Financial Literacy - Some Thoughts

Most interested observers agree the nation has a financial literacy problem.  In honor of Financial Literacy month, Digerati Life presents her thoughts and argues in favor of mandatory high school classes in money management skills. Most agree that financial illiteracy played an important  role in the 2008 housing crisis and is the fundamental factor in the ongoing struggle families have with credit card and other types of debt.

The departure point in the debate is how to solve the problem. Many people are quick to jump on the bandwagon calling for classes in high school and elsewhere, mandatory testing, and the usual type of solutions. Many are willing to throw a lot of money at the problem. Some, in fact, would have a lot of money thrown their way if their solutions were adopted.

A different view is expressed by Lauren Willis. A professor at Loyola Law School of Los Angeles, she has written "Against Financial literacy Education."  Ms. Willis does something  not typically done in this debate. She brings to bear evidence, and she thinks in terms of costs and benefits. She finds that the costs far outweigh the benefits.

One of the difficulties, I believe, is that financial literacy is such a wide-ranging subject area and  means different things to different people. Ms. Willis mentions the futility of turning people into "...financial experts."  This, to me and I suspect many others, is a bit of a strawman argument. Few proponents of financial literacy would even put themselves forward as "financial experts."  Most, themselves, use experts on complicated financial questions. They will have attorneys look over contracts and mortgages. They'll turn to financial advisors for investment advice and financial planners to do financial planning.

But, at the other end of the spectrum, there is the basic thinking about wants and needs. There is the basic understanding of compound interest and the value of saving and investing at a young age. There is the understanding of the basics of investing.

Extending these concepts to study how to think about buying a car or the analysis that goes into thinking about renting an apartment or even the whole subject of student loans is fairly straightforward. In fact, from the teacher's perspective, all of these subjects readily lend themselves to highly interactive classroom projects that students are interested in.

Even closer to home is the fact that there are really good blogs that speak to young people and cover these subjects in an entertaining way. I frequently recommend, for example, Ramit Sethi's blog to young people. Reading his blog for a year will ramp up people's financial literacy - both young and old.

The part that is not so easy is teaching when people need to get advice, when they need an objective analysis of whether they can afford the mortgage or whether they should take the adjustable rate loan or fixed rate loan.

Start at Community College or 4 Year School?

Ron Lieber of the New York Times has written an excellent column on this question: "Bargains on the First 4 Semesters."

Given the dollar amounts involved, the financial planning considerations are important. The parent's retirement plans can be affected by the choice of college along with the student's loan burden.

The article contains excellent recommendations along the lines of checking out the community college, talking to advisors, not taking courses that are too specific at the community college, finding out how many transfer students actually graduate from a 4-year college, etc. To me, anyone who would follow these recommendations is a serious student and would have no problem going the community college route. The worry for many people is the academic environment. I have taught at both the community college level and a 4-year major college. The academic environments are different.

The community college I teach at is nationally recognized as an excellent institution. It has outstanding honors programs from which the transfer rate is exceptionally high and for which the 4-year graduation rate is high. To me what is  lacking, compared to a 4-year university, is the opportunity to join a hard-partying fraternity or sorority and big-time college sports. The education in the honors programs at the community college can be, I believe, superior to the university for the first 2 years, when individualized attention is considered.

Away from the honors courses, community college is a bit different; and the student who desires to successfully transfer to a 4-year school needs to be highly motivated. The non-honors courses are populated by students who decided at the last minute to attend community college (maybe because they couldn't get a job), didn't take a college level track in high school, have no idea of a career path, and very likely are taking remedial math and English courses.

At the university, it is different. Students have prepared for college in high school, have gone through a rigorous process to get accepted, and many have the necessary math and English skills.A higher percentage of the students know why they are there.

One advantage I believe that the community college offers is that the instructors tend to have real-world experience. Many of the instructors are adjuncts who are practicing law, accounting, economics, or nursing in the real world and can provide excellent advice on career paths.

I, for one, felt I was better prepared entering the university 3-credit-hours-short of junior status with an AA degree from community college.

Need Inspiration?

Andrew Hallam is a bone cancer survivor, an English teacher at the American School in Singapore, and a man who accepts a challenge head on. He also has a talent and a love for exploring the world of investing.

Here is one of his latest challenges:



Is there any doubt this will be added to his list of conquests?

Bill Gates' favorite teacher (from Fortune magazine)

If you are interested in new ideas, education, and how businesses develop, you'll probably enjoy this article on how the Khan Academy came to be. If you are a member of a teacher's union, you'll cringe and give all kinds of reasons why the academy is harmful. There's a famous quote which goes into how people have a hard time understanding logic when it affects their wallet. It applies here.

What I like about Khan is that he gives the basics. In education today, there is a huge push for group problem solving and critical thinking. Form a group and ask them to figure out how to solve the housing crisis. Sounds great. After all they will teach themselves! Make them produce their evidence etc., etc. There is one small problem with all of this - students don't know the basics! They don't know the difference between the Treasury department and the Federal Reserve. They don't know the difference between the National Debt and the Federal Deficit. They don't know the basics of exchange rate effects. You may as well go to a local bar and ask out loud why the economy is screwed up. It's like a carpenter trying to build a shed when he is clueless about measuring and sawing.

Again, this is where Khan comes in. He is great at teaching the basics in a non-frills way; and people are obviously responding. Apparently, some are responding to a greater extent than they are to their college professors which is, of course, a bit threatening. And unions are quick to pick up on any such threat.

In the same vein, I detect a negative reaction to blogging on the part of educators. The first response I hear is that there is a lot of misinformation. This is true, but it is also true that there is a lot of learning that is obviously taking place; and the fact of the matter is the formal education system is not increasing the financial literacy in this country.

Personal finance blogs are.

At least, that's the way I see it.

Think Creatively

A must-see entertaining TED talk by anyone interested in education. Sir Ken Robinson argues that our system stifles creativity.