The U.K. in early February made it all but official: personal finance instruction will be mandatory throughout the school system beginning in 2014. This is an important development that largely fell on deaf ears in the U.S., where government has been dithering in the realm of financial education for years.
It’s not that the U.S. isn’t on board for measures to help individuals raise their financial acumen. In many ways, the U.S. is a global leader on this front. We have a formal National Strategy for Financial Literacy and both private sector and public sector presidential commissions looking into what works best.
What we don’t have is a lot of action, like a federal mandate to require financial literacy coursework in schools. The U.K. just joined Australia and Singapore in this regard, and others like Canada and New Zealand seem headed the same direction.
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“It’s encouraging to see an effort that promotes financial literacy nationwide, particularly one that incorporates lessons of finance and economics into subjects already taught in the classroom,” Nan Morrison, CEO of the Council for Economic Education, said of the U.K. development. “This will help students to understand these lesson’s relevance and also build their knowledge over time.”
The CEE and other advocacy groups are fighting for similar steps in the U.S., but face broad hurdles. There is a lot of conflicting data as to what kind of lessons actually work. We have built a library of research papers topping 1,400 globally and are essentially studying our way to inertia. There is also the question of who is in charge. In the U.S., states determine school curricula.
“We believe in school-based financial education and commend the U.K. on its efforts,” says Laura Levine, executive director of the JumpStart Coalition for Financial Literacy. “In the U.S., we need to realize that we’re a very large country that sets educational requirements at the state or local level; so we’re not likely to get nationwide financial education with the flip of a switch. But until our consumers are sufficiently financially capable, we’re going to have to keep working to provide that education in schools and anywhere else it makes sense.”
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A few states have moved ahead aggressively. Virginia, Missouri, Utah and Tennessee require a stand-alone personal finance course in high school. Others require economics or personal finance as a part of other subjects. Yet in some ways we are moving backward. In its most recent Survey of the States report, the CEE found that the number of states requiring schools to test in the area of economics fell by three, and states requiring schools to offer a personal finance course fell by one. States requiring that students be tested on personal finance concepts fell by nearly half.
Yet reaching kids in school may be our best shot at breaking the cycle of financially illiterate adults that don’t understand things like credit card terms, mortgages and payday loans. The OECD’s financial education project said, in a report:
“Including financial education in the official school curriculum is considered one of the most efficient and fair ways to reach a whole generation on a broad scale. In addition, since the curriculum spans several years and can start as early as kindergarten, it is a unique means to inculcate and nurture a more sound financial culture and behaviors among future adults. This is especially critical since parents are unequally equipped to transmit to their children sound financial habits.”
Underscoring the issue, the Brooking Institution found:
“21% of individuals surveyed, including 38% of those with income below $25,000, reported that winning the lottery was the most practical strategy for accumulating several hundred thousand dollars of wealth for their own retirement. In addition, 16% thought that winning the lottery was the best retirement strategy for all Americans, not just themselves.”
According to the Brookings study, among individuals past the age of 50 only half could correctly answer this question:
“Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow: more than $102, exactly $102, less than $102.”
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In an email, Annamaria Lusardi, professor of economics and accountancy at the George Washington School of Business, noted three reasons why financial education needs to take place in every classroom:
- Learning the hard way is costly “It is important to become financially literate before engaging in financial contracts, as opposed to learning from mistakes,” Lusardi says. “Young people face many financial decisions, from how to use credit cards to how to buy a car or start a business. One of the most important decisions that students face right out of school is how to finance their education.” Most big financial decisions are not repeated. You don’t go to college twice. You don’t retire twice. You don’t buy a lot of houses. You need to get it right the first time.
- Finance is science, not art Concepts like compound interest and risk diversification are learnable. “The groundwork for this sort of conceptual understanding is best laid in a formal educational setting,” Lusardi says.
- Everyone deserves a chance “Surveys on financial literacy among the young show that the small groups of students who are deemed to be financially literate are disproportionately white males from college educated families,” Lusardi says. “Similarly, data from the most recent wave of the National Longitudinal Survey of Youth show that the young adults who are financially literate have college educated mothers and have parents who had stocks and retirement savings when these young adults were teenagers.” That’s great for the few. The rest need some instruction in the classroom.
In the U.K., they are taking bold steps—not just talking and studying. Personal finance will be incorporated into mathematics courses and a “citizenship” course designed to equip all students “with the financial skills to enable them to manage their money on a day-to-day basis as well as to plan for future financial needs,” according to the briefing document. Included will be lessons in budgeting, money management, taxes, credit, and financial products and services. They have formally declared schools to be ground zero in the battle for raising the country’s financial I.Q.