Consider this tale of two college-bound students: Both on their own for the first time, both on a tight budget to last through the semester. One manages his money wisely, spending frugally and earning supplemental income through a part-time job. The other drains his bank account before midterms.
Which one took a course in personal finance?
Of course, the situation is hypothetical. However, it raises an important issue. We assume that our kids will instinctively learn to make the right financial decisions by observing the behaviors of their friends and family. The problem is, they’re not always the best role models.
Fortunately, policymakers have begun to appreciate that young people need a formal education in personal finance to navigate an increasingly complex financial world. And as more and more schools integrated financial education into the curriculum, it became clear that we would need a uniform set of instructional standards, to make sure that students not only mastered the concepts, but learned how to make the right financial decisions .
Working alongside a team of experienced and talented economists, education specialists at Federal Reserve banks, and financial education researchers, my organization, the Council for Economic Education, spent more than a year developing a framework for the body of knowledge and skills that K-12 students need to learn — the National Standards for Financial Literacy.
Drawing from what worked in the existing standards, and improving upon what could work better, we came up with a single set of benchmarks and concepts containing the six areas of knowledge and understanding: Earning Income, Buying Goods and Services, Using Credit, Saving, Financial Investing, and Protecting and Insuring.
Each standard emphasizes decision-making skills by relating planning and goal setting, financial decision-making and assessing outcomes — putting more emphasis on hands-on learning than rote memorization. While being able to define a “mortgage,” or “401K” is important, knowing the terminology will only take one so far. No two people are exactly alike, so sound financial decision-making may mean different things for different individuals. Some may save more, some may spend more — it’s about learning how their personal situations and preferences affect their financial decision making, while beginning to understand the trade-offs inherent in every choice they make.
For example, a fourth grader might be asked to consider whether he should charge his sibling interest on the $5 loan he made?
An eighth grader, with a slightly more sophisticated understanding of credit, should be able to weigh the pros and cons of buying a new bicycle without all the upfront funds.
Of all the lessons we teach our graduating seniors, isn’t it important that they know how they’re going to finance their postsecondary education? College has never been more expensive than it is today, so students need to be equipped with the skills to determine whether an expensive private university is worth the cost of attendance. Or given the career they embark upon, decide if it will even be possible to pay off the student loan debt they’ll incur.
In the end, more informed choices lead to better choices, and more satisfaction with the choices that are made. These lessons extend far beyond the classroom and into society at large. Financial literacy isn’t a failsafe , but it certainly helps people work, spend, save, borrow, invest and manage risk wisely. Managing financial matters in an increasingly complicated world is an enormous responsibility; but when they’ve learned the basics of personal finance in their youth, it’s a lot easier.
This story is an Op/Ed contribution.
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