At GBI, we believe that rather than asking people to increase their financial literacy, there’s a way that we in the financial sector can make it easier for people to engage with financial problems without the expert knowledge.
The key to accomplishing this? Creating a tacit understanding of financial planning.
We’ve written in previous posts about this idea of using tacit knowledge to create more opportunity for financial engagement for the everyday person. You can read about it here and here.
But, to break it down, you know you have a tacit understanding of something if you can do that activity without being able to explicitly describe the steps for someone else to do it too. For example, walking and leadership are both things one can have a tacit understanding of.
We think there is a path to unlocking this same innate ability to master a subject in the financial sphere. Specifically, in financial planning.
The Necessary Toolkit
To unlock a tacit understanding of financial planning, we think there’s a critical toolkit that can be used. The tools in that toolkit include analogy, imitation and practice.
As a quick overview for those who aren’t familiar with these concepts, we’ve included some definitions below:
- Analogy: Analogy is the process of learning about one object by comparing it to another object you already know. For example, if you’ve never eaten alligator tail before but someone tells you it tastes like chicken, then you would know what to expect upon eating an alligator tail.
- Imitation: Imitation is the practice of copying what someone else is doing. It is often used to learn new skills. For example, we learn to throw a baseball by copying someone else.
- Practice: Practice is the repetition of an action until you get proficient at it. It often works together with imitation. To use the baseball example, one learns to throw a baseball by first imitating someone else and then practicing that motion until they master it.
Now, how can we bring all of these concepts together to help people get their finances in order?
A Game for Getting Your Finances in Order
To truly make financial planning more fun and engaging, we think the place to start is with something people are familiar with – a game.
Our game is built on the realization that all financial plans contain four common ingredients: initial savings, a time horizon, future contributions, and a portfolio.
We all have experience in the first three ingredients. If you were asked questions about how much you have saved or how much time you have till you reach a goal, you could probably answer them.
However, the fourth ingredient, a portfolio, typically requires investment literacy which most of us don’t have.
This is where we bring in the first tool in our toolkit: Analogy.
Analogy provides the means by which an understanding of known ingredients – savings or time – can be translated into an understanding of unknown ingredients – investment portfolio.
This is just like the alligator tail example we gave above. Think of the investment portfolio like the alligator tail (unknown) and the savings and time ingredients like chicken (known).
Let’s see how this works in the context of our game. Here are the rules.
As a part of the game, players will build basic financial plans based on the four ingredients mentioned above. To win the game, a player’s plan must earn 100 points. Winning a game means the plan has the expectation of success.
Players earn points by adding ingredients to their plan. They will set initial savings, a time horizon, future savings, and a portfolio.
In our game, the potential benefit of each ingredient is measured on the same scale: points.
Adding more time – an extra year till you reach your goal – might earn 5 points. Alternatively, adding more savings – an extra $1,000 a year – may earn 4 points. Or, adding more stocks to your portfolio might earn 3 points.
Players can adjust their ingredients as much as they like to see what combination will get them to a winning score.
The Power of Points
Playing with points removes the need for investment literacy because points illustrate the benefit of investing (adding the portfolio) in a manner that’s comparable to the other plan ingredients that players understand.
In the example above, a player will intuitively understand that waiting longer to reach their goal will make a bigger positive impact on their plan (adding 5 points to their score) than adding more stocks, which only gains them 3 points.
Players are using Analogy to translate an understanding of one ingredient, like time, into another ingredient that is less understood, like portfolio.
And the result is that they are able to make better decisions around what actions to take to most effectively and efficiently reach their goals.
Now we see the power of points in allowing individuals to start to interact with financial concepts they wouldn’t have otherwise understood.
But, to realize the full potential of the game, we still need to ensure that the complete toolkit, including imitation and practice, is being used.
Bringing it all together
The game is built in a way that players can use one of the tools in the toolkit: Practice.
You can quickly and easily build a plan in the game. There are only three questions about your goal, so it only takes about three minutes to build a plan.
Therefore, you can try a lot of different ideas and easily make a lot of plans. Try out what it’s like to build a plan aiming for $80,000 of income in retirement each year. Don’t like it? Build another one.
Try out what $50,000 of retirement income would look like. Or $100,000. It only takes a few minutes and it’s fun.
Don’t know where to start? Use the final tool of Imitation. Imitation works best in communities where you can learn by watching others.
Our game is available through the Lasso app where everyone can share. Therefore, you can observe how people make their plans. Use that as a starting point. Imitate and then practice.
Within a game, the toolkit for tacit knowledge of financial planning becomes a powerful solution. We believe that this is the key to helping anyone engage with their finances while avoiding the need to increase financial literacy.
Want to get started building plans for your future? Click here to download Lasso