are American kids stupid about personal finance?

American kids are stupid about financial matters. That’s what a Federal Reserve study says. From the Washington Post:

High school seniors, on average, answered correctly only 48.3 percent of questions about personal finance and economics, according to a nationwide survey released Wednesday by the Federal Reserve. That was even lower than the 52.4 percent in the previous survey in 2006 and marked the worst score out of the six surveys conducted so far.

You might read this article and think that high school seniors are idiots. The survey was sponsored by Jump$tart Coalition for Personal Financial Literacy and paid for by the Merrill Lynch Foundation (ironically, since it’s obvious that the related Merrill Lynch corporation has a little bit of trouble understanding finance themselves). But look at a few of the questions and the responses – some of the questions seemed a little bit politically loaded, if you ask me:

21. Matt has a good job on the production line of a factory in his home town. During the past year or two, the state in which Matt lives has been raising taxes on its businesses to the point where they are much higher than in neighboring states. What effect is this likely to have on Matt’s job?
14.4 a.) Higher business taxes will cause more businesses to move into Matt’s state, raising wages.
18.7 b.) Higher business taxes can’t have any effect on Matt’s job.
57.3 c.) Matt’s company may consider moving to a lower-tax state, threatening Matt’s job.*
9.7 d.) He is likely to get a large raise to offset the effect of higher taxes.

(My response? The company is going to relocate the factory to Mexico and thanks to NAFTA and the Federal tax code will rob the US treasury of the wage income taxes of its workers, corporate taxes that would be paid if they remained in the States, and deprive the US economy of wages that could be spent to stimulate the economy).

And some of the responses were actually encouraging:

28. Which of the following credit card users is likely to pay the GREATEST dollar amount in finance charges per year, if they all charge the same amount per year on their cards?
16.8 a.) Jessica, who pays at least the minimum amount each month and more, when she has the money.
17.1 b.) Vera, who generally pays off her credit card in full but, occasionally, will pay the minimum when she is short of cash
18.2 c.) Megan, who always pays off her credit card bill in full shortly after she receives it
48.0 d.) Erin, who only pays the minimum amount each month.*

I was surprised that 48% of high school seniors really get it – paying the minimum is begging for trouble.

And this one was also good news:

16. Rob and Mary are the same age. At age 25 Mary began saving $2,000 a year while Rob saved nothing. At age 50, Rob realized that he needed money for retirement and started saving $4,000 per year while Mary kept saving her $2,000. Now they are both 75 years old. Who has the most money in his or her retirement account?
24.8 a.) They would each have the same amount because they put away exactly the same
11.7 b.) Rob, because he saved more each year
12.5 c.) Mary, because she has put away more money
51.1 d.) Mary, because her money has grown for a longer time at compound interest.*

51% of high school students understand the value of compound interest? I think that’s quite encouraging. I am willing to bet that a similar proportion of the adult population understands it – meaning that some people get it early on, and some people never will. I am not sure that represents a failure of education. A significant proportion of Americans believe all sorts of things (that witches exist today, that (at least in 2003) Saddam Hussein was behind 9/11 or that evolution cannot be accepted). It doesn’t mean our education system is failing, it just means that some people can’t wrap their minds around simple facts. So rather than looking at this as a glass half-empty, I look at it as a snapshot of how things are when parents and governments don’t set a good example by living within their means. If almost 50% of kids understand that they need to pay more than the minimum on a credit card to get out of debt and will have more money if they start saving sooner, I think there’s still hope. For the other 50%, I’m not sure that a personal finance class in school is the answer – the answer may be getting their parents educated. And as far as teaching personal finance in school goes, I’m not sure I want a federal government that spends well beyond its means each and every single year teaching anybody about how to manage their money.

27 Replies to “are American kids stupid about personal finance?”

  1. Steve,

    I agree that ignorance about personal finance is a cycle that needs to be stopped. But there’s surely no simple or easy solution. Kids can’t be expected to understand concepts they’ve never been exposed to and if the people around them have no concept of personal finance (in the form of parents, teachers, and yes, even their federal government) then there’s not much hope.

    I’m no fan of Bush’s “Every Child Left Behind” and I don’t have much good to say about the public school system in general. After all, that’s why I decided to homeschool my children all those years ago. Still, we have to start somewhere and requiring a personal finance class for HS graduation might be a solution.

    The biggest problem I have with your logic is this statement: I’m not sure that a personal finance class in school is the answer – the answer may be getting their parents educated.

