimental. I guess, a piece of what I have said about this is like, when we wrote this first paper, and we say that look, you know, from the things that are published, 0.001% of the variability among people, and whether they do the good or bad behavior is explained by whether they got the intervention. It was not a statement that we thought that it was not possible to do something beneficial. Rather, it was that what people have tried so far isn't working, or is not working the way they think it's working, because people are too easily convinced by anecdotes.

So, we suggested to them, they have to be a lot more evidence based. And one of the things about being more evidence based is being more careful about observing when one does run a study, being more careful about documenting in the study exactly what happened in the education, what are the details of the curriculum, etc. And then sort of careful measurement of those outcomes. Because I believe you can't do this by like intuition or what you think is "common sense." It requires an accumulation of evidence from different studies and saying, OK, these studies differ from these in a particular way, and that seems to be associated with this improved outcome. So, I'm a believer, I don't think that anything that we've written will ever have the effect of reducing enthusiasm for financial education because people seem super wedded to it. But my thought is, how to make it as beneficial as possible. And I think that anybody who's doing it should have a view that it's very provisional, very experimental; be very careful to actually test to be able to assess whether something did work or not and make that available in ways that it can be accumulated.

Benz: So, in terms of teaching financial education in a classroom setting, it sounds like you think it calls for sort of a fundamental rethinking of what we're doing there. How about for parents who are trying to inculcate, some good financial habits in their kids. Are there things that they should think about that maybe you could use your research to sort of influence?

Lynch: Yeah. So, I would say yes, and I'm going to say yes for a couple different reasons. But it's going to be a provisional, yes. The reason my yes is provisional, is because the question presumes the parents know what they're talking about. And part of the problem, I think, or we think, about financial education is it's very related to you know, Jeff’s question about other actors. The teacher could do a great job in some formal financial-education setting, teaching some topic about money matters, and the kid goes home, and mom and dad or aunt and uncle, and every family friend has opinions about money—you know, they're often wrong. And so parents can help their kids a lot if they know what they're talking about.

Then the second thing I would say, is I have another paper that is kind of a counterpoint to this just-in-time idea. One of the arguments, it's actually very related to Jeff's question. If you decide you're not going to give people financial education until you're sure they need it. What if by that point, it's too late, you know, like either you missed the opportunity for the behavior or they just can't assimilate it. And so you often hear when this research is discussed, this idea that well, you may not be able to show effects of this early school age financial education on behavior, but you set a foundation that will be helpful later in life. And my answer to that is, again, is this use it or lose it. We have a study—it’s not a paper on financial education—but we have a paper with Adrian Ward at University of Texas at Austin, about financial literacy of couples. And actually, I think I might have talked about that on Morningstar forum.

Benz: Yes.

Lynch: And that is relevant in this context, because what we show in that is that when couples first get together, they divide up various tasks that you know, things that couples need to divide up, one of which is money. And we find that when couples start their relationships, there's no association between people's measurable financial knowledge and who gets the job as what we call the household CFO or Chief Financial Officer. So, when you start out, if you wind up with a money job, it's not because you know more about money. It's not that you had a better credit score or any other record that you're actually are better with money. It looks like maybe if you want the job, you're more likely to get it. But it's not that you know more. But as couples progress in their relationship, the longer they're together, the more they start diverging in what they know. And the one who's the CFO, household CFO, gets better and better and better over time and what they know about money. It's learning by doing. And the person who's in the non-CFO role remains flat if they're unengaged or can actually decline over time. And it gets to the point that if you're—this is going to discredit everything I've said—but in my family, my wife handles all the money, and so we've been together for 45 years now.

What our research shows is that couples like us, by the time we've been together for a very long time, there's a wide divergence in knowledge between the one who's doing the money and the one who's not. And if you now, 45 years in, you ask the one person who hasn't been doing the money to make independent financial decisions—they’re much worse than the financial decisions of their partner, where that wouldn't have been true at the beginning when they had the same knowledge base. 

