Reading. Writing. ‘Rithmetic. The Three R’s. Sir William Curtis of London coined this phrase back in 1795, and it quickly spread to the United States. The ability of students to read, write, and perform basic mathematical tasks, is at the core of that knowledge which our society believes students ought to possess by the completion of their primary education.
Judging by recent test results, American students haven’t come close to achieving mastery in these three areas. The United States ranked below 29 other nations in 10th grade math scores, while a 2012 national assessment found that three quarters of eight and twelfth graders don’t write proficiently. The causes of these dismal results have been debated at length, with commentators and researchers exploring causes ranging from poverty and economic inequality to ineffective teaching.
Yet, English and math aren’t the only topics where improved knowledge is critical for future prosperity and success. It is vital for high schools to teach the basics of financial literacy and money management, so that each graduate can make informed, prudent decisions around managing his or her money, as he or she moves into adulthood.
In 2012, the Financial Industry Regulatory Authority (FINRA), a private regulatory body dedicated to supervision of the American financial sector, conducted a national survey, exploring the financial literacy of the American public, and delving into spending and saving habits, as well as overall monetary health.
This study offered some troubling results. In one part, respondents were asked a series of five basic questions, to test their knowledge of core economic issues and concepts. These questions explored several topics, ranging from interest rates to investment risk to inflation, which will impact every Americans over the course of their lives.
Just 14% of those surveyed were able to answer all five of these questions correctly, and 39% answered 4 of the five questions correctly (the average number of questions answered correctly was a dismal 2.88). Success in this quiz varied considerably among different demographic groups, with males, older individuals, those with college educations, as well as whites and Asian-Americans, performing significantly better than others.
FINRA’s findings were released in the same year as a study from the Organization for Economic Co-Operation and Development (OECD), which examined the financial knowledge of teenagers. Here, researchers measured the financial knowledge of tenth grade students, in 18 nations (or parts of a nation), including the United States, Australia, Russia, France, and the city of Shanghai, China. American teenagers put on a rather average showing, ranking 9th of those nations surveyed, between Latvia and the Russian Federation. Nearly 18% of American teenagers failed to meet a baseline level of financial proficiency, as compared to an average of just over 15% for other nations in the survey.
What is even more problematic about the test results for American students, is the extent to which a youth’s financial literacy is determined by his or her household’s income. Of all the nations surveyed, the US ranked third in terms of how much a student’s knowledge of basic financial matters, is determined by his or her socioeconomic status, and second in the degree to which family wealth affects a teenager’s financial literacy. Only Colombia fared worse in both categories.
American teenagers also face a massive wealth-based gap in access to basic financial services. 70% of teenagers in the top socioeconomic quartile (the wealthiest 25% of households) held bank accounts, compared to just 32% of those in the bottom quartile. This disparity in banking access was the widest in any of the countries which the OECD studied.
These findings suggests a sort of perpetual downwards cycle, where one’s familiarity with matters of finance is in large part determined by birth and family circumstances, while, at the same time, it can rather difficult to build wealth and advance economically, without this sort of knowledge.
Additionally, far too many Americans engage in harmful financial behaviors, which ultimately cost them more money in the long run. According to the FINRA study, less than half of those surveyed pay their monthly credit card bills in full (with over one third paying just the minimum monthly payment), causing them to go deeper in to debt, while incurring additional charges and fees.
Meanwhile, nearly one third of respondents have engaged in some form of non-bank borrowing, such as obtaining payday loans, auto title loans, or making purchases from a “rent to own” store. These financial instruments often carry exorbitantly high interest rates, which greatly elevates overall borrowing costs. Those who are younger, less educated, have lower incomes, and are from minority groups, once again are more likely to engage in these sorts of behaviors.
Americans also exhibit poor savings habits. 44% of households in this nation are either in debt, have no savings at all, or have less than 3 months of savings, if they were to lose their jobs, or face another financial emergency. Of particular concern is the widespread lack of sufficient retirement funds.Nearly one-third of American workers have no retirement savings at all, while the median retirement savings for those aged 55–64 is a meager $14,500. While those in retirement savings plans based through an employer have fared much better (almost half of Americans in these plans saved $50,000 or more), less than one third of workers in small companies, and under 20% of low wage workers, actually work for employers who offer such plans.
