CHAPTER

10

Financial Literacy for All: Let’s Teach Our Children

To fully participate in society today, financial literacy is critical.

—ANNAMARIA LUSARDI, DENIT TRUST PROFESSOR OF ECONOMICS AND ACCOUNTANCY AT THE GEORGE WASHINGTON SCHOOL OF BUSINESS AND ACADEMIC DIRECTOR OF THE GW GLOBAL FINANCIAL LITERACY EXCELLENCE CENTER

As of 2019, we have a long way to go in combating the financial literacy gap:¹

   The United States ranks only fourteenth in global financial literacy behind such countries as Singapore and the Czech Republic, according to Standard and Poor’s. However, when comparing U.S. financial literacy with that of other advanced economies, we seem to come out around average: about half “of adults in the major advanced economies—Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States—are financially literate,” Standard and Poor’s finds.² It is safe to say that we can be better than average.

   American teenagers rank average among 18 nations surveyed for financial literacy, behind Latvia and just ahead of Russia.

   One in six of our young people lack the financial skills to meet the basic demands of the modern workplace.

   Four in 10 millennials surveyed in 2014 said that they were overwhelmed with debt. More than half said that they were living from paycheck to paycheck.

   More than half of college graduates with student loan debt report that they did not try to estimate how much their student loan payments would be before taking them on, and a similar number say that they would change how they handled their student loan situation if given the chance to consider the issue again.³

As was stated in the 2015 Report on National Literacy:

We know that financial literacy is linked to positive outcomes like wealth accumulation, stock market participation and retirement planning, and to avoiding high-cost alternative financial services like payday lending and auto title loans. Conversely, financial illiteracy in part led to the Great Recession. To minimize the impact of any future financial crisis, Americans must be educated in personal finance. A great place to start is with our students.⁴

A MICRO HISTORY OF FINANCIAL LITERACY

Now that we have a snapshot of the challenge, what makes financial literacy a useful concept? Where did it start, and why did government and the financial industry start promoting it? Why should we care?

Compared with classic academic disciplines, financial literacy is relatively new. The idea of teaching financial concepts in schools dates back to the early twentieth century, whereas formal curricula and standardized disciplines became codified in the latter half of that century.

The formal movement for financial literacy really started with the campaign to teach domestic science, or home economics, that began with women such as Harriet Beecher and Ellen Richards, the first woman to attend the Massachusetts Institute of Technology. It grew to include the Smith-Lever Act in 1914. This law established a system of cooperative extension services, connected to land-grant universities, to provide any American with information about developments in agriculture, home economics, government, leadership, agriculture, economic development, and other skills. The extension services offered coursework on family financial management, coining the term financial literacy.

The Smith-Lever Act was the first federal law aimed in part at improving citizens’ understanding of financial concepts and monetary planning. In the 1930s, General Motors Chairman Alfred P. Sloan, Jr., started a foundation that sought to create a “nation of economic literates” through a variety of courses and programs. From the 1940s through the 1960s, financial literacy skills were taught (largely to women) in home economics curricula in high schools and colleges, but financial literacy itself wasn’t seen as a separate field until much later. “Home ec,” as it was known, was a required course for female students. Belying the commonplace myth that home economics was about baking cookies and learning how to sew, women were in fact taught skills for managing money and home-based affairs, many of them complex. It’s no accident that in post–World War II U.S. history, adult women not only “kept the hearth” but the family books as well—and kept an eye on spendthrift spouses. Until social advances began to challenge notions of traditional gender roles, women also had to be amateur psychologists to watch the family purse strings without offending the male egos in the house.

In the last three decades, government bodies, financial institutions, philanthropies, and community organizations have all dedicated considerable resources to personal finance education—as we have seen throughout this book. This has included increased attention in academia, efforts by governments to integrate financial concepts into school curricula and library programs, and a growing body of literature aimed at popular audiences.

This field has garnered increased academic attention since the 1990s. During this period, an increasing number of universities have established dedicated academic programs in financial education and increased the number of academic journals publishing research on teaching methods, program effectiveness, and other topics related to financial education.

This academic focus coincides with a spike in financial literacy programs in the 1990s and early 2000s—spurred first by auto-makers and other lenders taking heat for predatory lending and then swiftly followed by the passage in 2003 of the Financial Literacy and Education Improvement Act, which established a commission to develop a national strategy. “A congressional caucus dedicated to financial literacy formed in 2005, and the National Association of State Boards of Education established its own financial literacy commission by 2006,” reported Rachel M. Cohen in the summer 2019 edition of The American Prospect. “In early 2008, George W. Bush issued an executive order to create the President’s Advisory Council on Financial Literacy, a body that would ultimately recommend expanding and improving financial education for students in kindergarten through high school.”⁵ The programs came from a variety of sources, most commonly from community organizations, the Cooperative Extension Service (created by the aforementioned 1914 Smith-Lever Act), and local businesses.

