Ask any mid-20 something the world over for suggestions on what they wish they had learned in high school, and a reasonable assumption can be made that almost every individual will speak about wishing they had been taught the financial literacy skills to understand the value of good credit, how to avoid pitfalls in accumulating debt, and just what exactly a mortgage actually is. Many of them will have learned these lessons, but too often because of harder lessons learned in the arena of life rather than in the safety of a classroom. And a world of low interest rates, accessible credit and skyrocketing house prices is one where everyone might benefit from a greater understanding of modern finance, especially if traditional investment routes such as the purchase of a house are less likely for young people than they have ever been before.
For being such a core skill needed to participate in modern society, surprisingly little focus in the developed and developing nations is given to ensuring children have the financial literacy skills needed to manage their own futures. In the UK, 96% of teenagers say they worry about money on a daily basis, and 52% of teenagers find themselves in debt by the time they are 17. In the US, only 27% of young adults can define inflation, or do simple interest calculations – a step up from Denmark, where 73% of young adults have little to no knowledge of what an interest rate actually is. In the developing world, the trend compounds; 15% of South Africans could not divide 1000 RAND equally between 5 people, despite 77% of the population using financial products as investment or credit vehicles.
Often, gauges of financial literacy are measured differently by country. Some involve asking simple questions around the difference between constant and compounding interest rates, others simply view having a bank account as an indication of being financially literate. But as seen in the South Africa example above, an individual within the latter framework may be perceived as financially literate without possessing the necessary skills or education to explain what it is a bank does or where their money has gone. With this, it is no surprise that within most countries polled, between 80-90% of survey respondents claim they would appreciate a greater understanding about household finances and feel they would greatly benefit from a financial education course.
The impacts of a lack of literacy are felt universally, but certain trends remain consistent as well: Women have financial literacy in almost every country, and literacy rates are lowest amongst the very youngest and very oldest members of society. Greater financial literacy is associated with higher levels of income and education, as well as more sophisticated investment and savings behaviors. Young adults who are financially illiterate show a general inability to select the best options from a range of financial products, and a lack of interest in undertaking sound financial planning. If a large enough population fits within this description, this can have worrying impacts at both the micro and macro-economic level. In Canada, a nation with relatively high-levels of financial literacy, the average debt level is $21,000 per person, meaning households owe approximately $1.65 of debt per $1 of household income. This puts households at major risk of default in cases of recession, or even in cases of interest rate increases that are imminent, given the trend of relatively low growth rates and stagnant wage levels across the developed world. A leveraged household is at greater risk of default, potentially resulting in a cascading effect that might destabilize systems in the years to come.
Institutions such as the OECD have long championed inserting financial education into the curriculum for children as young as 7 or 8 years old. Financial literacy is categorized as having two components: acquisition of financial knowledge and numeracy skills, and the development of skills and attitudes to encourage positive habits. These habits include saving for retirement, promoting household savings over high-risk credit, and investing money into financial products that yield positive returns. The difficulty for policymakers is that the effects of financial literacy programs have been subject to debate: some research indicates literacy increases responsible financial behavior by an exponential factor, others have found little to no correlation at all. One trend is that more innovative, hands-on programs stayed with students much longer – much like playing Monopoly has a dual function of teaching one about financial basics and the dangers of trusting other players. Simulations and role-playing activities where students learned about investments or insurance showed significantly higher returns for years moving forward than simply scribbling a PV function on a chalkboard and expecting someone to understand that it relates to owning a home.
A counter-argument is that schools should not waste resources on educating children on financial literacy skills because those skills can be taught at home. This assumes that parents have the financial literacy skills to pass onto their children in the first place. The cycle of having to learn financial lessons the hard way, or early financial decisions made in positions of ignorance having negative impacts for year to come, is a destructive one. It perpetuates inequality by allowing rich and poor households to pass on their financial knowledge to their children respectively, cementing an existing unfair advantage to the next generation. But change can scarcely be expected – if no one is ever taught the fundamentals, how can one expect it to enter the home in the first place?
Perhaps if every single member of the graduating high school class from 10 years ago, all of whom are now of legal voting age, are asking for governments to make investments to teach people about investing, the returns could be evaluated on both the impacts of saving a young adult from drowning in debt and in preventing the collapse of an economy over the heads of those who didn’t fully understand it enough to stop it.