BI > JULY 2004

Better, But Not Good Enough

The Challenges of Financial Education

Since the mid-1990s, NAIC has been involved with efforts to educate teen-agers about a life skill rarely taught in our school systems: learning to manage one's finances. This effort started at CompuFest with a brave group of NAIC volunteers who were current or former teachers.

In 1999 the Youth Committee of the National Investors Association, led by Donna Jones, initiated a youth program. The committee conducted daylong workshops for teens and for some as young as 10 years old. Seminar leaders drove home basic NAIC principles about long-term investing and the impact of compounding. Since then NAIC has produced two major educational books for youth that are both in their second printings: Investing for Life (a home study course) and Investing in Your Future (a formal school textbook that includes a teacher's edition). The combined sales of these books are about 35,000 copies.

While NAIC's efforts are only a few drops in the bucket, the overall national trend toward educational reform in the personal finance area is slowly improving. The 2004 nationwide survey conducted for the Jump$tart Coalition for Personal Financial Literacy indicated that for the first time since 1997, high school seniors are reversing declining overall scores. They are demonstrating increased aptitude and ability to manage financial resources such as credit cards, insurance, retirement funds and savings accounts.

A Failing Grade

But this nation has a long way to go in preparing its children to be good stewards of their hard-earned money. On average, 12th-graders who participated in the 2004 Jump$tart survey answered 52.3 percent of the questions correctly -- a failing score.

The survey, conducted this past December, January and February, consisted of a written 45-minute examination administered to 4,074 12th-graders in 215 schools in 33 states. The broad survey measured these students' knowledge of personal finance basics. The results were then compared with those from similar surveys in 1997, 2000 and 2002. The grading system was based on a typical scale used by many public schools around the nation in which 90 percent to 100 percent is an A, 80 percent to 89 percent is a B, and so on.

While a large percentage of students failed the test, the mean overall score increased from 50.2 percent in 2002 and 51.9 percent in 2000. Even with modest gains in financial literacy among high school seniors, students didn't match the 1997 average of 57.3 percent.

In the 2004 survey, 65.5 percent of students failed the exam and only 6.1 percent scored a C or better. The survey leader for all four studies was Dr. Lewis Mandell, professor of finance and managerial economics at the University of Buffalo School of Management. Merrill Lynch provided financial backing for the survey.

Professor Mandell said: "I am encouraged that the survey results show the downward trend reversing among high school seniors as they become more aware of the need for financial literacy in a competitive job market. If parents, educators and school administrators continue to work together and emphasize the need for sound money management skills, we will likely see scores improve in the years ahead."

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Benefits of Classwork

The survey results revealed an interesting effect on students attending required money management courses in high school. Among students who took a full semester of these courses, those attending required classes did better (an average of 54.1 percent average) than those attending schools where they were required only for some students (50.6 percent) and those for whom these classes were electives (52.7 percent). Note: Only about a half dozen states require students to take a personal finance course.

The following are some other interesting findings from the 2004 survey:

• Parental involvement plays a significant role in the financial education and literacy of young people, as the vast majority of students say they're learning most of their money management skills at home.

Of the students surveyed, 58.3 percent said these skills are learned at home, versus 19.5 percent of students who said they learn such skills at school and 17.6 percent from experience.

• Students whose parents have college degrees did better on the test. Those students had an average score of 55.4 percent, compared with 44.6 percent for students whose parents didn't finish high school.
• Students planning to continue their educations did better than those who aren't. Those who described themselves as college-bound seniors had an average score of 55 percent, versus 41.9 percent for students who plan to have no further education.
• The survey participants did a far better job of correctly answering questions about income (an average score of 62.9 percent) and spending (55.4 percent) than they did about money management (45.4 percent) and saving (41 percent).
• The percentage of students who don't use a credit card was 68.2 percent, compared with 67.8 percent in 2002, 69.1 percent in 2000 and 70.8 percent in 1997. In this year's survey 11.4 percent said they use only their own card, versus 12.1 percent in 2002, 9.2 percent in 2000 and 7.7 percent in 1997. In addition, 15.7 percent use only their parents' card -- versus 15.4 percent in 2002, 18.3 percent in 2000 and 17.2 percent in 1997 -- and 4.8 percent use both their own and their parents' cards, compared with 4.7 percent in 2002, 2.8 percent in 2000 and 4 percent in 1997, according to the survey. More than 43 percent of the 2004 participants have an ATM card, compared with 35.9 percent in 2002, 31 percent in 2000 and 31.5 percent in 1997.
• Nearly 78 percent of the students have a savings or checking account, or both. The 22.1 percent of the students without any bank account scored lower (an average of 47.4 percent) than those who have a savings account (53.3 percent), checking account (50.2 percent) and both savings and checking accounts (55.5 percent).
• There was virtually no difference in performance by gender. The average score for boys was 52.4 percent, compared with 52.2 percent for girls.
• The average score for Caucasian students was 55.5 percent, compared with 48.3 percent for Asian Americans, 48.3 percent for Hispanics, 46.7 percent for American Indians and 44.0 percent for African Americans. Students from the Northeast scored higher (an average of 56.5 percent) than those from the Midwest (52.4 percent), West (52.2 percent) and South (49.9 percent).

Growing Interest in Financial Literacy

This past year has shown that state legislatures are getting more and more involved in financial literacy in public schools. "Interest in teaching financial literacy in these schools surged this year with 24 state bills, resolutions and proclamations introduced in the first quarter of 2004 alone," said Dara Duguay, former executive director of the national Jump$tart Coalition.

At the federal level, she notes that "Congress also established a new Financial Literacy and Education Commission to coordinate federal agencies' financial education efforts, so we hope this added emphasis on the need for Americans to become financially literate will translate into increased interest in our nation's schools."

A copy of the Jump$tart survey questionnaire is posted on the coalition's Web site in the Downloads section.

Jeff is director of educational development for BetterInvesting. Readers interested in sharing their experiences and stories about young investors are invited to contact Jeffery Fox at BetterInvesting or at jefff@better-investing.org