MONEY Kids and Money

Why More Parents Are Talking to Toddlers About Money

toddler counting pennies on table
Derek Henthorn—Corbis

The money talk is occurring as young as age 3. Here's how that could change the world.

Talking about money at home has long been a taboo subject. But the Great Recession changed that, and now we’re seeing evidence of more open discourse—and maybe even a payoff.

Nearly two-thirds of parents with children between the ages of 4 and 12 pay their kids an allowance to teach them basic money management lessons, according to a survey from discount website couponcodespro.com. On average, these parents began teaching their kids the value of money at age 3, the survey found.

In a similar study two years ago, the American Institute of Certified Public Accountants found about the same percentage of parents using allowance as a teaching tool. But they did not start as early. In that study, kids typically received allowance by age 8. In another study, fund company T. Rowe Price found that 73% of parents talk to their kids regularly about money—and about one in five stepped up the frequency since the financial crisis.

Talking more openly about money inside the household is one of the recession’s silver linings. Many families experienced such a financial blow that they could not avoid the discussion. But even setting aside the recession, starting earlier and talking more frequently makes a lot of sense. In the online world, kids begin making money decisions earlier than previous generations, and when they come of age they will have far fewer safety nets. They need to begin saving with their first paycheck and never stop.

The most common money conversations between youngsters and parents revolve around saving in a piggy bank (73%), working for pay around the house (66%), budgeting for things the kids want (57%), and finding bargains at the grocery store (29%), according to the couponcodespro.com survey. The survey also found that the average weekly allowance across the age group was $13.50, which is higher than the often-recommended rate of 50¢ to $1 per week per years since birth.

The survey also found that 73% of parents paying an allowance admit to buying their kids treats, a practice that can undermine the value of paying allowance in the first place. “Sweets and clothes I can understand,” says Nick Swan, CEO of couponcodespro.com. “But buying them toys for no reason when they are being given an allowance can backtrack on everything they are trying to teach their children about money.”

Still, money talk may be beginning to make a difference. In a recent survey of Gen Z teens (aged 13 to 17), Better Homes and Gardens Real Estate found that half say they know more about money than their parents did at their age. Two-thirds attribute their knowledge of money matters to discussions in the home, and two in five credit discussions in school. Three in five have already begun saving.

This youngest generation also seems to be managing credit cards more adeptly than their older cousins, the Millennials. These are encouraging trends that, if they persist, will help the economy long term and may just insulate this youngest generation from another crisis.

 

 

 

MONEY Kids and Money

The Surprising Thing Gen Z Wants to Do With Its Money

Teen in front of home
Getty Images

More than half of teens would give up social media for a year and do double the homework if it guaranteed they’d be able to buy a house when they're older.

During the Great Recession, home ownership took a beating as the ideal for the American dream. The median home nationally lost a quarter of its value, prompting adults of all ages to adopt other elusive goals—like retiring on time for boomers or working on their own terms for millennials.

Just 65% of Americans own their home, down from 69% pre-bust. And four out of five Americans are rethinking the reasons they’d want to buy a house in the first place. But Generation Z—also known as post-millennials, born after the 1990s Internet bubble— seems to prize home ownership like no generation since their great-grandparents.

An astounding 97% of post-millennials believe they will one day own a home; 82% say it is the most important part of the American dream, according to a survey of teens age 13 to 17 by Better Homes and Gardens Real Estate. More than half would give up social media for a year and do double the homework if it guaranteed they’d be able to buy a house.

This yearning stands in starkest contrast to the aspirations of millennials, older cousins who pretty much created the sharing economy and in large numbers prefer to rent. The housing bust and foreclosure epidemic scarred millennials, probably for life, as some watched parents and neighbors lose everything. In a key part of this generation—heads of households age 25 to 34—renters increased by more than 1 million in the years following the crisis, while the number who own a home fell by 1.4 million.

Post-millennials saw the carnage, too, though at a tender age that left them more confused than traumatized. Where millennials hardened and vowed never to repeat the errors of their parents, post-millennials sought the comfort of family and togetherness, says Sherry Chris, CEO of Better Homes and Gardens. “Many of these Gen Z teens were 7 to 11 years old when the recession hit,” Chris said. “At that age, children equate home with stability.”

The innate quest for stability leads them to prize a family home above things like going to college, getting married, having children, or owning a business, according to the survey. And the dream appears firmly grounded in reality. Chris observed that today’s teens have more information than any previous generation at their age and show early signs of financial awareness. Asked for an estimate of what they might spend on a house, the 97% who aspire to be owners gave an average response of $274,323—strikingly close to the median home value of $273,500.

