After the Great Recession laid waste to the housing market, decimated portfolios and cost Kaylene Murzin's father his construction job, the 15-year-old found another way that she, like many teenagers, didn’t want to emulate her parents: financially.
“My parents try to save but live paycheck to paycheck,” says Kaylene, now 19 and a senior at Newfound Regional High School in Bristol, New Hampshire. Seeing this scared her so much that her parents suggested she start working, and she got an after-school job as a hostess at the nearby Route 104 Diner to cover some of her expenses.
Then Kaylene did something most teenagers don’t: She signed up for a personal finance class. She wanted to get more financial discipline — to learn how to budget and save the money she was earning, so she wouldn’t fritter it away.
The financial crisis that began in 2007 not only exposed countless weaknesses in the U.S. economy, it demolished one of the American Dream’s greatest promises, that hard work leads to prosperity. By mid-2009, the path to financial success for most Americans was blocked by collapsed housing values, an $11 trillion loss in the stock market and student debt that soared to $800 billion. Despite lax lending practices that made banks partly to blame, Americans armed with personal finance basics would have weathered the category 5 recession much better than they did without them, economists say.
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“People believed that big risks would lead to big gains,” says Annamaria Lusardi, an economics professor at the George Washington School of Business and an advocate for financial literacy education. “The financial crisis shows the consequences of a lack of knowledge.” With U.S. household debt at a seven-year low, Americans may have already learned how destructive debt can be, though tight credit and low interest rates may play a part in keeping a lid on debt.
In the wake of the devastation, companies and educators came to realize that a crisis is a terrible thing to waste. Educating consumers in the basics of personal finance, they say, could put the U.S. on a stronger footing and help mitigate future crises. Hundreds of nonprofit organizations, financial services companies and schools — and nearly two dozen government agencies — have embraced this vision.
Could they all be wrong?
Ragbag of Remedies
Some educators say teaching kids about finance can do more harm than good — giving students just enough knowledge to boost their confidence to take greater risks but not enough to help assess those risks. Even those advocating mandatory courses can’t agree on what the term financial literacy means, or the best way to achieve it. Then there’s the resource crunch in cash-strapped schools and just where the topic would fit in packed curricula. The biggest problem: scant research showing that the courses are effective or help students make better financial decisions.
That last argument, say some academics, entirely misses the point. “An illiterate nation can’t compete globally,” says Lusardi. “How can we even think of not teaching it?”
So far, financial literacy instruction in the U.S. has been a ragbag of one-off remedies. Four states — Virginia, Missouri, Tennessee and Utah — mandate a semester of financial literacy in high school. In the rest of the country, the subject is folded into existing courses such as math, offered as an elective or ignored.
Even if the education is mandatory, that doesn’t mean schools teach the subject in a way that kids can absorb. In a recent test, high school seniors who had taken a one-semester financial education course did no better than those who hadn’t. Most students didn’t realize that stocks would probably have a higher average return than savings bonds over an 18-year period, or that people with high incomes must pay tax on interest from a savings account.
Results like that lead some educators to believe that if you haven’t first taught fundamentals such as math, teaching financial literacy is a fool’s errand. “It’s devastating to find it may not be worthwhile,” says Lewis Mandell, a financial economist and emeritus professor at the State University of New York at Buffalo. “American students can’t even add, subtract, multiply or divide as well as the rest of the world.” According to the National Center for Education Statistics, 47 million Americans were functionally innumerate as of 2003, the latest survey available.
Deferring financial literacy until high school, though, may be missing an opportunity. By then, bad habits can’t easily be changed and book learning won’t translate into action, the thinking goes. It’s like smoking-cessation programs, says Julie Heath, who heads up the University of Cincinnati’s Economics Center. “People quickly learn that smoking is bad for them,” she says. “Yet during the break, they’ll still be smoking in the parking lot.”
In an ideal world, we’d start teaching financial literacy in elementary school, beginning with basic concepts such as the difference between needs and wants, Heath says. When students get to high school, they can handle more complex topics, such as compound interest.
Sounds logical. The problem is that there’s no evidence an earlier start would be effective.
That doesn’t stop people from trying. On the South Side of Chicago, kids in Ariel Community Academy, mostly from low-income families, begin studying finance in first grade and then continue. The program, created by Ariel Investments founder John Rogers and Arne Duncan, the U.S. Secretary of Education, gives each new class of first graders a $20,000 grant.
