Here in Utah, the Legislature has mandated basic financial education for high school students (Utah Code 53A-13-108). It happened partly because bankruptcy filings in Utah were nearly double the national average. The prevalence of fraud is a problem too. The Salt Lake City metropolitan area was ranked 7th highest for fruad-related consumer complaints by the FTC in their 2006 report (pdf). Personal financial education is one of a small handful of areas where the intent is to shape societal behavior—in this case, lower bankruptcy rates—through public schools.

What Should Be Learned?

Our first goal should be to determine why we’re teaching financial literacy. Are we attempting to shift specific societal behaviors, like increasing the saving rate, reducing welfare filings, combatting identify theft, or decreasing reliance on Social Security? If so, we need to be specific so we can measure it.

This approach dooms us to be reactive, as the effects we wish to measure may only be visible 5, 10, or even 20 years (or longer!) following high school graduation. Teaching about pension plans is almost archaic; few corporations still offer them. In an era of debit cards, automatic payments, and internet bill-pay, learning how to write a check is becoming less of an essential skill. Identity theft is regularly in te media, but are “common sense” protections taught in our classrooms?

If our intended outcomes are broader and less measurable (e.g. “teach life skills,” “a more educated work force,” or “better citizens”), how do we decide whether instruction is effective? Certainly, if it has no lasting value it is time better spent in other arenas.

Reasonable people will agree on a core set of values that should be taught: saving, investing, retirement planning (start now!), insurance, basic economics (supply and demand) and capitalist theory (market forces, incentives), recognizing and avoiding fraud, identity theft, and predatory lenders, understanding the persuasive techniques used in advertising, and managing credit properly. As one researcher put it, “Financial education is what you had wished you learned in school.”

How Not to Teach Financial Literacy

Financial literacy is not something passively absorbed. Dr. Lewis Mandell, a prolific writer and speaker on financial education states his research repeatedly shows no significant correlation between potential financial exposure and financial know-how.

Students who pay for their own auto insurance tend to know as much about insurance as kids who don’t even drive. (Students are not likely to shop for their own insurance, but will likely be an add-on to their parent’s policies.) Students with securities accounts in their own names know just as much as those without. (Do parents go over the statements with their kids, and jointly make investment decisions?) Store debit cards, etc. provide little experience, and may be a negative as teens often aren’t the ones paying off the card, and experience only the spending. It seems then, that suggesting young people will learn by doing is inaccurate—they’re not doing. Some level of education is certainly in order.

Immediacy

A participant at a NEFE symposium echoed what educators know: course content needs to be relevant. [1] A high school student with college aspirations and no full-time job will benefit from examples of lifelong savings, mutual funds, and compound interest. The same student would reap little benefit from a discussion of 401(k)s, pension plans, and IRAs, as such topics won’t be personally relevant for several years.

The Role of Public Schools

Foundational skills in financial literacy should clearly be taught in public schools. But how deep should the instruction go? It may seem that I’m suggesting the lack of immediate relevance of in-depth topics should preclude them from secondary school curriculums. This is not the case! The more difficult or foreign a concept is, the less likely it is to be retained—but exposure transforms topics from alien to familiar. Discussing 401(k)s and IRAs in high school will make the topic less daunting when decision time comes.

In 2002, Alan Greenspan said:

A recent study by Freddie Mac finds that homebuyers who obtain structured home ownership education have reduced rates of loan delinquency. Similarly, an evaluation conducted by the National Endowment for Financial Education on its high-school-based programs found that participation in financial planning programs improved students’ knowledge, behavior, and confidence with respect to personal finance, with nearly half of participants beginning to save more as a result of the program.

These findings underscore the importance of beginning the learning process as early as possible. Indeed, in many respects, improving basic financial education at the elementary and secondary school level is essential to providing a foundation for financial literacy that can help prevent younger people from making poor financial decisions that can take years to overcome. In particular, it has been my experience that competency in mathematics—both in numerical manipulation and in understanding its conceptual foundations—enhances a person’s ability to handle the more ambiguous and qualitative relationships that dominate our day-to-day financial decision making.

Feb. 6, 2002, in testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs. See the hearing report, “The State of Financial Literacy and Education In America (pdf),” p. 19

A solid foundation in math is definitely important, but financial literacy is as much about language as it is about math. Like any field, it has its own jargon. One can’t have a good discussion about insurance without understanding deductibles or co-pays, or a lesson on investing without understanding stocks, mutual funds, bonds, CDs, and inflation. In order to experience the “Ah-ha!” moment where learning transitions to understanding, a foundation is essential.

Whether it’s in English, economics, consumer science, or math class, if it’s not tested, it won’t be taught. States may opt for an integrated financial curriculum or a stand-alone course; either way, specific standards need to be defined and measured.

More Questions

Should financial literacy courses be required or electives? And more importantly, is financial education in public schools the only piece to the puzzle?

The Problem

Americans carry about $800 billion in consumer debt. [1] At the end of 2004, nearly half (46.2%) of all families carry credit card balances month-to-month, and that percentage is increasing. The average balance has risen 15.9% over three years to $5,100. (The median was $2,200, which indicates the mean is skewed high; some consumers are in well over their head.) [2]

We’re spending more than we make. The U.S. Bureau of Economic Analysis is reporting a negative personal savings rate. [3] A CNN/Money article from the tail end of 2005 offers some good commentary:

The Commerce Department calculates the savings rate by taking the difference between after-tax income and all expenditures, including housing, food and clothing.

June was only the second month the rate was at zero since the monthly figure started being calculated in 1959. The annual rate for 2004 was 1.8 percent; the last time the annual rate was lower was 1934. [Emphasis added.]

CNN/Money, “The zero-savings problem” by Chris Isidore, August 3, 2005
Referenced Tues, 18 July 2006, 15:42 (MDT)

We’ve seen large national companies go bankrupt. Our national debt is expanding, and government agencies bond to cover recurring costs. Our government isn’t setting a good example. Parents making poor credit choices are ill-equiped to teach their children solid financial skills.

As home prices increase, Americans are borrowing against the equity of their home for more purchases. The increased spending has stimulated the economy, but the negative consequences are looming.

It’s a problem that needs fixing. Is public education the proper place for a solution?