Were you required to take a personal finance class in high school?
I wasn't. And I'm not in the minority.
In fact, only seven states require a personal finance class for graduation, and just nine states require testing student knowledge in personal finance, according to the National Council on Economic Education's 2007 Survey of the States: Economics and Personal Finance Education in Our Nation's Schools.
And even if you did take a personal finance course, did it have any effect at all? Probably not.
Get Rich Slowly founder J.D. talked about his experience in this post about financial literacy:
When I was in high school, all seniors were required to take a financial literacy class. It covered topics like compound interest, the Federal Reserve, how to write a check, and the dangers of credit cards. I took that class. I aced every test. And five years later, I had the beginnings of a debt habit…From what I can tell, the kids from my high school grew up to be no different than the rest of Americans. We learned the basics of financial literacy, but it had no perceivable impact on the way we saved and spent and earned. We still made stupid mistakes. We still spent more than we earned.
A lot of people think the solution is more education. But J.D. had the education, and it didn't make a difference for him or his classmates.
So why do kids who do take personal finance still wind up with credit card debt?
High school personal finance curriculum isn't “sticky”
The problem is that passing a test doesn't equal financial literacy.
“High school classes in personal finance or money management do not tend to increase the financial literacy of students who take them,” write Lewis Mandell and Linda Schmid Klein in a Financial Services Review paper. “The lack of 'stickiness' of courses…has long puzzled those who look to education for the solution to problems caused by financial illiteracy.”
But if course content doesn't “stick,” why can't we just write “stickier” curriculum?
One reason is that we don't really know what that looks like. “Currently, we have no clearly defined or widely accepted standards of excellence for financial education effectiveness, and certainly none pertaining specifically to youth financial education,” writes Martha Henn McCormick in her research paper, The Effectiveness of Youth Financial Education: A Review of the Literature.
But even if we don't have widely accepted standards for effective curriculum, we do have a few clues about what works.
What's in it for me?
McCormick says that one thing we do know is that the most effective programs start with a real-life, participant-defined goal, such as buying a home or paying off credit card debt.
That rings true for me. The first time I really started to care about personal finance was when I decided I wanted to go to Italy. I realized that in order to travel, I needed to get rid of my debt and save money every month.
I also recently spoke with a loan officer who said that often when people are turned down for a mortgage, it motivates them to improve their credit.
“Financial literacy programs… must relate the course content to goal attainment and demonstrate how understanding and implementing financial principles will add significant value to their lives,” write Mandell and Klein.
And there are programs out there doing this. Last year I wrote about a one called Opportunity Passport that provides personal finance classes for young people who are in foster care. But this program doesn't just consist of a bunch of lectures and tests.
“Beginning when they enroll, set a goal for what they want to purchase,” says Raquel Pfeifer, who develops personal finance curricula with program participants in Opportunity Passport.
Then participants receive a personal bank account, and money saved is matched dollar-for-dollar, up to $1,000 each year. The money can be used for approved assets, such as education expenses, housing costs and health care.
“They can change their goal at any time, and they also get information on how to get their specific asset and keep it healthy, like caring for a car,” says Christine Johnson, a consultant and trainer for Opportunity Passport.
Since Opportunity Passport launched in 2002, it has helped nearly 5,000 young people collectively save more than $6 million.
Another thing we know about effective personal finance programs is that they are customized for the participant. “There's not likely to be a one-size-fits-all financial education program for consumers,” writes McCormick. “Program reviewers [have noted] the impact of demographic descriptors such as gender, employment status, ethnicity, family background, educational level, and other social markers.”
In addition, study findings underscore the importance of incorporating a relevant program design. A 2008 study by Grody, Grody, Kromann and Sutliff found that elementary curricula are variations of the “save in a piggy bank” technique, but understanding the relationship of “money and ATM machines… is a more fundamental and current foundation for a financial education in our modern age.”
Opportunity Passport strives to do this by customizing their curriculum through focus groups with their participants. For instance, during these focus groups, they learned that a lot of the kids had trouble with credit, but they didn't know what it was or how it could be positive and negative.
“The old curriculum didn't have a lot to do with credit,” says Pfeifer. “The subject of credit came up again and again. Not just high-level information, but in-depth, detailed information about credit.”
So based on feedback from the focus groups, they added that detailed information about credit.
More education vs. the right education
Of course, it's not easy to set real goals and customize curriculum, especially when it comes to implementing these practices on a national level. Matching savings dollar-for-dollar for every public school student just isn't realistic, and students are coming from very diverse backgrounds, so developing curriculum that speaks to the majority of students is no easy thing.
But what is clear is that our current model fails. Either a student doesn't get a personal finance education at all, or they get a typical high school class of lectures, outdated textbooks and exams. Maybe they'll learn how to calculate credit card interest, but studies show that it won't prevent them from getting a credit card in college and racking up consumer debt.
I can't say I have any answers here, but I do think it's important to look at what's working instead of just saying the solution is more education. We need the right kind of education, or else it won't make any difference at all.
What was your experience with personal finance courses in school? And in terms of your own financial literacy, what was most effective?