Recent policy proposals have focused heavily on ways to improve retirement options for those whose employers don’t provide such assistance. Without such reforms, a very large portion of retirees will be heavily dependent on Social Security to cover their daily living expenses (which often isn’t nearly enough to live comfortably on). Today, Social Security comprises more than half of the yearly income for over 50% of retired married couples, as well as nearly three quarters of single retirees.
Those at the younger end of the age spectrum face another major challenge:student loan debt. 71% of today’s college graduates borrowed money to pay for their education (compared with under 50% of graduates two decades ago), with the average debt load for those who completed school in 2015 hitting a record $35,000 (making them the most indebted college graduating class of all time). A spike in borrowing by graduate students, and the extensive use of post-graduate government loan forgiveness programs, is also a source of recent concern.
As with so many other social issues, education is a vital part of altering many of these trends. High school is the ideal place to begin this process. During and immediately after those four years, students will face important choices around obtaining student loans to pay for college, entering the workforce, and thus having some income to spend, save, or invest, opening a bank account, and, upon reaching the age of 18, signing up for a credit card with the help of a cosigner.
These decisions are relevant both in terms of their actual financial impact (as seen with college debt) as well as the habits one forms (patterns of spending and saving of earnings). What high school students learn about money will be carried with them throughout their lives.
What should a complete high school financial education look like? It ought to provide students with a practical understanding of the most important “money questions” which they will face soon after turning 18, and just as crucially, offer a core framework for making these decisions throughout one’s life.
This curriculum should also offer a practical look at the basics of debt and borrowing, both for consumer credit instruments like credit cards, as well as loans to pay for one’s education. In particular, the math behind repayment of students loans ought to be explained in more detail, since it is simple to sign a paper promising to make a monthly payment to Sallie Mae, but somewhat harder to envision the long-term impact of such borrowing, particularly in the increasingly uncertain economic climate of this era.
Students must also learn the basics of budgeting, saving and investing their money (including how tools like savings accounts, 401(k) plans, index funds and other investment vehicles work), and gain an understanding of how setting aside and investing money impacts one’s long term financial future.
As a part of this coursework, it is useful to provide a brief snapshot of the way in which macroeconomic trends, such as inflation and interest rates, can affect one’s finances. All of this knowledge plays an important role in building a strong reserve of savings for retirement, or that inevitable rainy day.
Some might argue that this curriculum is too complex for high school students to effectively digest. Yet, as noted earlier, for much of the American public, matters of money and finance are seemingly challenging to grasp, often with detrimental consequences. Thus, it is crucial to break this cycle, and provide people with a head start, familiarizing them with these issues as early as possible.
If it is reasonable to expect high school students to graduate with working knowledge of core concepts in math, reading and writing, all of which are important for a student’s future, there is no reason to shy away from similarly rigorous expectations in a subject which carries lifelong implications for virtually everyone.
It is important to remember that not all poor financial behavior is caused by a lack of knowledge, or an irresponsible, spendthrift attitude. For many Americans, financial insecurity is a fact of life, a product of earnings that are sometimes insufficient to meet basic living expenses, let alone to withstand an unexpected event like illness, or the loss of a job. Real wage growth (that is, earnings increases after taking inflation into account) for the middle class and working poor has been weak to nonexistent for the past several decades, while housing costs remain as high as ever.
Given this situation, it isn’t surprising that outstanding credit card debt remains at near-record levels , or that many Americans make use of payday loans to meet basic expenses, borrow tens of thousands of dollars to meet ever-rising college and graduate school tuition costs, and save little to nothing for retirement or other contingencies. When meeting the costs of everyday living becomes tougher, use of debt grows more common, and long-term financial planning appears to be a distant, unlikely undertaking.
Until we see sustained middle-class income growth, an improvement in retirement savings options, and creative solutions to reduce educational costs and thus student debt, this situation is unlikely to fully change. Real policy reforms are required.
Yet, teaching responsible financial behavior early on, will allow more people to at least partially avoid the dire consequences of inadequate fiscal discipline, and poor money management skills. We can help the many Americans who face a range of economic challenges, make their situation somewhat more manageable. This isn’t a complete solution, but it is certainly a part of any real steps towards greater economic empowerment, and a better overall standard of living.
Reading, Writing, and ‘Rithmetic? All are important skills to have. But, it’s also far past time to add financial literacy to that list. Such knowledge is undeniably crucial for a productive and stable existence.
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