Teaching teenagers to manage money
Financial education programs can raise young people’s awareness of how to save for status symbols, such as trainers and smartphones. Adults, however, don’t learn as fast.
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Felix is nearly 15. He may be young but he knows what he wants: a moped. The problem is it costs money, a lot of money. And you have to factor in the helmet, insurance and general running costs on top. So classmates at a Munich secondary school draw up a list of how much Felix would need to save and discuss how best to raise the money.
Felix doesn’t really exist, but his situation certainly does. And this hypothetical situation provides valuable real-life lessons for the young, many of whom fail to understand the real meaning of money. While owning the latest designer trainers, iPod or iPhone can be all-important, many young people have little understanding of how to pay for all the text messages they send. “Most kids today own smartphones, but many aren’t even aware that they have recurring costs,” says Joachim Winter, professor of economics at Munich’s Ludwig Maximilian University. “They just want them, and buy them.”
This is where programs such as My Finance Coach (MFC) come in. This nonprofit initiative aims to teach 10- to 16-year-olds in German secondary schools how to deal with their personal finances and how money works. It is also designed to raise interest in personal finance using interactive examples and material relevant to their daily lives, such as Felix and his moped. In, MFC reached more than 150,000 pupils across Germany, thanks largely to corporate volunteering schemes from participating companies, such as Allianz, KPMG, McKinsey and Volkswagen Financial Services. Financial education programs help prepare teenagers for the monetary realities of life, says Winter, who evaluated the program over two years. “Our findings reveal that kids’ knowledge about consumption decisions and expenditure increases after the training.”
The training helps kids from poorer backgrounds have a greater feeling of control over their future finances Joachim Winter Before the program, more than 38% of the surveyed students expressed no interest in financial matters, with only 21% stating that their knowledge was good or very good. Almost half of the students reported that they shopped impulsively. After the program, interest in financial matters increased by about 20%, financial knowledge rose by 21% and the frequency of impulse shopping dropped. Interestingly, the survey shows a gender gap among teenagers, with girls reporting that they are less interested in financial matters and less likely to save than boys. This echoes later disparities with women generally claiming to know less about money and being less interested in personal finances than men, a finding confirmed by recent reports published by the Organisation for EconomicCo-operation and Development (OECD). Why this happens already among young people is unclear, Winter adds.
Take a peek inside My Finance Coach
Take a peek inside My Finance Coach
CONFIDENCE AND CONTROL
Clearly, not every student becomes a finance fan, and the long-term effects of such training programs are debated. Providing more information does not necessarily improve savings behavior, warns Rob Alessie, professor of micro-econometrics at the University of Groningen (Netherlands). Winter agrees. “We don’t really know whether increased knowledge translates into better decisions,” he explains. “We can’t follow students’ progress into adulthood due to reasons of data privacy.”
That said, Winter is convinced that training can help the majority of students – particularly those from lower-income families – make better-informed financial decisions. “Maybe it’s not so much about knowledge as about the confidence that thinking about these issues isn’t so hard. The training helps kids from poorer backgrounds have a greater feeling of control over their future finances.”
MFC isn’t the only program aimed at the young. Interest in state-run educational programs is increasing rapidly in many countries as governments realize the long-term implications of low levels of financial literacy within society. Child and Youth Finance International, for example, leads the world’s largest movement dedicated to enhancing the financial capabilities of the young, with regional gatherings and international annual summits aimed at creating awareness among policy-makers.
MyBnk and Aflatoun are other examples. Nevertheless, not everyone views financial educational programs positively. Teachers often think that big corporations shouldn’t play a role in children’s lives. Others wonder about the neutrality of participating companies. MFC, however, is free of charge and contains no advertising. People from lower social classes more vulnerable
PAINFUL DECISIONS
Sadly, it’s not just the young who lack financial literacy. A OECD study found that Canadian respondents considered choosing the right investments to be more stressful than going to the dentist. A British survey found that consumers do not actively seek out financial information; the knowledge they do receive is acquired randomly by, for example, picking up a pamphlet at a bank. Academic analysis has yet to find evidence that financial education can effectively teach adults.
Henriëtte Prast, professor of personal financial planning at Tilburg University in the Netherlands, conducted a meta-study into all research carried out on financial literacy and found no indication that it helps. “I couldn’t find a causal effect between increasing literacy and improving people’s planning for retirement or other saving goals,” she says.
Indeed, some research indicates that forcing people to become financially literate might be counterproductive. In The Financial Education Fallacy , Lauren Willis showed that people approaching bankruptcy who had attended a financial literacy course were actually worse at budgeting than their peers. “People’s overconfidence increases after such courses,” Prast explains. “They think they are suddenly experts and invest all their money in the stock market, for example.”
Her research shows that people from lower social classes are more vulnerable to consumer temptations and impulsive spending. The ready availability of online shopping and credit cards is a constant threat. “We are helped by things that limit our freedom,” Prast says, “such as a limited amount of cash in our pocket as opposed to an unlimited credit limit.”