Leaving room to practice what we preach: bridging the financial literacy gap

While there are many issues in the world we live in that seem to divide us, I have always thought education could never be counted as among these. Sure, we might have disagreements about education policy, but it seems hard to believe that anyone would truly be against more education programs. So imagine my surprise when I recently came across a research paper in the Iowa Law Review entitled “Against Financial Literacy Education,” written by Loyola Law School Los Angeles law professor Lauren Willis in 2008.

She articulates how costly government programs meant to improve financial literacy, like required personal finance courses in high schools and credit counseling programs, have actually done little to improve people’s financial decision-making. With all the focus in recent years on financial literacy within the financial services industries, this seemed hard to believe. Could it be, even with all the energy surrounding the improvement of personal finance knowledge, we were only achieving marginal success?

As a business professional and educator, I am disappointed to say that Willis was not wrong in 2008, and that many of her observations unfortunately still seem to be holding true more recently. As of 2014, only about 40 percent of U.S. adults have a budget and keep close track of their spending, according to the the 2014 Consumer Financial Literacy Survey by Harris Poll. This percentage has held steady since 2007.

Other research documents that even in the midst of all this talk about financial literacy, we continue to mismanage our money, overspend, and save less. Only 41 percent of Americans spend less their income, according to 2013 data from the Financial Industry Regulatory Authority. And from 2010 to 2015, the personal savings rate declined from 5.4 percent to 4.8 percent as well, according to a Trading Economics report from 2015. People still struggle with basic financial concepts, such as compound interest. The picture is grim and baffling at the same time. Educational quality could very well be improving, but this improvement is not being shown where it counts — in the society where we live and work.

While I cannot speak for all states, there definitely seems to be a disconnect between the classroom and the real world here in Virginia. Virginia currently ranks 3rd in financial literacy knowledge and education, but only 20th in terms of everyday financial planning and daily habits, according to Wallet Hub’s The Most & Least Financially Literate States in America for 2015. In other words, Virginians are very good at knowing the correct answers in the classroom, but when it comes to application, we are closer to average.

Don’t get me wrong. I am very proud of the fact that the commonwealth ranks as highly as it does. The strong presence of programs like Junior Achievement and the Jump$tart Coalition for Personal Financial Literacy have clearly helped us achieve a lot in the classroom — more than most states. Still though, the fact remains that the national numbers continue to deteriorate, and by remaining average in application in comparison to other states, Virginians are not contributing to the solution as much as they could. After all, being average in a country that struggles with basic financial decisions is not that great of a compliment.

So what do we do about it? While much has been made in the press and academic circles about how we need to impress financial education sooner, I think this is only part of the answer. In order to bridge the gap between classroom and real life, we need to give younger people a chance to practice what they have learned in real life. Giving children and teenagers an allowance and asking them to budget their expenses is an extremely effective way to do this. Asking them to save and pay for part of their college expenses also can be beneficial. Also, providing children and teenagers with a credit card and making them responsible for the charges can also help them learn about debt at a younger age. Discover, American Express and other credit card companies offer special student cards that are attached to a parent’s account. This allows the parent to monitor the activity of the student, while allowing the student to see how debt works in real life.

The bottom line is that while programs like Junior Achievement and Jump$tart are great, younger Virginians need something closer to home to complete their learning. Giving them opportunities to learn about debt, budgeting and other basic personal finance concepts on a small scale can help avoid problems with these concepts in real life. After all, a teenager having to pay a small finance charge on a student credit card now is much better than getting in trouble with mortgage debt later on life. The key is giving the younger generation room to learn and make mistakes now, so that they can make better decisions later.

David Peters, CPA, is the head of Legal, Admin, Finance & MIS for Compare.com. He is a doctoral student at The American College in Bryn Mawr, PA, and an Adjunct Accounting Professor at Strayer University in Chesterfield as well as a member of the Virginia Society of Certified Public Accountants.