Poor Financial Literacy for American Teens
Parents – how would you rate the financial literacy of your teenagers? You may be looking at massive cell phone bills and wondering whether negative numbers are allowed, or you may be proud to say that your son or daughter is as fiscally responsible as anyone you know.
Using data from 2015, a recent report from the Organisation for Economic Co-Operation and Development (OECD) suggests that too many American teens lack some of the basic financial skills required to survive and thrive in the working world. Of the 15 countries participating in the Programme for International Student Assessment (PISA), America ranked seventh – well behind first-place China, just behind Australia, and just ahead of Poland.
The OECD report found that an average of 22% of teens across all the participating countries were considered low performers – exactly the percentage of US teens similarly classified. Only 10% of American teens attained top performer status, compared to 33% of Chinese teens.
Perhaps the most disturbing finding is that basic proficiency is getting worse. The previous PISA report using 2012 data stated that 17.8% of US students and 15.3% of students in other countries were classified as low performers.
Understanding the Basics
Questions on the PISA cover a wide range of basic financial knowledge, such as identifying the components of an invoice (and why an invoice would be sent), understanding the difference between gross and net salary, handling bank accounts and debit cards, realizing the effect of interest rates, assessing risk, and grasping basic concepts about cost, price, and value.
All these topics are relevant to teens' successful handling of their own finances in the near future. Without a sufficient financial education, young adults are at high risk of poor financial consequences like excessive debt accumulation. If you want to reduce your interest payments and lower your debt, try the free Debt Optimizer by MoneyTips.
Is our educational system failing teens when it comes to finances? The OECD study implies that it is, but standard educational metrics are not well designed to measure financial literacy. According to the study, financial literacy correlates reasonably well with math and reading scores – typical metrics that are tested often throughout a child's educational path – but teens in countries with math and reading scores in the same range as ours still outperform American teens in financial literacy.
It will be difficult for US schools to improve financial literacy without a unified approach. The Council for Economic Education reports that only 17 states require offering a financial education course, and the quality of that course may vary from state to state.
One bright note is that apathy is not the problem. A 2013 survey from EverFi, Inc., found that students may lack financial skills but are eager to learn. 83% of the student respondents felt that personal finance education should be mandatory. They see the effects of money management firsthand, as 44% of respondents noted that financial-related stress at home affected their school performance. As teens age, this stress factor increases.
This statistic may be the key factor in resolving financial literacy concerns. Financial education – as well as financial impressions – starts at home.
Do, Then Teach
The EverFi survey found that 63% of students believed that it was a parent's responsibility to educate them about finances, while only 26% of parents felt qualified to do so. It's reasonable to assume this gap has existed for some time, providing a self-perpetuating cycle: if you received a poor financial education and didn't supplement it in adulthood, you probably don't feel qualified to break the cycle with your own offspring.
Socioeconomic factors play a role as well. The OECD study found that lower-income students had more than double the likelihood of a low score on the financial test – especially disturbing because low-income students (and their parents) are the ones that need financial literacy the most. There is little room for financial error when you are barely getting by.
The OECD suggests that the solution lies within the educational system. Perhaps Andreas Schleicher, the Education and Skills Director of the OECD, provided the best implication of the OECD survey: "Your school system today is your economy tomorrow." However, while this quote is insightful, it only covers part of the story. A good financial education at home can overcome a poor one at school, while observing poor financial habits at home can negate a good financial education at school.
Proper financial education is critical for the decision-making skills that drive the economy on both a personal and a macro level. Teenagers may receive financial education at school, but they will learn far more about finances from their parents – through both direct lessons and observing parental habits. Do the teenagers in your household see you handling money responsibly? Do you give them opportunities to learn on their own but in a relatively controlled way – such as managing a joint account or a pre-loaded card?
When it comes to credit cards, "If you add your teenager as an authorized user, you still control that account," points out Rod Griffin, Director of Public Education for Experian. "You can keep that card, maybe go to the mall with them and help them make charges. Sit down with them; show them how important it is to make those payments each month, how to manage that credit well, so that when they go out on their own they aren't out there learning from their mistakes. There are a lot of things in life we want to learn from our mistakes, credit is not one of those things." Adds Griffin, "It also establishes that credit history so that when they go into the workforce, when they graduate from college, that credit should be there to work for them."
As a parent, you owe it to your children not only to teach them about basic finances, but also to help them see the benefits of planning and budgeting to develop financial willpower. If you realize that you have to shore up these issues in your own life, why not start now? Your whole family will benefit as a result.