Personal finance is one of the rare issues that can unite people on all fronts. We all have money, and we all have to manage it at some point in our lives, but very few of us are ever explicitly taught how to do so. Collectively, we acknowledge that the education system fails to instill within students one of the most practical lifelong skills that we can possess: financial literacy. But not much attention has been devoted to reforming the education system to incorporate personal finance education. Furthermore, the financial literacy programs that have been implemented in schools are largely inadequate half-measures that fail to communicate the importance of learning personal finance from a young age. This misstep is both harmful to the individual as well as to the US economy. Schools across the nation should incorporate robust personal finance education into their curricula and assign to it the same level of importance as subjects like history or math.
The data surrounding financial literacy – or rather, illiteracy – in the United States largely speaks for itself. Over 78 percent of adults in the US are living paycheck to paycheck, and three out of five don’t even keep a formal budget. Consequently, two out of three families reported not having an emergency fund available should the need arise. While there could be many uncontrollable reasons why so many families are living paycheck to paycheck in America, it’s fair to say that out of the 78 percent who are living paycheck to paycheck, there’s a contingency of people who, because of unhealthy spending decisions, are finding themselves in such a precarious financial situation. Additionally, regardless of whether or not you are living paycheck to paycheck, it’s financially advisable to keep a formal budget. Spending without properly budgeting one’s money works fine in the present, but ultimately sets you up for potential financial ruin in the future. Case in point: as many as 44 percent of adults surveyed don’t have enough money to cover a $400 medical expense, which is particularly troubling when you consider that the median unexpected medical expense hovers around $1,000. As David Himmelstein, an associate professor of medicine at Harvard so aptly put it, “unless you’re Warren Buffett, your family is just one serious illness away from bankruptcy.”
These statistics are in line with the data surrounding college students and recent graduates. 44 percent of college graduates with federal loans – around 11 million Americans – are falling behind on their monthly payments or have received permission to postpone payments due to economic circumstances. When it comes to credit and credit cards, 36 percent of surveyed college students reported already having credit card debt of over $1,000, with an average credit score of 630 (600 being considered poor credit). These statistics demonstrate that Americans start out on the wrong foot when it comes to managing their personal finances. And, unfortunately, these financial decisions can last a lifetime.
While financial burdens such as the rising cost of living and egregious costs of higher education certainly share in some of the blame, they are only partially responsible for the precarious financial situations that many young adults find themselves in today. The early education system in the US has made it such that high school graduates still in their teens are having to take out student loans – some worth more than mortgages – in order to pay for college, often without even knowing what credit or debt is or how to properly budget their money. As a result, students carry this debt with them for a significant portion of their lives without knowing how to handle their finances accordingly – an issue that not only affects the individual but the US economy as a whole. According to the Philadelphia Federal Reserve, students with $30,000 in student loans are 11 percent less likely to start a business. Additionally, student loan debt depresses consumer spending and retirement saving, which both have deleterious downstream effects on the economy. An important clarification to make, however, is that student loans in and of themselves aren’t a bad thing. The issue is that there are many ways to take out student loans – some better than others – and oftentimes students are unaware of the important differences between a public or private loan and the various interest rate options associated with each. In 2018 alone, nearly 70 percent of students took out student loans. Yet no formal guidance is provided when it comes to making this decision.
Most states have started to mandate that schools provide some sort of personal finance education, whether it be integrated into already existing classes such as math or history, or as its own standalone class. Today, only five states don’t have personal finance requirements: Alaska, California, Montana, New Mexico, and Wyoming. While this is certainly a step in the right direction, the fact of the matter is that the personal finance education that is being provided in high schools is simply not effective enough. When you consider all of the aforementioned statistics, the five to eight hour course that states with required personal finance classes have implemented is not an adequate solution. Standards outlined by the Council for Economic Education for personal finance education in high school also miss the mark in terms of their overall usefulness. Of the eight benchmarks that 12th-graders should be familiar with, the majority are common-sense statements that have no practical application. For example, the Council for Economic Education wants to ensure that high school seniors understand that “people choose jobs or careers for which they are qualified based on non-income factors, such as job satisfaction, independence, risk, family, or location.” And while this is an important concept to understand, it misses the mark by a mile in terms of practical application and overall usefulness.
When done the right way, personal finance education can make students more likely to select student loan plans with better financing options, have lower credit card balances, and reduce low-income students’ need to work part-time while in college. But what exists today is no more effective than the blow-off health class that we all had to take in high school. We need a more robust solution. Most of America knows that this is the case: 41 percent of adults reported that they would give themselves a grade of C or below when it comes to personal finance knowledge, and 84 percent of undergraduates indicated that they needed more financial education. Unless we start treating personal finance education seriously, we’ll continue to send future generations of students into the adult world, blind and floundering around in the dark, just hoping that they’re making the right decisions with their money.
Photo: Image via Flickr (401k 2012)