Government bodies, including my old employer the U.S. Securities and Exchange Commission (SEC), the Federal Reserve, and the Departments of Treasury and Education, have all prioritized financial education and dedicated considerable resources to education initiatives. The 2008 financial crisis resulted in a renewed push for financial education in the public sector because the crisis showed that many homeowners took out mortgages they could not afford.⁶

WHAT CAN WE DO TO INCREASE FINANCIAL LITERACY?

If you have children at home, find ways to share what you know about finance and saving money. After all, almost all kids are interested in money. Consider these projects:

   Link parental allowances to specific savings goals. Help set up a savings account for your children at an early age. Parents, consider “matching” your children’s savings at whatever ratio you choose.

   If children have jobs, set up and manage an individual retirement account (IRA) to make contributions.

   Jointly manage a small stock investing account with Mom, Dad, or a mentor.

   Start an experimental micro business, including a business plan and payroll.

   Have your kids shadow you or a mentor during a major financial activity, such as planning to buy a new home or purchase a new car.

Education from an early age is another big part of the answer, starting in elementary school and continuing through high school. As of 2016, only 20 states required an economics course in high school, and only 17 required a financial literacy course.⁷

Although public education “mandates” typically give me a stress rash, states with mandatory personal finance high school curricula have had measurable success. Researchers at the Federal Reserve found that “young people who are in school after the implementation of a financial education requirement have higher credit scores and lower relative delinquency than those in control states” (emphasis added). The credit scores of high school graduates who have taken financial literacy courses increased as more years passed from the initial implementation of the mandate, which “likely reflects teachers’ ongoing learning and tailoring of the content and approach so as to be more effective for their students.”⁸

Researchers for Discover’s Pathway to Financial Success found that kids who take finance courses in high school save and accumulate wealth during their adult lives at a higher rate than those who don’t take these courses. Students who have taken a class in personal finance are more likely to engage in saving, budgeting, and investing. According to another academic study conducted in 2001, individuals who had state-mandated financial education in high school had higher reported rates of savings and higher net worth in adulthood.⁹

Many state leaders are investing real energy and political capital into addressing financial literacy. According to Oregon State Treasurer Tobias Read and Indiana State Treasurer Kelly Michell, who coauthored an op-ed for The Hill in April 2018, states are concerned about “a growing number of young adults [who] are also turning to alternative financial services such as payday loans and check cashing services because they are easily accessible.” In response,

many state treasurers are working with local banks and credit unions to ensure that all individuals have access to affordable banking services, and to raise awareness about the importance of saving, investing and managing debt. Stronger public-private partnerships can help support new financial literacy programs and promote smart financial decisions.

In Oregon and Indiana, our offices have worked with the private sector to develop tools that help remove barriers to saving money through various programs and free online resources. Our fellow state treasurers in Vermont, Utah, Rhode Island, Massachusetts and Mississippi are doing the same, while additional states have focused on partnering with the private sector to offer online courses that teach basic financial knowledge to students and parents in schools.¹⁰

These are encouraging developments.

At the national level, the Trump administration has given its blessing to consolidating redundant financial literacy programs to make progress and put an actual dent in the issue while also achieving budget savings. Treasury Secretary Mnuchin has supported the Financial Literacy and Education Commission, inviting high-profile visitors and promoting its work. As with many such commissions in government, we need private citizens to push the effort forward. The administration’s efforts are a step in the right direction.

You can access tons of credible, reliable, and useful information for teachers, families, and young people at https://home.treasury.gov/policy-issues/consumer-policy/financial-literacy-and-education-commission. Also check out mymoney.gov, the federal government’s website that serves as the one-stop shop for federal financial literacy and education programs, grants, and other information.

It is easy to be overwhelmed by the resources you can find on the internet about this issue. Stick to a few “gold standard” sources. Bank of America’s Better Money Habits and the staggeringly popular Khan Academy have partnered on a platform of financial literacy videos, tutorials, interviews, and step-by-step explanations (https://bettermoneyhabits.bankofamerica.com/en/khan-academy-partnership).