And so all that's a long windup to say, you know, if I scale the same principles to the issue of financial education in high school…because I think one of the problems with high school financial education is that kids tune it out, because they don't think they're going to use it. Well, now if you're a parent, you might have a way that you know the kid can use it in the way you've arranged things in your family, like the kid may have an allowance or they may have a job or something like that. You are in a position to allow the kid to act on what he or she is learning. And to me, that's the critical thing that all the learning literature suggests will prevent decay. It's if you're using it, then there's a chance that it's going to persist. The problem is if you learn it—you taught me about a mortgage when I'm in high school, what the heck, you know, it's not surprising that there's not a lot left by the time the kid gets out of high school, much less college, much less when they're actually buying a home a decade later.

So, a knowledgeable parent can be very thoughtful. And so if a parent listening to this podcast is discouraged about what's being said about what can be done in the school, if the parent knows his or her stuff, or the parents know their stuff, they can do things and they can help the kids learn good money habits that they'll act on. And I'm optimistic about that.

Benz: So, I wanted to go back to that research about couples and financial decision-making and kind of that divide-and-conquer strategy that a lot of couples use from a practical standpoint. Let's just talk about the downside then of one couple having honed his or her abilities over the years and the other one just sort of letting that decay go on. Why is that bad? Seems pretty obvious, but I just like to cover potential downside.

Lynch: Yeah, I'll say well, it turns out, it's really good. It can be good up to a certain point in time and then it turns bad. So interestingly, in our research, we find that when we have from these national surveys that measuring the objective financial outcomes of households, there is a pretty decent relationship between the measurable financial knowledge of the person in the household responding if that person is the Chief Financial Officer for the household. So how much they know and the financial outcomes for the household are related. There's no relationship between the financial knowledge of a respondent and the outcomes for that household if that person's not the Chief Financial Officer, which is to say that if I wanted to be totally ignorant, then as long as my wife knows what she's talking about, and we're together, we're good to go. 

The problem is depressingly, like every relationship ends in either dissolution of the relationship or death of one of the partners. And if you've had this apparently functional relationship where the partner is handling everything, and then suddenly you don't have that partner to rely on, you're in a pretty tough spot. Not only do you not know how to do things well on your own, our research shows that you have a harder time like restarting and accumulating because you don't have that base of knowledge that actually does help you learn more. So, you're in a tough spot. By the way, you may not be able to tell, like who to turn to. Do you turn to a family member? Does that family member know what he or she is talking about? And do they have your best interests at heart? Do you turn to a financial advisor? Are you able to discriminate between a financial advisor who actually has your interest in heart versus one who's going to fleece you?

So, I actually think this is a major policy issue, that it's natural that couples have this division financial responsibility, and that they're going to differ later in life and how much they know. But the partner who's been relying on the one who's the money expert is in a position of vulnerability. And I think both the financial-services industry and policymakers have to be seriously concerned about that issue. And I would just say—I'll put in a plug—we run what we consider to be the world's best research conference about consumer-finance decision-making, and our keynote topic for this coming year is about the aging consumer and financial decisions of the aging consumer. Those are really significant issues for a lot of people.

Ptak: I also wanted to talk about the idea of nudges. So I suppose a way to think about that is, you know, maybe you forego education and you just opt somebody into something; you make the decision for them in a sense. I suppose you could sort of frame that is that type of choice, though, maybe it's not quite that stark. But have you and your colleagues and others in the field had an opportunity to think about, where perhaps it's best to forego a certain amount of education altogether. And then, maybe opt someone into a decision or nudge them in a certain direction, because we know that education just is going to fall short of getting them to where they need to be?

Lynch: Yeah, that's another great question. So yeah, so I've been at the University of Colorado now for a decade and when I came here, that was kind of like the big tension was between the "financial education camp and the nudge camp." And the key issue with nudging is whether consumers are homogeneous or heterogeneous, and whether it's pretty easy to identify a behavior that's right for most people, or whether you and I might have different behaviors that are ideal for each of us. And so our position in the work that we've done is, if it's something where it's pretty clear what's best for most people—a classic example is the research on organ donation that many people may be familiar with, where you have to check a box to say you opt into being an organ donor versus check a box to opt out, has these huge dramatic effects on whether people are organ donors, in a world where most people agree that we should be organ donors. So that’s a case where people agree on what the right behavior is, and you can nudge people into a behavior that there's pretty wide agreement on.

