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.