Financial literacy is a mirage

The problem is not how people handle money; the problem is that people don’t have any.

This is one of the most important tweets of the 2010s. 

Posted just as the financial system was starting to find its post-crisis footing, dril’s tweet portends the kind of beyond-obvious personal finance advice that has flourished into a genre of durably clickable evergreen content. Think of your favorite story that tells how a 26-year-old paid off their student loans while working a low level job and living in San Francisco. The answer: their parents helped them

And so as the economy repaired itself and the public quit worrying about a daily five-alarm economic fire and moved collectively More Online to start the culture wars that consumed the second half of the decade, personal finance began its ascent as the medium through which the message of late capitalism would be carried.

Dril’s tweet resonates now as it did back in 2013 because what we’ve come to call literacy in personal finance has one rule everyone actually knows: spend less than you make.

The problem for most people is that this is not possible. 

My friend Brett LoGiurato wrote on Friday about The Checks and the stunning popularity of sending people direct payments. The takeaway from this kind of polling doesn’t require an internship on the Hill to figure out: if upwards of two-thirds of people support sending checks to Americans it’s because they want one. And the most likely reason they want a check from the government is because they need one. 

And indeed, the entire concept of financial literacy is really just a word game, an illusion suggesting that knowledge can replace what the pandemic has made plain as the primary concern facing most Americans — they do not have enough money.

The idea that people don’t know enough about money is not new, of course. Books like The Millionaire Next Door or Rich Dad, Poor Dad set the stage for today’s takeover of the conversation around our personal finances away from one focused on how much money we do have and towards how much money we don’t. Even the pronunciation of the word finance divides the world into people who Get It and people who don’t. 

But our present framing of inequality as something that contains within it a fixable knowledge gap — i.e. increased “financial literacy” — that would meaningfully change our distributional trajectory cannot hold up under even the most basic scrutiny.

Our culture’s obsession with consumer finances isn’t all bad, however. One of our working theses here at Late is that the internet allows everyone to know everything and anyone to know anything. And when it comes to these dynamics’ roles within the financial industry, the results have been an almost embarrassing boon for consumers.

Decent financial advice is now available for free with just a few clicks. The ability to invest is also free, both literally and effectively. Robinhood is a free service, though the shortcomings there are well-documented. Vanguard is not technically free, but a fee of 0.03% to buy a fund that tracks the S&P 500 might as well be. 

The immediate retort is that nothing is free because if something is, you are the product. Which is obviously true here. 

But trying to get some idea of what the Big Things might cost has never been easier or more reliable. Financial literacy is just a click away.

Anyone can, for instance, enter imagined down payment figures into a free mortgage calculator. And, yes, you’ve just set off a chain reaction of lucrative retargeting opportunities by ballparking your age, income, zip code, and so on. But you’ve also learned roughly what you can and cannot afford and this information did not require meeting with a person who is also trying to sell you a house. Indirectly, yes, someone is trying to sell you a house, but not the actual person from whom you are getting these figures and this financial advice. And this distance matters.  

And this rapid and ongoing shift of all financial transactions away from musty, low-slung buildings in a downtown strip mall and onto your iPhone has created a land grab for attention that is so far benefiting you and me. If social media is any guide, this is going to get way worse. 

But if our current market system is good at one thing, it is good at offering levered American consumers access to discounted goods and services in the hopes of earning long-term loyalty. All together now — LTV/CAC.1

And this existence of unprecedentedly great access to information has also acted as a siren call for an urgent reframing by Serious People of what should be understood when it comes to your finances. Or rather: how.

The personal responsibility streak in financial literacy advocates brings to mind visions of a debt-free society and perpetually balanced books. In other words, visions of a deep misunderstanding of the modern financial system and why it actually works.

Calls for financial literacy are also often focused on school curricula, the suggestion being that there ought to be a kind of standardized teaching that educates people about money. This ignores, of course, that these offerings already exist today. One also suspects that if you drew a Venn diagram of those who think we need to teach financial literacy in schools and those who think schools are poisoning the minds of our youth we might find a shape very near that of a circle.  