Half say they know more about money than their parents did at their age. Two-thirds attribute their knowledge of money matters to discussions in the home, and two in five credit discussions in school. Three in five teens have already begun saving, the survey found. Post-millennials, on average, aim to own a home by age 28—three years earlier than the median age of first-time homebuyers reported by the National Association of Realtors.

These are encouraging findings. A home remains most Americans’ single largest asset, and while the housing bust will have lingering effects, home prices nationally tend to rise every year—and have been trending up again the past few years. Not all of the news is good: Only 17% of post-millennials believe stocks are the best long-term investment; half prefer a simple savings account, TD Ameritrade found in a survey that defines the generation as slightly older (up to age 24).

But the TD survey also found that post-millennials have half the post-college credit card debt of millennials. And the Better Homes survey suggests that our youngest generation is at last learning more about money at an early age, which is the goal of a broad public-private financial education movement. A generation of financially adept youth who begin to save and gather assets that will grow for four or five decades is the surest way to avoid another meltdown and solve the retirement savings crisis.

Related:
Why Gen X Feels Lousy About the Recession and Retirement
Our Retirement Savings Crisis—and the Easy Solution

MONEY Kids and Money

Ace a Personal Finance Game, Win a College Scholarship

H&R Block is the latest financial firm with a program to teach kids about money. This one can earn students a college scholarship.

As the financial industry has worked to restore its image since the meltdown six years ago, one popular approach has been underwriting financial education programs aimed at teens and young adults. Tax preparer H&R Block unveiled its salvo on Monday, offering $3 million in college scholarships to high school students who ace an online budget game.

Block joins a bunch of national and regional banks from Bank of America to Key and FirstBank that sponsor some kind of financial education program. Credit-card company Visa and accounting giant PwC have made big commitments to youth financial education. The result of this broad push has been a disparate and often questioned effort to teach young people practical money skills while the financial industry nurses a badly damaged reputation.

Block is not a bank or credit company. It never sold anyone an exploding subprime mortgage. Still, when the company began looking around for a signature cause it landed fairly quickly on financial education for youth. “It’s appalling how clueless many teens are about money,” says Block CEO William Cobb.

He makes no apologies that Block’s “budget challenge” is as much about smart marketing as it is about helping teens get smart about money. The challenge concludes on Tax Day, April 15. But Cobb says educating high school kids about student loans and more is also “the right thing to do” and is “at the emotional center” of what the company stands for.

In a recent PISA assessment spanning 18 countries, the first of its kind, American 15-year-olds were found to be just average in terms of money know-how. Numerous other studies have shown that young people have a flunking knowledge of things like compound growth, inflation, taxes, investing and budgets.

Block’s program is built around an online game that simulates real world decisions. It is designed as part of a class with a teacher augmenting lessons that adhere to the Jumpstart Coalition’s standards for youth personal finance instruction and the Council for Economic Education’s standards for financial literacy.

The carrot for high school students is a college scholarship. The first challenge will begin Oct. 3 and last for nine weeks. Five more challenges will run through mid-April next year. Students need about 30 minutes to set up their profile and about 30 minutes per week after that in order to compete.

Students who score well by making smart decisions about insurance, retirement saving, fees, unexpected expenses and more may win as much as $20,000 toward college tuition. There will be 132 such awards along with some prize grants for teachers and classrooms—and one grand prize scholarship of $100,000 going to the top student across all six challenges.

The Block program appears both fun and engaging. Participants will have access to a real-time leader board to see where they stand and, Cobb says, winning isn’t as simple as just choosing the most conservative options. As in life, things are constantly changing. Kids will need to figure which trade-offs make the most sense in this simulated world of money so that, maybe, one day they’ll be good at it in the real world.

Related:
3 Mistakes That Will Cost You a College Scholarship
How to Get Full Credit When You Swap Colleges

MONEY Savings

Our Retirement Savings Crisis—and the Easy Solution

Skinny piggy bank
Barry Blackman—Tarhill Photos Inc./CORBIS

The numbers show we face a major savings shortfall. But there's a simple way out if we act now.

Data can be misleading. Mark Twain reminded us: “There are three kinds of lies: lies, damned lies and statistics.” Yet more often than not sets of numbers tell a compelling story, and that is the case with 29 charts recently compiled by Vox Media.

