How To ‘Save’ Thousands (and Other Black Friday Lessons)

By Dan Kadlec

November 15, 2017

Financial education would help

We are about to bear witness once again to one of the reasons financial education is so important. Black Friday and Cyber Monday are just around the corner, and the shopping frenzies—and occasional criminal behavior—they stir are as breathtaking as the personal debts they leave behind.

About 100 million shoppers will spend about $1,000 each the Friday after Thanksgiving. Many will visit the online trough a few days later. When the dust settles, they will have added about $1,000 of credit card debt per shopper.

A record 196 million consumers enter this shopping season with a credit card or access to some other form of revolving credit, Transunion reports. Americans are 50% more likely to apply for new plastic this time of year. Meanwhile, a record 143 million adults in the U.S. already have non-revolving debt like an auto loan or mortgage.

It’s a shame the prospect of additional debt doesn’t stoke the same kind of passion you see when shoppers converge on a sale item with limited availability. Hand-to-hand combat to save $29 on a Google Home at Walmart makes little sense in any event, but especially when the interest on your $1,000 of credit card debt would run $500 over seven years making just a minimum payment.

Researchers have long puzzled over Black Friday behavior. Many shoppers team up, typically with family, and attack sale  items like a coordinated military strike, according to a paper out of Winthrop University. They often…

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…show up predisposed for aggression. Just reading an advertisement for a limited availability sale item can stir competitive anti-social behavior in unrelated parts of life, according to another paper.

These are useful discussion points as they relate to the power of marketing and human behavior. Most consumers understand that when you spend $100 on an item that has been marked down from $150, you still spent $100. The $50 “savings” are immaterial unless it was an item you would have purchased anyway.

Consider that $15,000-a-year membership with the jet hailing app JetSmarter. You can “save” a couple thousand on Black Friday. But odds are it is not something you should buy.

For every $1 spent in the U.S. on financial education, marketers of financial products spend about $25. That’s part of the problem. It highlights the need for a much broader and more thorough swipe at reaching kids in school and adults in the workplace with information that will help them sort out the real value of holiday “bargains” or, at the least, help them stay out of fistfights at Walmart and Best Buy.

By the Numbers: Why We Need Financial Education

In its newly released annual report, the Consumer Financial Protection Bureau lays out a pretty solid case for doubling down on financial education.

One in four adults in the U.S. fails to pay all their monthly bills on time and 44% cannot cover an emergency expense of $400 without borrowing or selling something, the report states. Most people compare prices when shopping for a car but about half do not compare loan prices or terms to buy the car. Many also do not comparison shop before obtaining common financial products like a credit card, the report states.

Student loan borrowers seem to walk blindly into years of crushing debt payments. According to the FINRA 2015 National Financial Capability Study, which is sourced in the CFPB annual report, many student loan borrowers do not understand their loan terms. A majority do not estimate monthly payments before obtaining a student loan. Most say that if given a second chance they would take a different course of action.

More than half of U.S. adults surveyed in the FINRA study had not tried to figure out how much they need to save for retirement. The FINRA study also found that many misuse credit in ways that increase the cost of that credit.

An OECD assessment of the financial literacy of 15-year-olds in countries around the world, also sourced in the CFPB annual report, found that students in the U.S. ranked between seventh and ninth in financial literacy among 15 participating developed economies. In the U.S., 21.6%—about one in five—do not reach the baseline level of proficiency in financial literacy.

Five Principles of Financial Education

To address rampant financial literacy deficiencies in the U.S., the CFPB annual report highlights five principles for effective financial education. These are universal principles that apply in school or at work or in the community. They are designed to help consumers bridge the gap between knowledge, intentions, and actions in order to achieve financial well-being.

How financial education works

The principles derive from studies about how people make financial decisions and from insights from the CFPB’s own research into consumer experiences. Here they are:

Know your audience Different types of programs aimed at boosting financial well-being are required for consumers in different situations. Rather than adopting a one-size-fits-all approach, financial education programs should match specific circumstances, challenges and goals of the people being addressed.

Provide actionable advice Always connect consumers to knowledge in ways that stick. People are more likely to absorb information if it concerns an important decision they must make soon and includes concrete steps to follow.

Focus on key skills Those include knowing when and how to find reliable information to make financial decisions; knowing how to process information to make financial decisions; and knowing how to execute on financial decisions.

Find a way to motivate Knowledge, skills, and opportunity only lead to action when a person feels strongly that it is important. Financial education can reinforce attitudes that help people stay motivated to pursue their goals. Help people focus on their own standards and values rather than on external influences. This will help them persevere and become confident that they can achieve their financial goals.

Make good decisions easy Situations that people encounter influence their financial actions. Financial education can help put individual situations in context and make it easier to navigate and leverage the influences in their surroundings.

More on teachable moments:

What Doesn’t Grow in North Korea

How to Turn the Equifax Breach into a Teachable Moment

Rising Rates? Don’t Miss This Teachable Moment

Three Big (Teachable) Obstacles to Sound Money Decisions

Posted in Adults, Latest Research, Youth on November, 2017