    Remember, we’re talking about high school seniors here. Most of these kids are only a few years away from becoming parents themselves! If they don’t get personal finance info now, they will become another generation in the cycle — passing on their ignorance of credit card debt and compounding interest to the next generation. I would think that thought educating high school seniors in even the rudiments of personal finance would be easier than rounding up the parents of those same seniors and teaching them the same concepts and then hope that they’ll pass the info on to their kids.

  2. While I don’t think kids are stupid when it comes to issues like these, I do think that the area of personal finance is something that is really learned by experience. Do half of the kids know that it is a bad idea to pay only the minimum? Sure. But how many really know how bad it is?

    Until they have spent some time actually feeling the effects of struggling with debt, or have witnessed the power of compound interest in their own accounts, many people still won’t get it.

    It is one thing to understand the concepts, but it is another to really understand their true importance. Of course, those who understand the concepts may still experience bad decisions, but they will have the knowledge to rectify the problem much sooner than someone who is completely clueless.

  3. I agree with the commenter Steve. Knowing something and doing something with that knowledge are two completely different things.

    I would say most kids anywhere are stupid about personal finance because they have rarely had experience with receiving a paycheque, paying taxes, using credit, etc.

    Stupid here doesn’t mean lack of book knowledge but lack of experience.

  4. I’ve known a few witches, but not of the storybook variety. Just ladies who identified themselves as being witches. (Not including a number of wiccans as well). So technically I believe in them as much as I believe in the sun…but I don’t think that’s the kind of witch the story you referenced meant.

    At least somewhere around half are getting the concepts right. It’s a start.

  5. I don’t think “getting it” is the problem – it’s actually DOING it. Most Americans know that credit card debt is a dangerous thing – the challenge comes in when you’re actually faced with the item that you want. Do you truly have the willpower to say no?

  6. I think it’s encouraging. People aren’t going to do it if they don’t know that they should.

    Optimism, folks, optimism.

  7. Thanks for sharing some of the questions. I heard about the survey results, but didn’t realize the sponsorship or the bias. Of course, your responses are biased too, but it’s your blog so they have every right to be.

    I was raised by working class parents where money was tight, in an era where there were few credit cards or other personal instruments of debt. I went to the library and taught myself personal finance when I started earning a regular paycheck (the Andrew Tobias books of the 1970s/80s were great!). I couldn’t tell you why; it just seemed like the right thing to do. My parents knew nothing about the subject, and it certainly wasn’t taught in school. But it’s more than education; it’s also the application in everyday life.

  8. Being able to answer questions on a sponsored quiz is different from facing the “free money” of credit cards in college and/or the real world. The fact that our national savings rate is -2% or so, and that college students are graduating with credit card debt, proves the point that somewhere along the line the next generation isn’t being educated on the facts of finance.

  9. I think it’s easy to know something, but harder to do it in the face of everything around you telling you otherwise. For example, I should know that I shouldn’t get a loan using my car as collateral, but the TV told me it was a perfect way to buy clothes at the sale that started today….

  10. The kids are stupid compared to what though? It would have been more interesting if they gave the exact same test to their parents and compared the scores.

    All that survey tells me is that kids have declining financial literary which match the explosion of debt levels across the nation so are the falling test scores a generational thing or a societal thing?

    Seems like they jump to conclusions without looking at context…

  11. Those are really sad figures, I mean sure not everyone knows but having over 50% of the student population not knowing the correct answer,… sheesh. Well personal finance is not taught in school. The most exposure a student may receive will be maybe an hour or two lecture in there math course which of course is the most interesting class in the world.. Can’t blame them too much.

  12. Are American kid’s parents stupid about personal finance? That might be the best question!

    Like Trent said, knowing a fact is relatively easy, understanding it is a little more difficult, but putting it into practice can prove to be extremely difficult. Where American kids will have problems in the future is with the “gotta have it now” attitude. My phrase is: I came, I saw, I wanted, I bought (with Mastercard).

    What you and I are doing, along with our readers (hopefully) and other personal finance bloggers is preparing OUR children to be the business owners, entrepreneurs, and employers of those who were never taught anything about managing their money. It sounds harsh, but it’s true.

    In today’s economy, the greatest asset you can have is knowledge, but the greatest characteristic you can have is the willingness to put that knowledge to use.

  13. @Jeremy: I’m not sure I agree completely. I never struggled with debt, and I began investing early. Clearly I didn’t suffer through experience to learn how to do this – I was taught (by my parents and grandparents). I get your point, but I don’t think we need to view it as a “throw the kids in and let ’em swim” question. I just think the schools aren’t the place to do it!

