Financial Literacy: What Is It, Disparities, and Should It Be Taught In Schools?

What is Financial Literacy?

Financial literacy can be defined as the understanding and the effective use of that understanding among various financial skills. These skills cause vary from budgeting, investing, and managing paying off debts. There can be many hazardous consequences if one does not have these skills including falling into lifelong debt, poor credit, and bankruptcy, all events that no one wants to experience.

Financial Literacy Disparities

According to a report by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC), 43% of Gen Z can be considered financially literate. About 48% of Gen Y, 49% of Gen X, and 55% of Baby Boomers are financially literate. The leading trend is that fewer and fewer people among generations are understanding finances as the years go by, which is one of the leading causes of why the total American household debt is up to $16.9 trillion.

There are also trends among different racial groups. A study conducted by the FINRA reported that on average, Asian Americans and White Americans were able to correctly answer 3.2 out of 6 questions related to basic financial literacy knowledge while Hispanic Americans were able to answer 2.6 out of 6 and Black Americans 2.3 out of 6, both below the national average. As a result, these groups, as well as other less-educated and low-income households, are more likely to use money orders, bill payment services, and check cashing services, all behaviors that are often tied to financial insecurity.

Financial Education in Schools

A survey conducted by the Federal Reserve Bank of St. Louis found that there are two major factors that determine an individual’s level of financial knowledge: education and household income, meaning that the education that students receive in school plays a large role in their financial literacy as adults. Many students that take a financial literacy course or a personal finance course in school tend to immediately start applying the knowledge that they learned in their classes. A survey conducted by the Ramsey Solutions Research Team in 2016 found that two out of three students who took a personal finance course were already earning an average of $3000 a year. A large majority of this group also reported that they are in the habit of having a monthly budget, and about 20% of them already have their own car that they paid for themselves!

These students that have completed a personal finance course prove to be financially literate. Each of the following has at least 79% of students understand the topic: The difference between a credit and a debit card; how to pay income taxes; how home, auto, and life insurance work; how student loans work; and what a 401(K) is and how it works. Many of them also feel confident with their ability to budget (95%), invest (87%) and save money (94%). As a result, they also have their financial priorities in check. Students who have had some sort of financial education are three times more likely to say that they would prefer to have $500 in the bank rather than a cellphone, compared to students who have not had such an education.

As seen from the data, students who take some sort of financial course prove to understand and apply various financial skills. Once these students learn about finances they will carry it for the rest of their lives as it is something that is used every single day. Many children don’t have access to this knowledge at home, but if schools start integrating finances into their curriculum, they would be raising a generation of students who are more knowledgeable and better equipped to tackle their financial challenges in their adulthood.