Teenagers in America might know their way around a mini-golf course, Dairy Queen menu and the "Twilight" trilogy, but they are far less familiar with basic financial concepts such as how to calculate interest or balance a checkbook. An international survey of over 29,000 15-year-olds in 18 countries released last month found that American teens are merely average -- behind their peers in China, Estonia, New Zealand, Poland and elsewhere -- when it comes to practical money skills. (Americans did score better than teens in Russia, France, Slovenia and a handful of other countries, however.)
About 18 percent of American students did not even achieve a basic level of financial proficiency in the survey, suggesting they would struggle with everyday financial tasks, from managing spending decisions to understanding an invoice. The survey found that those with strong math and reading skills tended to have a better grasp of financial concepts. The most advanced students, who came in among the top 10 percent of those surveyed, could grasp complex financial tasks, including calculating a bank account balance and understanding income-tax brackets.
The survey, known as PISA, or the Programme for International Student Assessment, is conducted by the Organization for Economic Co-operation and Development and collects the data through an hourlong written test. Unique in its international scope, the findings offer insight into cultural and educational influences on financial know-how: Some of the countries introduce students to financial literacy through coursework, while others, including the high-performing China, teach students math skills but not necessarily financial ones.
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More financial literacy courses for students, as well as teacher training, could help enhance financial education in this country, says Ted Beck, CEO and president of the National Endowment for Financial Education. Parents play an even more important role, he adds. "Talk to your kids about money in a nonconfrontational way. Culturally, we don't talk about it," and that's a problem, he says. Parents can explain to even young children that money is in the bank account because of their job, for example. Beck also says parents can role model a disciplined approach to shopping by waiting to purchase tempting items. "Things don't seem as shiny the next day," he says.
One of the biggest questions within the field of financial literacy is how to make such lessons stick. Previous research suggests that when high school students learn budgeting and credit management skills in class, they don't necessarily remember those lessons when they need them years later. That's why Alexander Gonzalez, president of California State University--Sacramento, said at last month's release of the PISA data at George Washington University that it's important to learn practical skills when you are also applying them to your life. For example, when you sign up for your first bank account or get your first student loan, that might be the best time to learn about managing money.
Indeed, students who reported having bank accounts already, at age 15, tended to report higher levels of financial literacy in the PISA survey. (That advantage, though, disappeared once researchers adjusted for socioeconomic differences.) While 7 in 10 U.S. students in the highest socioeconomic brackets had a bank account, just 3 in 10 students in the lowest quartile did so. In the U.S., many of the 15-year-olds in the survey also reported other financial experiences, including earning money or working in a family business.
Teens in the U.S. were slightly less likely than average to hold bank accounts. In New Zealand, for example, the vast majority of 15-year-olds reported already having a bank account, while about half of U.S. teens have one. U.S. teens were also less likely than their peers in other countries to already have prepaid debit cards. Shanghai teens, the same group that scored highest on the financial literacy test, were the least likely to have prepaid debit cards.
Gonzales noted that while 3 in 4 of his USC students receive financial aid, many of them arrive on campus unfamiliar with basic financial concepts. "Many of them have not even seen a checkbook," he said. It's not entirely clear how colleges can best impart this information, he added, and whether it should be done through a series of required personal finance courses or some other means, like one-on-one counseling in the careers or financial aid office.
Even parents familiar with financial concepts, like Gerald Rosenfeld, a fellow at the American Academy of Arts & Sciences and investment banker, say they struggle to impart money lessons to their children. "Even though I work in financial services, [my daughter at age 15] wouldn't have known the difference between compound interest and a compound fracture," he said at the conference.
Parents who want to start their own dinner table conversation with their teenagers about money can peruse sample questions from the PISA website (oecd.org/pisa). They include making sense of a subway map to determine the most efficient location to meet a friend; deciphering sales data from a graph; and understanding the purpose of a retail invoice. If parents don't know the answers to the questions themselves, they can rely on the extended explanations offered on the site -- a helpful cheat sheet for parents whose own financial literacy skills are a little rusty.
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