The issue is in financial behavior it's not always quite so easy, which is earlier in the interview, I alluded to this work that we had tried to do on these mortgage-recommender systems. The idea of that was that well, you could have somebody who has a different ideal behavior than another person. And a recommender system is a form of a nudge. Some people talk about what they call smart defaults. A smart default is a nudge and a default that captures something about what makes you different from me. The classic example on that is a target-date retirement fund, right? If you think that the main statistic that dictates whether we should have similar or different preferences in how we're investing in retirement funds. Target-date funds says, oh well, depending on how far you are away from retirement, if you're closer to retirement, we should scale down your exposure to stocks. If the differences among people cannot be captured so readily by some single statistic like, how many years till retirement. Those are the cases where I think, you know, if you can't count on somebody to know what's best for you, then you got to know for yourself.

So, my view and I would say, our view, and I'm speaking for my co-authors at University of Virginia and Katholieke University in this financial-education area. Our view is that it's those cases where the financial education is best focused. So if you can't be sure what's best for an employee, for example, well, then you should try to have financial education but in the form of what we call a recommender system, like to help them sort through what they say their priorities are, here's a way to easily find that.

Benz: So, your research seems to indicate that rules of thumb for financial decision-making can be effective in terms of improving decision-making and behaviors. So why do you think they might work? And what are some examples of rules of thumb that could help instill better behaviors?

Lynch: Well, rules of thumb are especially ... well, let's give an example rule of thumb. A rule of thumb might be: contribute to your 401(k) up to the employer match; don't leave money on the table. Like it's a pretty easy rule of thumb. I guess there's a risk that somebody might have contributed beyond that. That rule of thumb, you know, seems like very good advice. Somebody who doesn't contribute up to the match seems like they're making a mistake. You may have other rules of thumb when you're teaching younger people about: pay your credit cards off at the end of the month; you know, don't spend money that you don't have. So those are things where you can get people to argue with you. But those rules of thumb are pretty good. And I guess that you've actually, once again, asked another really good question.

In our view, if we go back to, what should you be trying to impart both to adults, but also to younger people, the things that make someone have a successful versus less-successful financial life are largely not that complicated. It's not, something about their understanding about compound interest and bonds. It's basic stuff like don't spend money you don't have or those kinds of examples I've been talking about—contribute up to the employer match. So those can be good, and there's a lot of analogies in other domains that show that even though that's not like the 100% solution, for the person who's most sophisticated, it's a darn good solution. An example would be in food consumption. Take your plate and fill it up to the inner circle; don't go outside the inner circle as a portion amount. That's an example of a rule of thumb. And it's easy to argue with it and say, well, there are cases where it should be less or more. But it's not a bad rule. And I think that idea of rules of thumb is a very good line of thinking for both firms and for researchers who are trying to help consumers.

Ptak: One of the things that you mentioned a little bit earlier in our conversation is that your research found some differences in I guess the efficacy of financial education depending on perhaps their social and financial circumstances. I think that you referenced the fact that, you know, there were some differences that you observed among lower-income individuals. And so I wonder if maybe you can expand briefly on that and explain why that's so and what, if anything, we can learn from that so that’s better addressed going forward?

Lynch: Yeah, so there's a financial-education industry. And my view is that people in that industry like are very sincere in their beliefs, but there's an ideology about financial education that it's this great leveler. And the data don't support that. The data show instead that whether you're talking about correlational studies that correlate a measure of financial literacy or financial behavior, or intervention studies where one group gets the financial education, one not, or it's a prepost design where you compare the behavior before or after the financial education. Our data show that in both cases, the effects are a little bit weaker, actually significantly weaker, for the lower-income samples. So, it's not true that it's a great leveler at all. Unfortunately, it's harder to help people who need help more. And so the data don't really suggest that it has that leveling effect.

Ptak: And why is that?

Lynch: I think that you can have a lot of different speculation. One thing is what we just talked about earlier about the fact that you can get financial education, you go home, and then what happens? Does somebody contradict you, or do they say the same thing, and so on. I gave the example of my teaching people that advanced statistical course and experimental design. It's not like people go home, and somebody tells him to do it a different way than the way I taught. You know, they don't go to a cocktail party and have Uncle Vic say, you know, do it different. But with money, that's not the case. And when you ask the question about what parents can do, the conjecture is that parents of lower-income families have less advantages and less sophistication in what they know about money. So, I would imagine that that part of it is a piece of it. In general, there's something in learning called the enrichment hypothesis, which is that knowledge makes it easier to gain more knowledge, which is the same thing we talked about in the research on couples. And so if low-income kids have less baseline then it just turns out that what you try to do to help them has even less effect than it has on the kids that are more of the middle-class kids.

