Financial Literacy

Posted Sept. 29, 2009, at 5:10 p.m.

Among the many things we expect public schools and colleges to teach these days, “financial literacy” tops the list. And with good reason. In 2007, for the first time since the Great Depression, Americans had a net savings rate of negative 1.2 percent, down from a positive 4.5 percent 10 years earlier. While the finger of blame for the current recession has been correctly pointed at bad lending practices, there is also an element of personal responsibility — and knowledge — that contributed to personal bankruptcies and mortgage defaults.

Along with English 101, colleges might do well to teach financial literacy to freshmen, a survey of students completed by the Center for Economic and Entreprenurial Literacy suggests. “What we learned,” James Bowers, the center’s managing director recently wrote, “is that today’s youth is fumbling around in the dark, financially speaking. Two-thirds of college students have taken out loans to pay for their education, and 25 percent expect to have that debt hanging over their heads more than 10 years after graduation.”

Equally sobering were other results of the survey: 64 percent of college students have at least one credit card; of those, 61 percent carry a balance. Yet 44 percent did not know that APR stood for annual percentage rate. Further questioning revealed that 81 percent “severely underestimated the amount of time it would take to pay off a credit card balance making only the minimum payments.”

Mr. Bowers suggests that parents should not throw up their hands and give up hoping their children will learn how to manage money and debt responsibly. He writes that most college students among the 500 surveyed, 58 percent, said they learned values about saving and spending from Mom and Dad.

He urges parents to lead by example and create and follow a household budget. They should talk openly about their finances, he adds.

A useful exercise parents can undertake with their children is to browse a weekend newspaper — which is typically chock-full of advertising circulars — and review the cost of houses, cars, appliances and “toys” such as big-screen TVs and snowmobiles. Then, they should flip through the classified section to see what jobs listed there pay. Mr. Bowers also suggests showing the kids the receipt from the weekly grocery bill. A car repair bill, property tax or rent check would also open their eyes.

“Learning basic economic principles is just as important as Shakespeare and organic chemistry — arguably more universally practical,” Mr. Bowers argues. Whether those principles are taught in high school, college or around the family dining room table is not critical, but ensuring that our future leaders know the relationship between income and debt is vital to us all.

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