Financial Literacy Education Research Paper

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Money Management

Basic financial literacy is sorely lacking in today's America, and the results affect us all. For some, basic financial literacy is a personal issue, and it is that, but it is also a social issue because high debt levels affect everybody when they contribute to economic volatility. Malcolm (2013) notes that the standards of education in money management tend to be low, which leads people with incoherent savings plans. This is turn has them avoid saving altogether, instead spending on immediately desires. The result is that American is a nation of debtors. We all joke about owing money to the Chinese, but the sad reality is that most people owe money, and of those most have no real plan to deal with that debt. It's a ticking economic time bomb, and we need to resolve this issue. The time has come to bring financial literacy to the fore. It is an easy issue to solve. Even adults can learn the basics of financial literacy. But in the school system, where we have the most control, is the place were standards need to be developed and instituted that will leave Americans with a consistently high level of financial management.

The Costs of Poor Financial Literacy

The concept of financial literacy is typically understood as relating to personal finance (Investopedia, 2014), not an understanding of, say, the Black-Scholes Option Pricing Model. This isn't about Wall Street, but about Main Street. Personal finance is one of the topics that covers most of what we do in life, and yet for reason most schools do not teach it. At the risk of sounding glib, it's a lot more important to understand how a mortgage works than it is to memorize all the vice-presidents. People joke about not using the math they learned in high school all the time and quite frankly this begs the question of why weren't they learning something that would be useful? Why weren't they learning the math they would use -- a personal finance education.

The level of financial literacy is very low in America. In a 2012 study, a survey of adults was asked five questions and 61% scored three or lower -- and they were not complex questions (Malcolm, 2013). Where financial literacy is part of the curriculum, such as in Illinois, there are no standards or the standards are not enforced, leading to more financial literacy problems (Malcolm, 2013).

The result is that people often have little concept about things like debt. So you have young people who get deep into debt very early in their lives. 20-somethings average about $45,000 in debt, which can include student loans and mortgages, but part of the problem is that they do not necessary make good investments with their education or even their home-buying. These are some of the biggest purchases a person can make, and they end up going into the purchase having little concept of the financial ramifications (Malcolm, 2012).

The result of this high debt is that it becomes a drag on the economy. While the person is acquiring the debt, their spending is adding fuel to the economy, but once the debt catches up to the person and they end up in bankruptcy or have to tighten their proverbial belt, the economy can lose traction. During the last recession, people became fearful for their jobs and stopped spending. While this helped to boost savings rates, it also meant that the economic recovery was going to take longer because business revenues were down and more people were getting laid off because of the prolonged sluggishness. The ideal situation is to have a balanced level of spending that is sustainable, so that the economy does not go through booms and busts in consumer spending.

On a personal level, there is clear benefit to having a financial education. Young people in particular get into debt trouble and this delays some of their progress in life. People between the ages of 18 and 24 end up paying 30% of their incomes into debt repayment. This is highly inefficient, and it makes it difficult for them to save for a house or start their retirement savings -- and delaying those things only creates more problems down the line. So there is a cascading effect to financial decision making that means it is imperative that children learn about money management in school, so that when they enter the real world they are ready for its realities, especially with respect to spending and debt (Money U, 2011).

Worse yet, there are limited opportunities to remedy this as an adult. There are few random money management courses, but they are not always available for free, and their availability is pretty random to begin with. Such courses often do not reach the people who need them the most. It has been estimated that 40% of American households have less than $1,000 in retirement savings -- this level is unacceptably low for financial security. The problem is that reaching these people as adults is not only difficult but it is often too late. If you reach people when they are in high school, you give them not only the tools that they need to be better financial managers, but you can also give them the dose of reality that they need, before they have racked up massive debt and before they have made lousy choices with respect to their careers or education. This is not to say that people shouldn't go into debt to get an English degree, but they should definitely understand the financial implications of that decision before they make it. For the most part, high schools do not cover any of this, and provide very limited opportunities to learn about the things that will affect people the most in life.

Understanding financial issues is important for just about everything in life and it is not reasonable that people learn these as they go. First, people are more likely to make mistakes when they don't know what they are doing, and these mistakes hurt the economy overall, especially when people are forced into bankruptcy. Furthermore, many important financial issues are complex. Even something like a credit score is based on a bizarre, counterintuitive calculus that says you should have lots of credit cards and use them. This basically invites ruin, and punishes people for being responsible, and while the method of calculating credit scores is phenomenally stupid, people actually need to have a sense of how it works because they might need it someday.

Mortgages are complicated. Taxes are complicated. Retirement savings is complicated. And these are major issues that need to be dealt with by everybody. And yet America is at the point where most people do not have budgets or even a coherent sense of financial objectives. So at this point, it is clear that improvements need to be made to get people up to speed with their money management knowledge, because there is no need for people to make some of the mistakes that they make, especially at a young age.

It is worth knowing as well that other countries do not face this issue to the same degree. We know that when people have a low level of financial literacy they are more likely to make mistakes, and that those mistakes end up harming the economy, by reducing productivity and increasing volatility. The U.S. performs poorly when compared with other major economies on the issue of financial literacy (Lusardi, 2013), and this puts America at a competitive disadvantage -- note that countries with high savings rates can still grow quickly, like in China, because they have the flexibility to add more consumer spending if need be. The U.S. needs to amend this competitive disadvantage and start teaching people…[continue]

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