Wednesday, January 20, 2010

Three Reasons to Teach Financial Literacy in Schools

On December 15, 2009, U.S. Department of the Treasury Secretary Tim Geithner and U.S. Department of Education Secretary Arne Duncan met with students, educators, and community leaders to promote strengthened financial capability among the nation’s youth. They outlined programs to encourage financial education in schools across the country. The need for financial education cannot be overstated. There are at least three compelling reasons to require financial education in schools.

First, it is important to be financially literate before engaging in financial contracts and not after. Yet findings from the Jump$tart Coalition for Personal Financial Literacy, which surveys high school students, and from the National Longitudinal Survey of Youth, which surveys young adults, show that young Americans lack knowledge of basic concepts of economics and finance. This is worrisome as it means that young people are borrowing without understanding, for example, the power of interest compounding and are choosing their investments, including investment in their own education, without knowing rates of return. Young people face many financial decisions, from how to use credit cards to how to buy a car or start a business. Of course, one of the most important decisions that students face right out of school is how to finance their education—an important investment decision both personally and financially. Also, an early grounding in financial literacy sets the stage for engagement in financial education later in life.

The second reason it is important to teach financial education in schools is that financial knowledge is based on scientific concepts—for example, the law of interest compounding and the concepts of risk and risk diversification—and the groundwork for this sort of conceptual understanding is best laid in a formal educational setting. Financial concepts are not necessarily best learned through experience over time or on the advice of friends, family, and colleagues who are not, themselves, financial experts. Some of the most important financial decisions individuals make are not made repeatedly over time. We do not retire many times or buy many houses. Risk management or rates of return are rarely explained to us in easy-to-understand terms; more likely they are reported in long and complex statements printed in 6-point fonts! And financial experiences can be difficult to decipher without some basic knowledge: For example, what is one supposed to learn from the current economic crisis?

The third reason that financial literacy should be taught in schools is to give everyone the chance to learn it. The surveys from Jump$tart Coalition show that the small groups of students who are deemed to be financially literate are disproportionately white males from college educated families. Similarly, data from the most recent wave of the National Longitudinal Survey of Youth show that the young adults (23–28 years old) who are financially literate have college educated mothers and have parents who had stocks and retirement savings when these young adults were teenagers. While this is good news for this limited demographic group, everyone—even those without highly educated and financially sophisticated parents—is faced with financial decisions and we all need the skills to make sound decisions. Some have argued that financial literacy is relevant only if one has wealth. This is a very narrow view. Individuals must make decisions not only about assets but also about debt. And debt is present, even pervasive, across all income strata.

For those of us who believe so much in the value of financial education, seeing Secretary Geithner and Secretary Duncan together on December 15, 2009, was an historical moment. When I look back at 2009, that day—December 15—was one of the best days of a bleak year. For me, it marks the day where we started making progress on an important topic like financial education. I feel better and more optimistic for the new year!

7 comments:

Home Equity Refinance said...

For me i think its very important to teach financial literacy in school. I think it should be necessary.

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Unknown said...

The surveys from Jump$tart Coalition show that the small groups of students who are deemed to be financially literate are disproportionately white males from college educated families.
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