And fewer than one-third of Americans can answer
three simple questions that assess basic numeracy, knowledge of inflation and
understanding of risk diversification.
Yes, we are a country of financial illiterates.
That’s what was revealed in the 2012 National
Financial Capability Study, released a few weeks ago, which evaluates adults.
When you look at teenagers, the results are even more chilling. Data published
bi-annually by the Jump$tart Coalition for Personal Financial Literacy showed
that only 7 percent of high school students are financially literate.
Seven
percent!
But it’s not so much about the statistics. What’s
most important is the behavior that results from that lack of basic financial
knowledge. People who are not financially literate are less likely to plan—or
save—for retirement. And they are more likely to rely on costly borrowing,
paying high fees and ending up in financial trouble. A paper by Stephan Meier
at Columbia Business School and other scholars published this week concluded
that people who are stymied by financial concepts are far more likely to
default on subprime mortgages.
The President’s Advisory Council on Financial
Capability issued a report a few months ago that outlined strategies to address
financial literacy. One recommendation stood out: to include financial education
in school curricula. There are four compelling reasons to support this.
First, you must be financially literate to navigate today’s
complex world. This has become so evident that the OECD’s Programme for
International Student Assessment (PISA) last year added financial literacy to the
skills (along with math, science and reading) that it tests in 15-year-olds around
the world.
Every three years, PISA gauges the following: Are
students well prepared for future challenges? Can they analyze, reason and
communicate effectively? Do they have the capacity to continue learning
throughout life? The goal is
to see if students nearing the end of compulsory education have the knowledge
and skills essential for full
participation in society.
There
is a second reason to bring financial education into the schools. At age 17,
young people face a life-changing decision: whether to invest in higher
education. What they decide carries vast income consequences over a lifetime.
It also determines whether they begin their work years with instant debt. Options
for financing higher education have changed and the cost of a college education
has risen rapidly. That confluence means an average college student now takes
on $26,000 in education loans. Graduation celebrations are now tempered with
the reality of immediate—and significant—debt.
Financial
education in schools also addresses the issue of equality. Who makes up that
small percentage of students who are financially literate? White males from
college-educated families. And research shows that this distinction is a
lifelong one. Women, African Americans, Hispanics and the poorly educated
display much lower levels of financial literacy than their counterparts at
every step: in school, in middle age, before retirement and after retirement.
Perhaps
not surprisingly, this inequality in knowledge translates into inequality in wealth.
As they near retirement, financially literate people tend to have greater
levels of wealth than their counterparts who are not financially literate. According
to my calculations, about half the difference in that wealth can be explained
by financial literacy.
Finally,
by anchoring financial education in schools, we ensure that people are
knowledgeable before, rather than after, they engage in financial
transactions. Today many transactions—from using a credit card to opening a
checking account to buying a car to signing up for a cell phone plan—start at
an early age. They involve decision-making that is by no means simple.
You
need not wait for our politicians to bring financial education into schools. Be
an ambassador. Push your local high school to add financial literacy to an existing
math or English curriculum. Ask the business community to support the
initiative and train the teachers. It should not take much to convince a
business-savvy person that it’s more economical to learn about finances in a
high school than in the school of hard knocks.
Organizations
like the Jump$tart Coalition for Personal Financial Literacy and the Council
for Economic Education have designed standards that can be used in teaching.
They have materials for both students and teachers.
To
naysayers who claim financial education does not work, I must point out that
ignorance does not work either. Give education a try. As an economist, I know
people need an incentive to take action. Here it is: Without some basic
financial know-how, your children will move back in with you after college.
