When Will Langella began teaching personal finance to junior-high students, he was surprised at how many of them thought borrowing money was the best way to handle unexpected expenses.
"They thought it was a good option because it was easy," said Langella, an accountant and Junior Achievement volunteer who recently finished teaching a personal finance class at a middle school in Fresno, Calif. Once he explained the ins and outs of credit — home mortgages, car loans, etc. — it was the students' turn to be surprised.
"Some of them were shocked. They didn't realize how much you paid to use credit," he said.
Experts say Langella’s experience shows why students need financial knowledge. At a time when kids are just starting to learn the facts of life, they also should be learning about their finances. Instead of a simple allowance, many kids are being given credit cards by their parents.
A recent poll of teenagers in the Junior Achievement program found that more than 11 percent are carrying credit cards, and some of them are as young as 13 or 14 years old. In addition, three out of 10 teenagers have checking accounts, many linked to ATMs through debit cards.
An ‘F’ in finance
“Financial awareness is now key at an earlier age because young kids are becoming more aware of consumer issues, and marketers are responding to them,” said Brent Neiser, director of collaborative programs at the National Endowment of Financial Education (NEFE) in Denver. “Cell phones for 8-year-olds is a perfect example. Companies are trying to capture market share and brand affinity at an earlier age than ever before. That results in young kids making spending decisions earlier, but they’re still not learning how to save for the long term.”
And it certainly doesn’t help when they see the typical financial skills of their elders: The U.S. savings rate is at an all-time low, bankruptcies are at near-record highs and the average household has $9,000 in credit-card debt.
The JumpStart Coalition for Personal Financial Literacy does an annual personal finance survey of high-school seniors, and the results have been hardly stellar. The average score on the 2004 survey was 52.3 percent — a failing grade.
“The general consensus is that students don’t know enough and they aren’t learning enough about it either in school or at home,” said JumpStart’s executive director Laura Levine. “The majority of schools don’t have personal finance classes, and many parents find their own finances is a difficult subject to talk about.”
Yet, Levine said, the topic is important, because ignorance can have such dire consequences. Bankruptcy and bad credit can take years to overcome, and those with insufficient savings may face a grim retirement. “Today’s young people are faced with more choices and more marketing pressure on them.”
Personal finance education for kids has not been too high on the priority list for schools or states, but that is now changing. Only 12 states require students to take a course about basic finances to graduate high school, but another 12 have pending legislation. Texas is the biggest and most recent state to mandate the requirement starting this fall.
The Federal government is also taking more responsibility for financial literacy. The Fair and Accurate Credit Transactions Act of 2003, which mandated new rights for a free annual credit report, also set up a 20-agency commission led by the Treasury Department to coordinate a personal finance campaign. Its first action was to launch a new Web site named Mymoney.gov which offers personal finance advice and information. Its national strategy — which includes issuing various calls to action for industry, government and individuals — will be launched in April, which just happens to be Financial Literacy Month.
Even though the Mymoney Web site does not have specific information targeted to kids and teens, Dan Iannicola, the Treasury’s deputy assistant secretary for financial education, says his department already makes a concerted effort to educate kids in the classroom, partnering with visiting 20 states in the past year. “When we’re in the community on business, we’ll sometimes partner with a bank or credit union and visit high schools. We’ll give presentations on topics like credit cards, credit scores and how to manage both.”
But many financial experts say the lessons should start earlier. Chad Foster, co-author of Financial Literacy for Teens, said grade school is the optimum time. “Middle school is when they start amassing money and start thinking about what to do with it. They should recognize the difference between needs and wants in 6th grade so when they’re in high school with even more money, they know how to act on the difference.”
Nonprofits like JumpStart, the NEFE and Junior Achievement are trying to raise children’s grades in financial literacy. Junior Achievement’s Langella taught in the organization’s educational outreach program, JA Economics for Success, geared to teach middle-school students real-life lessons in personal finance. The program sends volunteers from the business community into classrooms once a week for six weeks to teach lessons in budgeting, credit and other financial topics, and then provides follow-up lessons and activities for classes to use afterwards.
”We talk about anything from getting insurance and budgeting to renting an apartment and buying a house," said Langella.
Leading by example
Still, like with most lessons, children should be learning the big ones at home. Parents need to lead by example, even if that means cleaning up their own financial act, said Foster. “It’s like smoking and telling your kids not to smoke. If you want to make them save, learn about investing and pay their credit card off every month, you need to do that too. If you do something different, that defeats the purpose.”