    @Elizabeth: I think there is a simple solution, which is to teach your kids about personal finance at home. The kicker is that to do this, the parents need to be educated about it in the first place. It’s a chicken-and-egg question in some ways. And you’re 100% right – I think personal finance (if it was to be taught in school) needs to come much, much earlier. High school is already too late.

    @Trent, @Matt: I agree that self-discipline is more important in many ways than knowledge. I doubt there are smokers out there, for example, who are unaware that smoking is bad for them. But on the flip-side, it’s tough to “just do it” if you don’t even understand the rules of the game. If I don’t know that I NEED to pay more than the minimum on my card to pay it off – if I am really unaware of the consequences – then it’s going to be tough to understand the need for discipline. But a good point – experience and discipline are required to make use of “book knowledge.”

    @plonkee: Absolutely. Glass is half full!

    @Mrs. Micah: Maybe I should have said “witches who have powers beyond the ability to wear all black and listen to goth-punk music without irony”? 🙂

    @Curmudgeon: I’m not sure it was bias in the survey so much as just an odd view of what’s important. Investing in the market is pitched with such fever in this country it’s often confused with fact rather than opinion. Merrill Lynch obviously has a vested interest in steering people towards investing in the market rather than, say, starting a business of their own. It’s commendable that you taught yourself. Today’s students are in an odd situation – every single drop of financial information you might ever need in your life is available through the Internet, so they have an advantage over those of us raised in the “paper era.” At the same time, the competition for their attention is mind-numbing – from Wiis to Facebook to 500 TV channels, they have to struggle mightily to focus. I don’t envy them, to be honest.

    @No Debt Plan,@deepali: Yep, you’re right – same as with smoking, everyone knows it’s bad yet a significant percentage of the population still do it. Knowing and doing are two different things!

  14. @thickenmywallet: I would love to see the same survey applied to adults, I agree. I doubt that the results change much, to be honest, although some people obviously learn once they are thrown in the water, as other commenters have pointed out.

    @SYL: I can’t remember one second of personal finance except as you said maybe as a math problem. But I don’t think I heard a single whisper in school about finance. Not one. Amazing, when you think about it.

    @Ron: I think you said something I didn’t want to say but it’s completely true! In a selfish sense, I was armed by my parents and my son will be armed by me with an advantage over our fellow citizens. In a purely selfish sense, the “dumbing down” of American students in regards to personal finance is good news for all of us who do have some understanding. It’s harsh, it’s not pleasant to frame it in those terms, but it’s true. And since the information is not exactly The Secret – at least not if you can Google “personal finance” – I guess we hope that the rising wave will lift all swimmers!

  15. wow. how perfect to come across this post! this is going on my news links page as it is EXACTLY the kind of stuff i’m looking to point out. i am about to add a quiz and it has similar questions. i think high schools should go back to teaching civics and make personal finance 101 part of it. kids need to see real life examples. that does it – wealthblocks for kids is now under construction!

  16. Show me the money … take my 13 y.o son [please!] as an example:

    1. How does he handle his own money

    2. How does he earn his own money

    A.1. – Splits into two equal piles: spends half with impunity and no guilt on things that he needs and can afford; invests the other half in my portfolio (he asked me!).

    A.2. Chores = $28 / Month Allowance + his eBay Store = $30 / week (all his own initiative … we do nothing to help).

    Do I really care how he answers a few theoretical questions?

  17. It is pretty scary. As Bernanke recently said, personal finance has become more complex than ever, and those who aren’t savvy will struggle. Hopefully this brings light to the fact that kids in America are very uneducated when it comes to finances. Why isn’t Personal Finance 101 mandatory in every public high school? I took honors AP economics my senior year of high school and was being taught complicated theories and supply and demand curves. Have I ever used that knowledge again? No. I would have much more greatly benefited from learning how credit cards work, how insurance works, how to file your taxes, etc. Why are we letting our kids learn the hard way instead of simply teaching them in school? Isn’t that the point of school?? Phew, sorry…this subject just gets me all riled up!

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  19. Yes, I think it would be beneficial to have a PF 101 type of class for HS students… but let’s not forget, many times school is not the answer. What I mean by that is that it doesn’t work many times… people just don’t want to be educated, that’s part of the problem!

    And it’s not just kids… we are all guilty of this at one time or another:

  20. I’ve said it about every other factor in childraising and I think this is no different. You get out of a child what you put in. Some grow in spite of what you put in. Some grow because of what you put in. But they’re all giving back some form of what we put in. Hopefully when my kids are taking those nifty (weighted) tests, they’ll be scoring in the higher smartitude brackets.

  21. High school seniors, on average, answered correctly only 48.3 percent of questions about personal finance and economics ——————– this is sad… because you need to manage your finances well..

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