Without a hint of irony, the New York Times recently reported that America’s schools do not teach financial literacy because they cannot find the money.
Despite a presidential council’s call to mandate financial education, it seems that Congress, state legislatures, and school districts have not managed their budgets well enough to teach students how to manage budgets. Does it serve our nation’s future to produce multiple generations of citizens who cannot understand the risk of credit card debt or the time value of money? Young people benefit the most from financial education, because time is the force behind compounding. Consider this example – if a 20-year-old man and his 40-year-old father each decide to invest $2500 per year into an index fund until they retire at age 65, and that fund produces the S&P 500’s long-term historical return of approximately 10% annually, their nest eggs look quite different at retirement. The father’s account grows to $267,992. Not bad for a total investment of $62,500. But the son gets the benefit of an additional 20 years of investments ($50,000) and compounding – his retirement fund reaches almost $2,000,000 by the time he is 65. Over a 45-year period, the son has invested only $112,500, but it has grown to $1,960,422 through the mechanism – or magic – of compounding. Young people need to learn about this.
The Times notes, “Just 13 states require students to take a personal finance course or include the subject in an economics course before they graduate from high school, up from seven states in 2007, according to the Council for Economic Education.” Because of shrinking school budgets, such requirements would amount to unfunded mandates, always a challenge at the local level.
Research cited in the article shows that college students from states with required finance courses exhibited greater competency in handling credit cards, budgets, and savings. The same study showed that parents exert tremendous influence over a youngster’s financial knowledge. Sadly, many parents lack a basic understanding of the concepts themselves. As do many teachers.
One teacher who goes beyond his school’s basic curriculum to teach financial topics covers “budgets, expenses, investing money, how to use credit wisely, insurance and careers.” But according to the National Endowment for Financial Education, “64 percent of kindergarten through 12th-grade teachers (in states with financial education guidelines) reported feeling ‘not well qualified’ to teach those standards.”
Many schools, struggling to meet accountability standards associated with the No Child Left Behind legislation, teach only subjects that appear on standardized tests. The Times quotes Gary Stern of the Council for Economic Education, who observes, “The adage ‘if it isn’t tested, it isn’t taught’ is unfortunately true in this case.” Of course, school is the only place in our society where financial literacy is not tested on a daily basis, and that raises an uncomfortable question: If our values are exposed by how we allocate resources, do we actually value economic ignorance?
In a round about way, we certainly do. Over the past forty years, our extremely adaptable economy has molded itself to the consumerist whims of the population. Ill-educated consumers benefit from an economy based on people buying junk they don’t need with money they don’t have. But such a model is unsustainable, and our best hope for improving the economy is to improve the education of its consumers.