Congratulations, Secretary DeVos, on your recent appointment to lead the U.S. Department of Education. Now the real work begins.
Your position requires you to prioritize competing educational ideas to promote the mission of “student achievement and preparation for global competitiveness.” While much attention has been given to your advancement of school choice, I write to suggest your department also focus national attention on another key education issue: financial literacy.
As a community college professor, I cover personal finance in my economics classes, but too often the education that I provide to my students arrives too late. Many of my students have already made terrible financial decisions, and it is not unusual for them to reveal that they are considering bankruptcy.
Students communicate that the personal finance section of my economics course is the most valuable, and several students—particularly the older ones—wish they had this personal finance knowledge when they were young because they would have so much more money today.
A basic course that covers economics principles, sources of economic progress (such as economic freedom), public choice, and especially personal finance should be mandatory for all high school students, and should be strongly encouraged at the college level, even for those not majoring in economics or finance.
I am very passionate about this for many reasons, but the bottom line is that financial illiteracy fosters poverty and derails many life plans. Financial literacy, on the other hand, promotes wealth and hope.
Consider, for example, that entrepreneurship is a pathway for the poor to escape poverty. You don’t need a college degree to be a successful entrepreneur, but before you can begin to think about starting a business, you must have your financial ducks in a row. It is a necessary, but not sufficient, condition for success.
Education in financial literacy is empowering. I have seen firsthand the excitement and change in students when they learn how they can accumulate hundreds of thousands of dollars over time by saving only $3 a day.
Students who learn about the cost of raising children as well as the power of compound interest on savings (as well as debt) will have a better understanding about the opportunity costs of their actions and may choose a different path. I realize that this is not a panacea, but it can help.
Many colleges and universities do have school-wide financial literacy initiatives. At my school, Wake Technical Community College, we take a multi-pronged approach. We offer 36 personal finance workshops per semester, as well as games, contests, and challenges that help to strengthen students’ understanding of the material. We even have a related online learning center on our website. Wake Tech has partnered with the Sun Trust Foundation to assist with these efforts.
And some four-year universities have adopted a similar approach. For example, UNC Chapel Hill partnered with Coastal Federal Credit Union to offer financial literacy workshops through its student support office.
However, the problem is that unless a student proactively attends a workshop or completes a course in personal finance, there is no guarantee that he or she will graduate from college knowing these essential lessons.
For example, I spoke with a young man who is a few months shy of graduating from UNC Chapel Hill with an economics degree. Yet he revealed he didn’t know the difference between gross and net pay.
Promoting financial literacy should be a goal that gains support from across the political spectrum. On the left, many are concerned about income inequality as well as wealth inequality. In his famous book Capital in the Twenty-First Century, French economist Thomas Piketty argues that because the return on labor is less than the return on capital, income and wealth inequality result and can potentially undermine our democratic foundations. His solution is income redistribution to reduce the inequality.
Here is another idea: reduce income inequality by educating our future workforce on how to participate in the capital markets and take advantage of the higher return.
Right now, that is not happening. Nationally, financial illiteracy manifests as a lack of participation in our capital markets and through an accumulation of personal debt. This USA Today article, citing data from the U.S. Census Bureau and Federal Reserve, highlights the fact that while “more than 60 percent of households carry no debt on their credit card, the average credit card debt for households that carry a balance is a shocking $16,048.”
Moreover, an April 2016 Gallup poll revealed that only 52 percent of American adults owned stock. This figure is down slightly from 2014 and 2015. Middle class adults and those younger than 35 were the least likely to invest.
The key to taking advantage of compound interest is not income, but time. It is clear that in the U.S. the young don’t save, and when people start to save when they are older, they have to make much larger sacrifices. On the other hand, saving large amounts of money over time requires smaller sacrifices at an early age.
For example, at a 7 percent real return (which is the long-run return of the stock market), the decision to spend rather than save $5,840 ($2 per day) between the ages of 22 and 30 is a decision to give up over $85,000 at age 65! This suggests that spending small amounts of money while young has a large opportunity cost.
The earlier we teach these important lessons, the earlier students can leverage this knowledge and build wealth.
Secretary DeVos, please prioritize personal finance. There are some who will criticize you no matter what you do. They might argue “What good is teaching about investing in the stock market when the working poor barely have enough to eat? Let’s stick to the status quo, and focus more on things such as Algebra I.”
The truth is that not everybody needs to learn Algebra I to succeed, but everybody needs to understand the basics of budgeting, saving, and building wealth.