The SEC recently reported that Americans lack essential knowledge of the most basic financial concepts, and that this could have a very negative effect on the financial health of our families. As a parent of two young daughters, I'm particularly worried about what this means for the next generation of Americans.
I recently had the pleasure of interviewing U.S. Secretary of Education Arne Duncan, and he seemed to share my concerns. "Making sure our young people graduate from high school financially literate is one of the biggest gifts we can give them," Secretary Duncan told me. "If they don't understand finances, then I think they're going to really struggle. I look as a society, as a country, at the mortgage crisis and other things like that, and I really question if we had a more financially literate populace, would that have happened? And I think the answer is no."
Sadly, we have a lot of work to do on the financial literacy front. According to the SEC report, young people perform the worst on financial literacy quizzes. And in a 2008 survey of high-school seniors and college students, scores sank to an all-time low.
That shouldn't be surprising, unfortunately. When it comes to teaching our kids basic concepts of finance and economics -- which they are certain to encounter as adults -- we as a country deserve an "F." Consider:
- Only 25 states require a high school course in economics to be offered.
- Only 22 states require a high school course in economics to be taken.
- Only 14 states require a course in personal finance to be offered.
- Only 13 states require a course in personal finance to be taken.
Widespread (financial) panic
There are about 313 million people in the United States today; about 16% are children between the ages of 6 and 17. The vast majority of these children -- about 90% -- are in public schools.
A considerable portion of our population is starting off at a disadvantage by not learning the fundamentals of financial literacy during their most formative learning years. The maps below show the few states that are currently attempting to tackle the problem:
Let's be clear. The goal isn't necessarily to teach the inherent risks in a mortgage-backed security (although that's great stuff to know). The goal is to teach our children the basic fundamentals of financial literacy, from managing a simple checking account to buying a car or a home to even dealing with personal taxes.
There are too many kids that make it all the way to adulthood without a clue. I know some. You likely know some, too.
There are tangible benefits to teaching these skills. According to the 2011 Survey of the States, students from states where a personal finance course is required are:
- More likely to save money.
- Less likely to max out credit cards.
- More likely to pay their bills on time.
- More likely to be willing to take average financial risk thanks to their knowledge of finance.
So why haven't more state and county curricula adopted financial literacy programs? Higher One (NYSE: ONE ) co-founder and COO Miles Lasater told me that "time and resources stand out as the most common obstacles cited. With the focus on the basics and competency testing -- i.e., No Child Left Behind and other mandates -- teachers are hard-pressed with overcrowded curriculum. In addition, teachers may not have the appropriate training and/or confidence in their own money management skills to teach effectively."
Getting the ball rolling
I had the good fortune of being taught these kinds of things by my own parents, and as a parent now, I want to teach my daughters the same way. And I am. There are no replacements for parents teaching kids principles of personal finance education.
"The most important thing that parents can do is set a good example for their children by modeling responsible financial behaviors in their everyday lives," Lasater told me. "Children learn from what they see and observe. ... Having casual conversations about money, explaining how much things cost and how they are paid for, and giving them chances to succeed and fail on their own (giving them an allowance, hav[ing] them save for a special toy) are ways to encourage children to think about money and make good decisions."
But my kids have the advantage of having me and my wife to teach them; we are both financially literate. I'm not under the misapprehension that every parent is as interested in money matters, or is as comfortable having conversations about financial literacy.
Secretary Duncan acknowledged that in some households, money can be a bit of a taboo subject. But, he told me:
Having open and honest conversations about what things cost and what we can afford and what we want and what we need and having kids have allowances and having them work hard and save some money and having the ability to spend -- I think you can never start early enough on that. ...
Every parent can have those conversations and not be shy about that, not be worried about that. And children are interested in money, they're interested in what things cost and having an open dialogue, honest conversation about what you want to do, what you have to do, what you need to do, what you would like to do and what children can contribute -- I think those are really, really important conversations to have. And again, those can start at 3, 4, 5, 6. If you wait until 14, 15, 16, I think it's late then.
And that's why we need a standard for financial literacy. Until it's actually implemented as a staple in our public education system, we'll continue to graduate teenagers unprepared for the complexities of the real world.
So where do we go from here? For one thing, we need to focus on small, achievable goals. Rome wasn't built in a day, and this issue won't be solved overnight. But take a look at those maps again. Is your state in the majority? If so, contact your representatives and tell them this is simply unacceptable. You can find them all right here: governors, senators, and congressional representatives. I encourage you to drop them a line and demand your state become one that requires completion of a personal finance course for high school graduation.
If your state is already on board, great. But you still need to check into the curriculum offered and make sure that the teachers teaching the material have what they need to do the job. Make sure that your children are learning the right things from someone qualified to teach them. The easiest way to play a part here is to make sure you are an active member of your school's parent-teacher association, or PTA.
The only way to tackle this issue is to get involved. The more noise we make about the cause of financial literacy, the more people will hear us.