I support the work of the Council for Economic Education, and the council has one of the best sites for teacher resources at www.councilforeconed.org/k-12-resources/.

The National Education Association offers a ton of helpful materials for teachers at www.nea.org/tools/lessons/resources-for-teaching-financial-literacy.html.

Finally, the nonprofit TeachFinLit.org has a comprehensive list of all the best resources for families, students, and anyone interested in mastering money at www.teachfinlit.org/new-teachers/.

RECOMMENDATIONS FOR TEACHERS

What else should government and schools do to help teach our children? My research review points out that most experts agree on a number of commonsense ideas, including:

   Improve teacher training and professional development.

   Provide teachers with take-home materials for students.

   Introduce and/or support additional economics, business, and financial literacy curricula in grades K–12.

   Encourage teachers to use apps and digital tools to engage high school students in learning about personal finance.

   Introduce financial literacy topics to standardized tests.

HELPING RETAIL INVESTORS

To be sure, young people aren’t any less informed than many of their parents—including millions of investors. During my years at the SEC, we conducted a study on the financial literacy of retail investors, as was required by the Dodd-Frank law. The study drew on a number of sources, including public comments, a study by the Library of Congress on quantitative studies of retail investors, focus groups, and an online survey.

We found that American investors also lack basic financial literacy, which is not a surprising revelation at this point in this book. I make it here because this is an area where the fund management industry can make a difference.

Many investors do not understand basic financial concepts, such as diversification or the differences between stocks and bonds. Nor are they fully aware of investment costs and their impact on investment returns. The Library of Congress review concluded that “low levels of investor literacy have serious implications for the ability of broad segments of the population to retire comfortably, particularly in an age dominated by defined-contribution retirement plans.”¹¹

At the SEC, we did identify ways to improve the timing, content, and format of disclosures, as well as useful and relevant information for investors to consider when selecting a fund manager or purchasing an investment product. We found that investors prefer to receive investment disclosures before investing rather than after, as occurs with many investment products on the market. We also identified the kinds of information that investors find useful and relevant in helping them make informed investment decisions. This included information about fees, investment objectives, performance, strategy, and risks of an investment product, as well as the professional background, disciplinary history, and conflicts of interest of a financial professional. Investors favor investment disclosures presented in a visual format, using bullets, charts, and graphs.

We found that investors favor layered disclosure. This means an approach in which key information is sent or given to the investor and more detailed information is provided online, with a paper copy of the more detailed information sent upon request.

The mutual fund industry and its advisers must ensure that they are educating their investors in the most effective manner when preparing disclosure documents. The industry has made great strides in the usability and navigability of digital information tools. I am convinced that the industry’s recent advances in simplifying how fund performance and dynamics are explained to us have played a role in the increased confidence of investors in our capital markets.¹²

POOR RICHARD SAYS…

I’m planning to start a new organization to support research and practices that lift the financial literacy of children and young people. I’d love it if someday the concepts in this book are “old hat” to far more people than is the case today.

Financial peace of mind is far easier to read or talk about than to achieve, but once your habits are formed, you’ll find it hard to manage money any other way. You’ll notice less stress, better sleep, and possibly more harmony with your partner or spouse. Financial peace of mind is a great boon to your health. Ben Franklin captured Poor Richard’s wit and wisdom in Franklin’s book The Way to Wealth, read by millions over the centuries since its publication in 1758.

As a book author, I can easily relate to the end of Franklin’s parable of Poor Richard:

“Experience keeps a dear school, but fools will learn in no other,” as Poor Richard says, and scarce in that; for it is true, “We may give advice, but we cannot give conduct.”¹³ . . .

Thus the old gentleman ended his harangue. The people heard it, and approved the doctrine, and immediately practiced the contrary, just as if it had been a common sermon; for the auction opened, and they began to buy extravagantly.

I found the good man had thoroughly studied my Almanacs, and digested all I had dropped on those topics during the course of twenty-five years. The frequent mention he made of me must have tired any one else; but my vanity was wonderfully delighted with it, though I was conscious that not a tenth part of the wisdom was my own, which he ascribed to me; but rather the gleanings that I had made of the sense of all ages and nations. However, I resolved to be the better for the echo of it; and, though I had at first determined to buy stuff for a new coat, I went away, resolved to wear my old one a little longer. Reader, if thou wilt do the same, thy profit will be as great as mine.

If you know of any organization interested in addressing these issues in our schools or with young adults in the workforce, please have them contact me. Discounts for book sales can be arranged by contacting me through my website at www.normchamp.com.