Ariel manages the account while students learn the basics. In sixth grade, students can trade stocks through a teacher. The graduating class of eighth graders sells the portfolio and hands $20,000 to the incoming class; any profits are split between the school and the kids. Those who put their share in a 529 college savings plan get an extra $1,000 for deferring gratification. If a portfolio has a loss — as it did in 2009, when it fell to $15,571 — Ariel funds it back to $20,000.
The school says its students show impressive academic results. In math, 83.4 percent of Ariel students met Illinois state expectations in 2012, according to the Illinois State Board of Education. (This compares to 74.2 percent in Chicago public schools.) There’s not enough data to show if the kids are making good financial decisions.
Few schools can afford such a real-life experiment. Many proponents of financial literacy training are trying to make playing with virtual money instructive and engaging. EverFi, a Washington-based financial literacy company that teams up with many Fortune 500 companies to bring its program into schools, has developed software modules with interactive games and videos that it says have reached about 5.5 million kids (see "The Mixed Motives Inside the Classroom").
Both inside the classroom and out, companies are targeting the point on which most young adults’ eyes are fixed: cell-phones, tablets and laptops. Efforts include T. Rowe Price and Walt Disney Imagineering’s Great Piggybank Adventure, Doorway to Dreams Fund’s Farm Blitz and Visa’s Money Metropolis game. Playing the games reveals how hard it is to make such learning fun; moves are interspersed with stilted, sometimes preachy bursts of information about short-term interest and diversification.
At Doorway to Dreams, which works to improve financial opportunities for low-income communities, Farm Blitz was designed to teach about compound interest, debt and savings. You inherit a farm from a crazy uncle and must take loans at 10.5 percent to cover costs. Then you must harvest enough crops to pay off the debt with savings (on which you get an enviable 4 percent interest rate). Any remaining savings buys protective trees for your orchard. Debt is represented by white bunnies, which multiply rapidly and chuckle as they devour your harvest. By the end of the game, you pretty much hate bunny debt — a useful lesson — but the experience is hardly addictive.
In a survey completed for Doorway to Dreams, participants either played Farm Blitz or read a pamphlet online. Those who read the pamphlet saw a slightly greater gain in financial knowledge. Nevertheless, the report concluded that “because the driving force of Farm Blitz and other casual games is their ability to draw people in,” it’s possible that “Farm Blitz is more effective as a financial tool than the pamphlet."
That’s one reason Joel Levin, a former high school teacher at Columbia Grammar and Preparatory School in New York, quit his job to focus on video games. He turned Minecraft, a game that millions of kids are obsessed with, into an educational tool and now licenses MinecraftEDU to schools.
In the educational version, players are often immersed in sword fights and destruction. They’re also making financial decisions without realizing it. Players may have to set up their own economies, decide on a system of trade and create a regulatory system. There’s no currency, so in some versions of the game, if you run low on, say, iron, you must trade other resources to get some. In other words, you must consider future needs. “These are the kinds of decisions you have to make all your life,” says Zachary Cohen, a junior at Columbia Grammar.
Tug of War
Many educators say that teaching kids finance will lead to good lifetime habits. Yet our brains don’t always work that way. We want a good bottle of wine with dinner yet also want to lose weight. The dopamine reward system in our brains urges us to order wine — an instant gratification, says David Laibson, a behavioral economist at Harvard University. It won’t urge us to start the long-term process of losing weight. “There’s a tug of war between doing what we want to do right now and what can be put off until later,” says Laibson (see "How Our Brains Betray Us").
The risk of procrastination is that if education isn’t followed by action, you won’t remember the lessons. That’s why learning to drive is generally a successful effort: After you take lessons, you get your license and continue driving. It’s also why trigonometry is often forgotten.
Many behavioral economists say financial education works best if it comes right when it’s needed. Teenagers will remember lessons on student loans if they’re exposed to them as they shop for loans and look at colleges. Young adults will learn about mortgages when they shop for a house. The question becomes: Who will provide that objective information at just the right time?
Even if a successful way to teach financial literacy is found, there will always be people — even those who know better — who make mistakes (see "Smart Money, Dumb Idea: Bad Bets by Financial Pros"). Nan Morrison, chief executive officer of the Council for Economic Education, left her 401(k) money in the stock of her first employer after she left the company. She could have invested it however she wanted. She didn’t. Later, when the company encountered management issues, the stock fell by about 50 percent. “What an idiot I was,” she says. “I had six figures in there.”