Change course: Can people really learn to be financially literate?
When Gene Natali teaches high school students about money, he likes to give them two simple imaginary tasks.
First, he has the students imagine they were given a week to spend $1 million.
The students tell Natali, who is senior vice president at C.S. McKee, a Pittsburgh-based investment firm, that they would have no problem doing that.
Then he gives the students another task: Save $5 each day for a week.
"If I came back in a week, how many would have done it?" wonders Natali, the co-author of "The Missing Semester: Your Financial Choices Have Consequences."
Saving money is just one simple financial skill that students can learn that would help them have a more secure future. The Council for Economic Education, an organization that promotes the teaching of economics and finances, just released a survey that found, for the first time, that all 50 states and the District of Columbia include economics in their K-12 standards. But having standards doesn't mean economics is required for graduation from high school. Only 22 states require students to take economics. Even fewer — 17 states — require personal finance courses. Only six states require testing of the students' knowledge in personal finance.
In an economy still trying to recover from a recession, where student loan debt is growing and health care costs speed past inflation, some experts, like Natali, say financial literacy efforts will help people make better financial choices.
Against the world
Natali says the world is stacked against young people. "Instant temptation is everywhere around them," he says. "How can we expect people to save money?"
But Natali feels strongly about getting young people to understand how important it is to start a sensible financial life while they are still young. "Age is an opportunity," he says. "If we can teach high school and college students to capture that potential, we won't have the problems a lot of older people are facing now."
That potential, he says, can be seen in another example he uses in his classes. He compares two savers: One person saves $3 a day for 10 years from about age 25 to 35 and then just lets the interest grow in that investment. Another person starts saving $3 a day for 30 years from age 35 to 65. Because of the way interest works, the one who saved $3 a day for just 10 years will have almost twice the amount of money as the person who saved $3 a day for 30 years.
But knowing this doesn't mean people will do it. "They have these constant temptations," he says. "What is more fun? Putting $100 in a Roth IRA or spending it having fun with your friends?"
Morgan Vandagriff, the co-founder of an online financial literacy company called Banzai, is also passionate about teaching youth how to better handle their money. He says the recession and sub-prime mortgage crisis happened for a lot of reasons, including bad decisions by banks and regulators. "But if people avoided mortgages they couldn't afford, we wouldn't have had the problems we did," he says. "It was (individuals who) put their name on the dotted line. Ultimately, they were the ones on the hook for it."
The 17 states that have some personal finance requirements for high school graduation imply an underlying belief that if people knew more about finances, they would make better decisions. Standards include topics such as earning income, using credit, investing, insuring and saving.
Vandagriff says the basic skill underlying financial literacy is budgeting. Those who run financial literacy courses can talk about the pros and cons of leasing or buying a car, or renting or buying a home, "but none of this matters if you can't create a budget," he says. "People are hosed if they can't budget. No other knowledge will be of any use without it."
Banzai offers their courses for free at www.teachbanzai.com (parents can sign up as "teachers" on the site, according to Vandagriff).
Not a panacea
Helaine Olen, author of "Pound Foolish: Exposing the Dark Side of the Personal Finance Industry," doesn't have much trust in the push for financial literacy.
Olen, who lives in New York, likes to cite studies she says shows financial literacy does not work. For example, a study by Shaw Cole at Harvard, Anna Paulson at the Federal Reserve Bank of Chicago and Gauri Kartini Shastry at Wellesley College concludes: “State mandates requiring high school students to take personal finance courses have no effect on savings or investment behavior.”
Part of the reason she thinks the efforts are not working is that there is so much effort going into make people not behave in financially responsible ways.
A study by the Consumer Financial Protection Bureau found that financial services companies are spending about $17 billion each year on marketing — about $54 per person. The total amount spent as a nation on financial education is about $670 million, or about $2 per person. In Olen's view, financial companies may say they support financial education, but their marketing expenditures show otherwise.
"They know offering financial literacy programs doesn't work," she says. "There is no way you can keep up with this vast marketing machine. ... So to presume that you are just going to give people a class and they're going to be able to withstand all sorts of marketing, all sorts of promotion by the banks, all sorts of vagaries of human nature is just absurd."
The blame, she says, falls not on average folk who are not behaving well, but on how things have changed.
"We've always had people who don't live within their means," Olen says. "The difference now between 100 years ago or even 50 years ago is they didn't have access to easy credit. It was just a lot harder to do. It wasn't that your grandmother was more virtuous than you it was that no one gave your grandmother a credit card."
It doesn't surprise Billy Hensley that a class on finances wouldn't set a person up for life.
"There is no such thing as a one-time class or a one-time intervention that's going to be a one-size-fits-all for every personal finance choice throughout your life," says Hensley, director of education for the National Endowment for Financial Education, a national non-profit based in Denver that promotes financial education. "I think in general, we can't put that expectation on each personal finance course or each personal finance intervention or workshop we go to, and think, 'This is the one thing I'm going to go to and all my personal finance choices will be so much easier.' We don't do that with any other education subject. Why are we doing that with personal finance?"
Hensley says it is a combination of "smart regulation" and education that will have an impact on improving people's financial situations. He says that teacher training, for example, will help improve the outcomes of financial literacy classes. He also says that more work needs to be done to figure out how to integrate behavior into successful classes.
"It is not either/or, it is not us versus them, it is not regulation versus education," he says. "Why can't it be all those things together?"
A personal problem
Natali says the students he teaches are learning how to handle money. He tells about one student who worked hard to pay off a student loan — using a picture of an expensive purse on her wall to inspire her. When she paid off the loan, instead of buying her reward purse, she started a Roth IRA. "This generation is really excited," Natali says.
Olen, however, still thinks the efforts to teach individual financial literacy is a distraction from larger issues.
"It's a political and economic problem that is presented as a personal problem," she says. "That is essentially the bottom line on financial literacy. The subset to that is, you are attempting to change human nature, which is a futile quest."
Hensley with the National Endowment for Financial Education, which has created financial education courses for decades, is willing to continue that quest.
"This is not a go to school, learn the knowledge and then you are done," he says. "It is an onramp to a lifetime of learning to become financially capable."