Why Johnny Can't Balance a Checkbook
By Lewis Mandell
Dean, UB School of Management
Millions of American teenagers graduate from high school every year without a basic understanding of how to manage their money. As they venture out from under their parents' protection for the first time, what awaits these young adults is an increasingly complex society that asks that they make immediate and sometimes irreversible financial decisions-decisions that will likely impact their livelihoods for years to come. Unprepared by teachers or parents to make those decisions, the consequences can be quite severe. Debilitating debt, clumsy money management, poor retirement planning and even bankruptcy-this is what the financial future holds for many American teenagers because they were never given proper, if any, instruction in the basics of personal finance.
How prevalent is personal-financial illiteracy among America's young people? The answer is startling. In 1997, I designed a personal-finance exam that was administered to more than 1,500 high school seniors nationwide. Students were asked basic personal-finance questions regarding money management, saving and investing, and spending and credit. Overall, students answered just 57.3 percent of the 31 multiple-choice questions correctly. More shocking is the fact that only 10.2 percent of the students scored a "C" or better on the exam. Further analysis revealed that bankruptcy rates were the highest in states where students performed the poorest on the exam, suggesting that financial illiteracy may be a factor in a nationwide increase in personal bankruptcy.
These results indicate that America's teenagers are heading down a path toward financial difficulty, at the very least. Just think about the numerous financial decisions that confront them after high school: Credit card companies are constantly hawking instant credit to students who barely understand the ramifications of interest rates. Young adults entering the workforce are asked to make choices on pension plans without even a rudimentary understanding of the stock market and investing. Car dealerships promote a variety of come-ons aimed at getting first-time buyers behind the wheel of a new car. And the high cost of higher education has forced many students to go into debt for tens of thousands of dollars even before they cash their first paychecks.
A generation ago, most employers offered defined-benefit pension plans backed up by the absolute certainty of Social Security. You had to seek out a credit card, and there were only two ways to legally acquire a car-cash, or a three-year installment loan. Investment choices were far less bewildering. Those relatively simple days are behind us now, replaced by hourly reports on the rise and fall of the stock market, online banking, electronic commerce and vanity credit cards.
What can be done? Unfortunately, it's not enough to simply provide teenagers with "hands-on" experience in money management. As the results of my exam showed, students with hands-on experience with credit cards and/or checkbooks, for instance, were no more knowledgeable about personal finance than were their inexperienced peers. What is needed is for personal finance to become a mandatory life skill taught in all U.S. high schools, with an emphasis on taxes, investing, saving and spending. Currently, just seven states-Illinois, Florida, Kansas, New Hampshire, New York, Pennsylvania and Virginia-require such a course in their high schools.
Some educators may think that students should learn about personal finance at home, but parents aren't always the best teachers (even if their children would listen to them). A high school classroom seems like the ideal setting for a personal-finance course. After all, we teach sex education, computer skills, hygiene and home economics in high school, so why not personal finance? A recent Stanford University study showed that people from states that require a personal-finance course save more money in their lifetimes than people from other states.
Given the results of this and other studies, it may seem logical that high schools would readily begin to incorporate personal finance within their curriculums. But because educational standards are set by each individual state, a grassroots movement of parents, teachers and business leaders is needed to press legislators into listing personal finance among their state's educational standards. These standards define what a high school senior should be expected to know upon graduation.
One not-for-profit group, the Jump$tart Coalition for Personal Financial Literacy-the organization for which I designed the personal-finance exam-is currently assisting in the development of state-level coalitions to spur legislative action in this critical area. Jump$tart's goal is that, by the year 2007, every student will have the skills to be financially competent upon graduation from high school.
For this goal to become a reality, we must realize that in a society where one's happiness is so closely tied to one's financial well being, sending teenagers out into the world without first giving them a sound understanding of personal finance is a bit like pushing them out of an airplane without a parachute.
Our children deserve better.
Lewis Mandell, is author of Our Vulnerable Youth: The Financial Literacy of American 12th Graders, and is a member of
the board of directors for the Jump$tart Coalition for Personal Financial Literacy (http://www.jumpstartcoalition.org).