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Students Need Financial Literacy

Jordan Catapano

Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have?

This is the first question on a six-question quiz gauging American’s financial literacy. The survey was developed by FINRA, the Financial Industry Regulatory Authority, which is a not-for-profit organization authorized by Congress to protect America’s investors.

So what would your answer be?

This six-question survey was recently distributed to thousands of Americans, and the conclusion drawn from the results was that “Many Americans demonstrate relatively low levels of financial literacy and have difficulty applying financial decision-making skills to real-life situations.” That national average was 3.16 correct answers, with Montana coming highest (3.78) and Florida lowest (2.89).

This is not the first report to indicate that financial literacy is a problem in America. The Organization for Economic Cooperation and Development found America’s 15-year-olds ranked in the middle of 18 countries assessed, and found “Many young people confused by money matters.” Today’s adults, too, struggle with balancing their finances, with 80 percent -- yes 80 percent -- of adults failing a test by the American College on how to make their nest eggs last during retirement.

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Fortune magazine points out that while Americans are currently feeling better about finances than they were during the recession, the financial crisis was supposed to teach Americans a lesson about managing money. “Apparently, the message, though, didn’t get across.”

In short, the results of the study indicate that Americans don’t know as much about money as they need to. Money matters are often left to parents to teach to their children; however, if parents are often the ones confused, how can they avoid passing on their mistakes to their children?

While there are many solutions, a heavier emphasis on financial literacy in schools can help students when it comes to making financial decisions now and in the future.

Economics and Financial Literacy in K-12

The past decades have a mixed history of economics and personal finance requirements in schools. CNBC reports that financial education can vary drastically from state to state. Some require that standards be implemented starting in primary school. Others merely suggest that high school classes in economics or personal finance be offered, while others require students to pass those courses to graduate.”

There is no single tried-and-true program of required courses, but studies conducted by FINRA do indicate that states with more rigorous requirements are helping their students graduate with stronger financial skills. Students don’t necessarily need to learn the complex details of economics or fancy monetary terminology. But there are a few essentials that could help them after they graduate and in the long run.

For starters, teaching students about interest rates and the basic math principles related to them will help students make more informed decisions about credit card debt. If they owe $1000 and have a 20 percent interest rate, can they calculate what the true cost would be? If they plan on taking out student loans for college, can they assess how much tuition, books, dorms, and interest will cost them over the next 10 years?

Champlain College makes a case for high school financial literacy, noting that one of the most important decisions an individual can make is whether or not to attend college. “Most college students borrow to finance their education, yet often do so without fully understanding how much debt is appropriate for their education or the connection between their area of study and the income level that they can expect upon graduation.” The decisions our high school students make about post-secondary education may affect them for much of their lives, yet we might be doing a lousy job equipping them with information to make that decision.

Students should also be taught about the value of investing versus keeping money locked in a bank. How much of their money should be liquid or invested? What is the difference between a stock, an actively managed mutual fund, and an index fund? Students can also learn about retirement. The earlier they make their own plans for retirement, the more likely they’ll meet their goals. Do they know what a ROTH IRA and traditional IRA are?

In 2015, FINRA published an interesting finding about course requirements and student financial success. They found “Notable improvements in credit outcomes for young adults who take personal finance courses in high school. These results come from separate analyses of three states with mandates of somewhat varying degrees of intensity, but that all require students to take the course in order to graduate from high school.” Those three states being Idaho, Texas, and Georgia – and Georgia required that their teachers first be trained to teach financial literacy.

The conclusion indicates a relationship between the quality of financial education (especially at the high school level) and the financial behavior of young adults.

A Relevant and Engaging Education

One of the challenges of teaching students about money is that students tend to have very little of their own. Although they can learn the knowledge about finances, they may have years before they have money to apply what they learned and gain experience. Another challenge is that teachers themselves – most of whom come from the middle class – may lack a fundamental understanding of positive money practices.

A decision like Georgia’s – to require teacher training prior to instructing a financial course – is an essential step to address the latter issue. As far as student knowledge goes, aside from just handing students money to play with, schools need to come up with relevant and engaging methods that will increase the likelihood of retention.

One way to engage students is to connect financial education to the money decisions teens are already likely making. Brian Page, a former teacher and financial literacy advocate, tells us he likes to “Prepare for my class by seeing the financial world through the eyes of a teenager. Shopping for prom, saving for a car and choosing a mobile phone service are teenage priorities.” Students may have jobs and allowances, and make decisions about shopping, car insurance, and college savings. Our first step as educators is to tie big-picture financial education to these day-to-day decisions students are likely making.

Opening a bank account, saving for a long-term goal, balancing a budget, negotiating a car price, and paying off credit card statements are common financial activities students are likely to encounter. Schools often do a good job introducing these aspects to students. The next step is to show how day-to-day decisions make a big difference in their long-term financial outlook. How will they think about money in the years to come, as they earn more but also spend more?

Books like “Rich Dad, Poor Dad” or “The Richest Man in Babylon” help to break down important money matters into simple terms. Blogs like MrMoneyMustache (though brash and inappropriate at times) help students rethink the traditional narrative of money, encouraging frugal living and early retirement. Exposing students to easy-to-understand resources helps them gain a foundation upon which they can build their future experience and decisions.

Lifelong Success

Our goal as educators is to provide the next generation with lifelong success. We tend to emphasize the academic part of that equation, but may undervalue the financial part. Although students have an academic education, they may struggle through life without a financial education. Once they become earners responsible for managing budgets and raising families, will they be ready to effective manage the wallets?

Schools cannot single-handedly solve these issues, but they can contribute. As they seek to improve the financial educations they provide, schools should partner with parents and with the community to ensure that the best money-managing principles are instilled in our youth.

What do you think about providing financial education to students? Share your perspectives in the comments below!

Jordan Catapano is a high school English teacher in a Chicago suburb. In addition to being National Board Certificated and head of his school’s Instructional Development Committee, he also has worked with the Illinois Association of Teachers of English and has experience as a school board member for a private school. You can follow him on Twitter at @BuffEnglish, or visit his website www.jordancatapano.us.

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