All of which leaves out that literacy itself is a suggestive and loaded term. Sure, there is a narrow question of “can you read or write” but often the tacit follow-on is “can you read or write well.” And go further: “well” is then a stand in for “like me and my peers, who went to good colleges.”

Like it’s close cousin rationality, the concept of literacy ranks and pits those who are against those who aren’t. Literacy is cultural, not strictly measurable. And the suggestion that financial literacy could be at the root of problems in our economic system today passes judgement primarily on those suggesting as much; in keeping with the Fourth Law, the advocates reveal more about their own insecurities than anyone else’s understanding of money. 

Over the last year, we’ve covered the rise of retail investors extensively in this newsletter and elsewhere. The number of people trading stocks has exploded during the pandemic. Popular explanations for this boom include: people have excess income from the government sending them checks; people have excess time on their hands as the result of an economy-wide shutdown; and, people have excess pressure to try and squeeze their own financial rock a bit harder as a result of the aforementioned circumstances. This list is not exhaustive.

But whatever the motivation of those entering the market today, the data suggest newcomers are doing well.

Work from Goldman Sachs published last month showed that stocks favored by retail investors have meaningfully outperformed both the broad market and stocks loved most by hedge funds since the March 2020 bottom. 

Back in June, we argued in this space that the ability for anyone to know anything had created an educated class of investors almost overnight. “Buy low, sell high” is the first thing people might learn about investing and so this new crop of retail investors bought the stuff that went down the most and watched it rise more than everything else.

And indeed, if the internet’s promise is to empower the individual in an unprecedented manner, then why would the expectation for new market participants be anything less than near-expert knowledge in just a few months?2

The returns generated by this crop of retail investors does, however, suggest their risk tolerance is elevated. And over the long term, this has some problems. Without getting bogged down in the specifics, I simply refer readers to Benn Eifert’s thread from last month which outlines how volatility within a portfolio can drag down returns. Professionalized investing, then, is sort of designed to underperform these kinds of markets. Against this backdrop, retail’s outperformance may be but a mirage. 

Retail’s recent performance and the risks required to achieve as much also suggests smaller investors are trying to do one thing in the market — get rich quick.

We could go on and on about Top Shot and crypto and SPACs, but the actual evidence for why individuals are motivated to speculate is right there in the polling on stimulus checks. The kinds of behavior we’re seeing in the market enabled by services fighting for every ounce of consumer attention is being argued as preying on ignorance when the data suggests the fuel is actually desperation. 

And so it seems we societally face two choices: we can either give people more money or we can open up the financial system’s full machinery to the masses.

Right now we are choosing the latter. 

And if this is the path we continue to take then so be it. Open up the markets. Broaden those lines of credit. Financialize it all. Hell, we can even go ahead and put that financial literacy curriculum in public schools. Call it the Common Core for old times’ sake.

But we must also be clear that understanding is not the problem, literacy is not the problem. The problem is people don’t have the money. And that problem is a policy choice.

Let us not be surprised, of course, if consumers figure out more novel ways to hack the financialization they’re being offered today.

And let us not just call these future gambits some big misunderstanding.

If you made it this far, thanks so much for reading. Reader feedback is always welcome and appreciated — it is what keeps this project going.

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LTV/CAC is “lifetime value to customer acquisition” cost. What a “good” LTV/CAC ratio is I don’t really know. It’s not clear if the people who use this really know or care. It could be a moving target of sorts, because different cohorts of customers have different lifetime values but that is not exactly here nor there. But there is little doubt that LTV/CAC is the cool kids’ business metric. And both of these concepts fit neatly into modern business ideas in which recurring revenue is the holy grail  — with a large lifetime value implied — and the cost of acquiring consumers is table stakes. “CAC is the new rent,” is what you say to sound smart. Though it may well be true.


It seems not unlikely that mainstream finance’s interest in cryptocurrencies is driven in part by a view that this new area of financial markets can be declared the domain principally of experts much the way now-vanilla equity markets were viewed a few decades back. And that maybe when it comes to the good old fashioned stock market, the question now is whether this is a solved problem, not whether David can keep pace with Goliath.