Benz: So which parts of the consumer financial decision-making process are the most worrisome to you today? Are you seeing another crisis in the making anywhere? Whether with auto loans or student loans, retirement decumulation, which you referenced, anything like that?

Lynch: Yeah. Let's take the student loan one. So, I mentioned that we run this annual conference, we always pick some key topic. We had Richard Cordray who was the director of the CFPB, we had this fantastic keynote panel about the growing student-loan crisis. And here's an example of a rule of thumb as a way to try to address a problem like a student-loan crisis. It turns out that if you look nationally at flagship state universities, like the one where I teach, out of kids who enter as freshmen, 35% or 36% graduate in four years. It's gotten to the point that universities keep statistics about six-year graduation rate rather than four-year graduation rate. There's a terrific white paper called “The Four-Year Myth” that examines this and examines what things both students and universities are doing to make this happen. That's an example of something that it's in my opinion of crisis level. There's one thing that could be done that'll make that a lot better. Like if you're in college for five years, rather than four, then that's an extra year of education. A year that you're out of the workforce has a big financial effect on what your debt burden is going to be. And so, like, that's an example of just-in-time financial education. I think that when they bring kids on campus for these orientations, they should be talking about this with the kids and the parents that should be totally your goal how you are going to get through in four years. And by the way, organizations like mine should care about it. And they should be laser-focused on what bottlenecks in the system would make a kid wind up having to take five years instead of four. So, the student loan crisis is a big one. And again, I think there are things we've been talking about that can help.

Retirement-plan savings in my view is another big one that's just a looming crisis level. If you just look at the median level of savings, at least 401(k) savings of people that are in the 55- to 64-year-old range I've seen a statistic at Vanguard that the median balance was something on the order of like $62,000, and you're sitting there that close to retirement. So those are areas where there are problems and I’ve also talked about solutions in the same interview, like the problem of retirement-plan balances being so low. Well, if something on the order of $0.35 to $0.40 on $1 that's put into a retirement plan leaks out, mostly a job separation. And there are things that we could do as a country about that, I think that should be addressed.

Ptak: What about with respect to, and I don't know if this is a facet of your research or not, if not, feel free, and we can move on to the next question. But healthcare is a topic that we've returned to often on this podcast because it is so consequential and also because it's in many respects so unpredictable. And so I guess, are there any best practices that you could share on how one can educate themselves properly to prepare for that quandary that they'll face and managing healthcare expenses at the different junctures, or is that not an area that your research has focused on to this point?

Lynch: I am actually just starting to try to do some research on the inner linkages between health and financial domain. We did have actually in this Boulder summer conference on consumer-financial decision-making, last year's keynote topic was about consumers’ decisions around healthcare, and what are domains where people are really vulnerable. You know, one of the things that we have this amazing—I mean two amazing speakers—but one of them is a guy named Peter Ubel, who is at Duke University and is an MD, and quite an accomplished behavioral economist. And a lot of his work is just about how the system does not give people information about what they're spending on healthcare. Just as a concrete example, he gave an example of somebody who's a cancer patient, saying like, the doctors don't know what you and I are going to be charged. They don't think it's their job to have to know—everybody's got a different insurance system; how could they possibly know? And the result is the doctor's advice is utterly insensitive to the financial costs on the consumer.

His example of this cancer patient, had a choice of treatments in the early round and picked one that happened to be dramatically more expensive, wiped out his savings, and therefore couldn't afford to try when the first treatment didn't work, couldn't afford to try the second thing. The doctors don't know. So, in my view, when we talk about financial education around health, a lot of that should be directed at the healthcare system and the providers who are thinking only Hippocratic Oath. But actually, they give advice that's almost universally followed by the patients. So, if I were putting policy effort into how to help consumers around decisions around health. How can they possibly make good financial decisions if they're going to their doctors and their doctors don't know the price tag.