Teresa Froehle and her husband Gregory of Centennial, Colo., are trying to set a good example for their three kids, ages 9, 12 and 15. Bills and balancing the checkbooks are frequent topics of household conversation.
"Money and bills are discussed every day in our family," said Froehle. "We’ve tried to instill the value of a dollar in them since they were four years old."
The Froehle children — Lauren, Leah and Andrew — all have savings accounts and put money in them on a regular basis. When the two daughters shop at the mall stores, they immediately head to the discounted rack, and even nine-year-old Andrew looks for his gym shoes on sale. Besides studying for good grades that will get them scholarships for college, they also work on the side — Lauren baby-sits, Leah dog-sits and Andrew earns an allowance for chores, much of which goes directly to his savings account.
September 11 and Doug Froehle’s downsized retirement benefits as a pilot for United Airlines, was the turning point for the way they viewed their finances. “Before then, we bought more or less what we wanted and thought if it as no big deal,” said Teresa Froehle. “But after September 11, we took stock of both our income and our lives and it made us more frugal. It also taught the kids a valuable lesson in life that things can change in a second.”
Some experts’ advice on imparting fiscal responsibility to your little ones:
- Don’t teach, just talk. “You don’t need to be the teacher, just talk to them,” said JumpStart’s Levine. “That will raise their awareness and pique their curiosity.” If you don’t know the answer to one of their financial questions, research it together.
- Get them a piggybank – or a spending account. It’s a better method to practice spending than a credit or debit card, and it creates a mechanism to get them saving. When the Froehle children received their first communion, three-quarters of the money they received went into their savings account. “We show them how much money they have in the bank and that encourages them to put even more in there,” said Froehle.
- Give them a goal. Levine recommends having them save for something they want, no matter how young they are. Start younger children by having them save for a toy that they could purchase with a couple weeks worth of allowance.” If you start with saving for a bike, that might take a whole year’s allowance and they may not make it that long,” she said. “Starting small still teaches delayed gratification and the concept can then be applied to bigger, costlier things when they’re older.”
- Monitor their use of plastic. If you’re going to give them a debit or credit card, teach them how to use it, Levine said. "You don't give a child a musical instrument and then say, 'Plunk around on this for a while a see if you can learn to play. There has to be teaching and practicing.” Sit down with them to go over their monthly statements, and talk about issues like interest rates and the importance of paying on time.
- Have a “Family Money” night. The NEFE encourages families to have a night where everyone sits down to discuss all financial issues from planning family vacations and holiday gift-giving budget to what home improvements and credit card charges to make. "Pull out your credit card statements to show what’s being put on the plastic," said the NEFE’s Neiser. "All these decisions involve the kids too, so increase their awareness level of the issues and they’ll have a higher appreciation of why you keep saying, ‘We can’t afford it.' "
- Tone down the consumerism. Show them the value of discounts and sales. "I don’t buy clothes to excess, I go to sales racks, I clips coupon, anything to save money," said Froehle. "I try to set good savings examples and I think my children have learned to do the same through me."
- Use extracurricular activities. Besides school and the home, there are other places to learn about money. The Girl Scouts, Boy Scouts, and the Boys and Girls Club offer financial literacy lessons. The Money Camp, a weeklong day camp, teaches the middle- and high-school set about basic financial literacy (it also offers home-based lessons). Campers learn about investing, savings, credit, stocks and bonds, and real estate. The final day of camp is spent on field trips to retailers, banks and investment firms. Contests earn play money that kids can trade for prizes.
- Turn them into investors and donors.Talk to them about the stock market and how they can invest. "If they want a McDonald’s Happy Meal for the toy, tell them there’s a way to own a piece of McDonald's," said Neiser. "Then they can understand how and why the company markets toys to boost profits, and that may also make them understand — and become more skeptical about — corporate marketing strategies." Making charitable contributions can also help them understand how money can improve the lives of others by meeting needs instead of just wants.
- Make them work for it. The typical start is assigning chores for allowance, but as they get older encourage them to look outside the house for work, such as dog-walking and mowing lawns. Foster emphasizes the importance of part-time jobs for teenagers. “We found that working part-time as teenagers was the number one common denominator among financially successful people. Getting a check every pay period makes them understand the importance of taxes and managing money wisely.”