Don’t bother teaching kids financial literacy

This is an inter­est­ing arti­cle on finan­cial edu­ca­tion for children.

Don’t bother teach­ing kids finan­cial literacy

By Genevieve Cua

THOSE who advo­cate teach­ing per­sonal finance to chil­dren in pri­mary schools envi­sion adults in the future who are able to bud­get, under­stand the impli­ca­tions of rollover credit card debt and can side­step com­plex and risky invest­ment products.

Pro­fes­sor Emer­i­tus Lewis Man­dell, who has researched finan­cial lit­er­acy issues in the last 15 years, is quick to bring these notions down to earth. Teach­ing finan­cial lit­er­acy to kids doesn’t work, he says bluntly. Finan­cial lit­er­acy is defined as the abil­ity to make impor­tant finan­cial deci­sions for one’s own benefit.

‘I’m very pes­simistic. I have been doing research con­tin­u­ously, track­ing lev­els of finan­cial lit­er­acy which have not got­ten any bet­ter, and also attempt­ing to mea­sure the impact of edu­ca­tional pro­grammes. The research gives no rea­son for opti­mism. It basi­cally shows that stu­dents in high school who have had a course in finan­cial edu­ca­tion are no more finan­cially lit­er­ate than those who never had such a course. That’s an indi­ca­tion that we have not fig­ured out how to teach finan­cial lit­er­acy.’

Prof Man­dell is in Sin­ga­pore until next week. He teaches Eco­nom­ics for Man­agers in the UB (Uni­ver­sity at Buf­falo) Exec­u­tive MBA pro­gramme, which is offered in part­ner­ship with the Sin­ga­pore Insti­tute of Management.

Since the finan­cial cri­sis, reg­u­la­tors have been grap­pling with how the sale of invest­ment prod­ucts should be tight­ened par­tic­u­larly when investors are rel­a­tively finan­cially unso­phis­ti­cated. In Sin­ga­pore, the Mon­e­tary Author­ity of Sin­ga­pore has pro­posed a test to ascer­tain investors’ knowl­edge before they can invest.

Prof Man­dell says finan­cial illit­er­acy takes a heavy toll on indi­vid­u­als and soci­ety. ‘(Mis­takes) aggre­gate. They were not the sole fac­tor in the melt­down but they were an impor­tant fac­tor. If every­one makes a bad deci­sion it can have a bad effect on the whole soci­ety. Is it pos­si­ble to edu­cate peo­ple to the extent that they will not make such mis­takes? It does not appear to be possible.’

There are, how­ever, ways to raise the chances that chil­dren will absorb sound per­sonal finance prin­ci­ples. One way is to allow them real expe­ri­ence with money — with adult guidance.

Prof Man­dell him­self was allowed by his par­ents to invest his col­lege edu­ca­tion sav­ings. ‘When I was 13, my par­ents said — you have some money and you have an inter­est in the mar­ket. They called my bro­ker, who was a cousin and told him to let me trade my own account. That was before there was online trad­ing. So I’d call him and he’d invest. That helped me develop a great inter­est in finance.’

His daugh­ter, he recounts, came home one day when she was 12, and said she wanted to invest in Pepsi instead of South­west Air­lines which was then a fast grow­ing stock. ‘She said — ‘I think (South­west) is bor­ing. My friends and I all like the com­mer­cials for Pepsi. I want to invest all my money in Pepsi’.’

Prof Man­dell told her to call the bro­ker and to go ahead with what­ever was jointly decided. ‘The bro­ker said — rather than invest all your money in Pepsi, let’s invest half in Pepsi and half in Southwest.

‘Pepsi fell. She lost some money but she learnt some­thing extremely valu­able. To this day she’s very good at per­sonal finance. She has a very good under­stand­ing that no mat­ter how much you like a stock, it doesn’t mean it will go up.

‘I believe that it is use­ful to get chil­dren involved in their own finances to give them a degree of con­trol with adult super­vi­sion. If they realise they are spend­ing and invest­ing their own money, they’ll be much more seri­ous about it than if it was a game.’

Chil­dren, he adds, should also be able to open their own sav­ings accounts and have con­trol over their spend­ing. In Sin­ga­pore, child accounts are typ­i­cally jointly opened with a par­ent. Banks such as OCBC, how­ever, do allow accounts solely in the child’s name, from as young as five years old. Yet another avenue is to allow a child to have a sup­ple­men­tary credit card with lim­its on spend­ing. This, he says, will teach the child to spend respon­si­bly within a bud­get. Sup­ple­men­tary cards, how­ever, can only be issued to a child of at least 18.

‘I believe strongly in child accounts. I believe that a child should at a very early age have an account in his or her name, and that the par­ent should encour­age the child to get into a behav­iour of sav­ing … If a par­ent can take money out of the account it doesn’t give the child iden­ti­fi­ca­tion with those assets.’

Research on the effect of allowances on chil­dren yield star­tling results. There are gen­er­ally three types of allowances, he says. One is a reg­u­lar allowance. A sec­ond form is an allowance as a form of reward, for doing chores, for instance. A third is not to give a reg­u­lar allowance, but to give money when the child asks for it.

‘It turns out that chil­dren who get a reg­u­lar allowance have the low­est finan­cial lit­er­acy. Colum­nists are well mean­ing and often argue that an allowance teaches respon­si­bil­ity but it’s the oppo­site. The ones who do best are those who get an allowance for doing chores or meet­ing expec­ta­tions. They’re fol­lowed closely by those who don’t get a reg­u­lar allowance but who ask for money.

‘My rea­son­ing is that chil­dren who get a reg­u­lar allowance — it’s like being on wel­fare. You’re not rein­forc­ing good habits. You’re say­ing that regard­less of how good or bad you are, I’m giv­ing you this amount, and it doesn’t tend to teach responsibility.’

Prof Man­dell has been work­ing on a pro­posal as part of the Obama administration’s efforts to address the need for an ‘auto­matic’ retire­ment sav­ings option that is safe and sim­ple. His pro­posal, dubbed RS + (Real Sav­ings +) is a port­fo­lio that aims to pro­vide cap­i­tal and infla­tion pro­tec­tion with some upside from equities.

The default option in most US retire­ment plans is a tar­get date fund where the asset allo­ca­tion shifts to a more con­ser­v­a­tive pro­file as a worker nears retire­ment. But such funds came under fierce crit­i­cism in the cri­sis as their fairly heavy equity weight­ings caused severe losses.

Prof Mandell’s port­fo­lio would invest a por­tion in Trea­sury Inflated Pro­tected Secu­ri­ties, at an allo­ca­tion that would deliver the prin­ci­pal on an infla­tion adjusted basis at retire­ment. The bal­ance is to be invested in equi­ties through low cost index funds. ‘My idea is to use finan­cial engi­neer­ing to develop prod­ucts that are not going to make rich peo­ple richer, but to make ordi­nary peo­ple safer. They may use deriv­a­tives but to ben­e­fit the ordi­nary per­son rather than the finan­cial institution.’

This arti­cle was first pub­lished in The Busi­ness Times.

So instead of giv­ing reg­u­lar allowances, we should give our chil­dren allowances based on their behav­ior or chores done.

Do you agree?