Benz: Speaking of health, you have done some work on the topic of financial well-being. And I'd like to talk a little bit about that. It's obviously so intertwined with our overall sense of well-being if we feel that we have some financial wherewithal. Can you talk about the research that you've done in that area? And also, maybe just define what you think is financial well-being?

Lynch: OK. Thanks for that question. Yeah. So, it actually, again relates to our earlier line of discussion when you were asking me well, how do you know that a behavior is a good or bad financial behavior? And some policymakers have taken that question to be serious and difficult and have decided that we're going to instead judge whether an intervention is successful or not, not by whether it changed somebody's specific behavior by whether it makes people feel a higher sense of financial well-being. So, we have done work on this. The Consumer Financial Protection Bureau has done work in measuring this. So, there's a very large literature in psychology, economics, a whole array of sciences, about overall personal well-being. And there's sub-literatures about how your overall well-being relates to things like how do you feel about your job? How do you feel about your personal relationships and so on? And now we're starting to have this literature about financial well-being.

So, we worked on both front to conceptualize what this is and developing a measure of it. And broadly, we see these two different dimensions of financial well-being. One is the absence of current money-management stress. That is, you're not sitting here right now and just worried about how you're going to make it through the month. And the second is a sense of long-term future financial security. And what we find is that these measures of financial well-being are strongly related to overall well-being at a level that’s actually quite high in magnitude compared to how you feel about your jobs, your personal relationship, etc. It's a big deal. And we further find that those two dimensions I mentioned—feeling free of current money-management stress, and having a sense of long-term financial security. That the weights on those two depend on your income. There's a big literature about income and overall well-being that makes the claim that income matters a lot when you're at very low levels of income. But pretty quickly, once you get to middle class, more income doesn't really change your overall well-being.

But what we find is kind of a twist on that standard finding. What we find is that this sense of whether you're stressed, has a pretty big effect if you're lower in income. And as you get to be higher in income, whether you feel that way stress or not, on a monthly basis doesn't have as big an effect on your overall sense of your well-being as a person. The long-term sense of future financial security that turns out to matter—no matter how much money you make, no matter what your other personal circumstances are. And so, you know, we think that's a really interesting area for employers to think about how they can improve the lives of their employee. What can you do as an employer to either help people deal with their current money-management stress or to have them have a greater sense of personal financial security.

And just to give a factoid for your audience, these CFPB statistics, its Consumer Financial Protection Bureau statistics, show this shockingly high percent of American consumers have received a call from a debt collector in the last year. So, the numbers around a third of Americans got a debt-collection call. Well, if you're getting debt-collection calls, you got problems that current money management stress, and I think that employers are probably pretty ignorant to the fact this is going on with their employee base. And can think about things that might be done to redress that.

Benz: What would be an example of that?

Lynch: One of the main issues is around emergency savings. When I earlier alluded to this finding of retirement-plan leakage—part of the problem is that people don't make a mental separation between what's an emergency fund available in an emergency and something that should be untouchable. And so first of all, most people don't have emergency savings. I'm sure your listeners have heard the statistics about what fraction of people can come up with, you know, $400 to be able to without having to go into some really unusual route. Well, there is a movement afoot to try to have employers support having their employees have an emergency-savings fund, and even to contribute, have some matching dollars even around an emergency-savings fund. And if that were the case, that would, obviously a big help in this issue of this current financial stress.

Many retirement plans have a loan feature that you can borrow from your retirement plan. And that, in a sense that's like an alternative to the payday loan industry that you can, if you could borrow from your retirement plan, you're really borrowing from yourself. So, doesn't that sound like an emergency savings. But we have some data that suggests that if people think about their retirement plan as the place to go for emergency savings, it gets people thinking that that's a reasonable source to raid when you change jobs. So, I believe that will be very meaningful for employers to look at systematic efforts to encourage their employees to have an emergency savings first, even before they start worrying about the retirement plan. And also to examine the possibility of employer matching on emergency savings.

Benz: Well Professor Lynch, this has been a great conversation. We are so happy that you were willing to take the time to talk with us today. Thank you so much for being here.

Lynch: Thank you very much for having me.

Ptak: Thank you.

Lynch: Take care. Bye-bye.

Benz: Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcasts. You can follow us on Twitter at Christine_Benz.

Ptak: And @SYOUTH1, which is S-Y-O-U-T-H-1.

Benz: Finally we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis or opinions or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)