Helping Students Overcome ‘A Rigged System’ Via Financial Literacy

Despite fairly broad recognition that young people should armed with a level of financial literacy and a basic understanding of economics, states have been slow to require such courses in high schools.

Only 23 states now require high school students to take a financial literacy course before they can graduate, up from 21 states three years ago.

Florida just became the largest state to require financial literacy for a diploma and several other states are considering similar measures or have laws on the books waiting to be enacted. But overall, adoption of the issue has proceeded at a snail’s pace.

“To be positive, of course, 23 is better than 21, and a number of states are moving in the right direction,” said Suzanne Norman, an executive coach, consultant, financial literacy expert, and education fellow at the Alliance for Lifetime Income. “But they haven’t moved significantly.”

The need for financial literacy - or even basic skills such as balancing a checkbook, paying bills or reducing debt over time - is well documented. A recent study by the Financial Industry Regulatory Authority found only 34% of respondents could answer at least four out of five basic financial literacy questions on topics such as mortgages, interest rates, inflation and risk.

“Because half of the states do not offer this education, it often falls to the family to help foster these skills,” according to “America’s Financial Literacy Report Card,” a white paper Norman co-authored for Milliman Financial Risk Management. “But many Americans simply do not speak this ‘language.’ A staggering 93% report having math phobia, a core element of these skills.”

Evidence shows that students who are required to learn financial literacy as part of a state’s or school department’s curriculum make better decisions.

The Milliman white paper cited a study that showed financial literacy has significant predictive power for future financial outcomes.

“A one unit increase in the 2012 financial literacy index (compared to 2018) corresponds to almost:

• A 2.5% increase in financial satisfaction.
• A 6% increase in retirement planning.
• An 8% increase in a higher likelihood of being able to meet an unexpected $2,000 expense.”

Getting Connected

Norman said teaching adolescents basic economics can be and should be very basic. For example, she said, it’s all about income, expense, budgeting and interest.

“The basics we teach we call ‘the money happiness formula,” she said. “It’s about getting students connected to the basic idea of income greater than expenses, basic budgeting. And second, we make them aware of the power of compound interest. As Einstein said, ‘He who understands compound interest earns it.’”

She frequently poses a question with high schoolers asking them if they’d rather have $10,000 in cash today or a penny that doubles every day.

“They know that it’s a trick question but it’s fun to reveal what the end number looks like,” she said. (A penny that doubles every day for 30 days would total more than $10 million).

Norman partially blames the lack of financial literacy on the student debt crisis.

“It’s almost a rigged system where we have a teenager being asked to make probably one of the most important financial decisions of their lives when they haven’t even been equipped with basic skills to understand what burden is,” she said.

There Are Caveats

And it’s not just the lack of financial education courses but also the quality.

In a review of 76 studies that evaluated the successes of a variety of financial education programs offered around the world, the authors of a research paper at the Retirement Income Institute and the Alliance for Lifetime Income, found mixed results.

“Financial education programs generally cause the desired improvements in knowledge and behavior for most individuals,” the paper’s authors wrote. But there were caveats.

• Financial education programs generally increase an individual’s knowledge, but that increased knowledge does not necessarily lead to improved behavior.
• Financial education programs increase financial knowledge more for individuals living in developed economies … than for those living in developing economies.
• Financial education programs generally improve knowledge and behavior over savings and budgeting more than they do over purchasing appropriate insurance products, or over limiting or reducing excessive debt.
• Although acquired knowledge might continue to influence and individual’s behaviors beyond two years, there is not enough empirical data in the existing studies to confirm this theory.
• Only 20 of these 76 studies attempted to determine if financial education interventions are cost-effective. Since so few studies cannot lead to a statistically reliable conclusion, the authors suggest that future studies should include cost-benefit analyses for the benefit of policymakers.

“Policymakers [should] design education programs that will specifically improve decisions over retirement income planning,” the authors wrote. “In addition, they [should] analyze the effectiveness of education programs as implemented.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].