Start with this data point: the savings rate in the U.S. will be about 4.1% this year, which ranks 17th among 24 countries in the Organization for Economic Co-operation and Development. It’s a slight number next to savings rates like 13.1% in Switzerland and 9.9% in Germany. It’s also a shadow of the 10% or better savings rate we enjoyed in the U.S. 40 years ago. And consider this: Our savings rate is only this high now because of a renewed focus on putting money away and paying down debt since the Great Recession. It had been running at about 2.5% before the financial crisis.

This low savings rate explains at least part of our retirement savings crisis. Some 36% of workers have saved less than $1,000. That includes workers in their first year of full-time employment. So it’s not quite as bad as it sounds. Still, 69% have saved less than $50,000 and just 11% have saved more than $250,000.

Looking at folks already retired, the numbers don’t change much: 29% have saved less than $1,000 and 17% have saved more than $250,000. These are bleak readings. Experts estimate that you’ll need to bank eight to 12 times final pay in order to retire comfortably. If you peak at a salary of $75,000 a year, you will need a nest egg equal to $600,000 to $900,000.

The current generation of retirees has a big advantage that helps explain how they are getting by on so little savings: many collect a traditional defined-benefit pension, which guarantees lifetime income, in addition to Social Security. Three decades ago, 38% of private sector workers had such a pension while 17% had a defined-contribution plan like a 401(k). Those figures have reversed. Today, 14% have a traditional pension while 42% have a 401(k) or similar plan.

This means individuals are becoming increasingly responsible for their own retirement security. Yet we are doing little to prepare them. Financial concepts are not widely taught in schools in the U.S., where 15-year-olds recently tested in the middle of the pack for financial literacy—behind Latvia and Poland, and more importantly behind nations like Australia and New Zealand, where financial education is a government priority.

We’re not teaching kids about money at home either. Teens’ top source of money is gifts from friends and relatives. The share that holds a summer job is down 50% the last 20 years even though the value of summer work goes well beyond learning how to save and budget.

These data points suggest a downward spiral of sorts: we don’t save enough even though we are more responsible than ever for our individual financial well being, and we aren’t doing enough to break the trend among younger generations that will have even less of a safety net. Much of the issue would disappear if individuals simply bumped up their savings rate to at least 10% (better yet, 15%) and young people started early and let compound growth over an additional 10 or 15 years do the heavy lifting for them. Forget anything the critics say: financial education can change that. Until then, though, only households in the top 40% of net worth (at least $164,000) can expect their kids to have as much wealth as the parents. These numbers don’t lie.

Do you need help getting your retirement planning off the ground? Email makeover@moneymail.com for a chance at a free makeover from a financial pro and a story in Money magazine.

MONEY Saving

This App May Let You Retire on Your Spare Change

Acorn App
Acorn

The new Acorns app rounds up card purchases and invests the difference for growth, with no minimums and low fees.

Americans spend $11 trillion a year while saving very little. So it makes sense to link the two, as a number of financial companies have tried to do over the past decade. The latest is the startup Acorns, which hopes to hook millennials on the merits of mobile micro investing over many decades.

Through the Acorns app, released for iPhone this week, you sock away “spare change” every time you use your linked credit or debit card. The app rounds up purchases to the nearest dollar, takes the difference from your checking account, and plunks it in a solid, no-frills investment portfolio. So when you spend, say, $1.29 for a song on iTunes, the app reads that as $2 and pushes 71¢ into your Acorns account. With a swipe, you can also contribute small or large sums separate from any spending.

The Acorns portfolio is purposely simple: Your money gets spread among six basic index funds. The weighting in each fund depends on your risk profile, which you can dial up or down on your iPhone. More aggressive settings put more money in stocks. But you always have some money in each fund, remaining diversified among large and small company stocks, emerging markets, real estate, government and corporate bonds. The app will be available for Android in a few weeks and through a website in a few months.

Why Millennials Are the Target

Micro investing via a mobile device clearly targets millennials, who show great interest in saving but have been largely ignored by financial advisers and large banks. Young people may not have enough assets to meet the minimum requirements of big financial houses like Fidelity, Vanguard, and Schwab. With Acorns, there are no minimums. There are also none of the commissions that can render investing in small doses prohibitively expensive. “We want small investors who can grow with us over time,” says Acorns co-founder Jeff Cruttenden.

This approach places Acorns in the middle a rash of low-fee, online financial firms geared at young adults—including Square, Betterment, Robinhood, and Wealthfront. Such firms hope to capitalize on young adults’ penchant for tech solutions and lingering mistrust of large financial institutions. Cruttenden says a third of Acorns users are under age 22. They like to save in dribs and drabs—and manage everything from a mobile device.

Acorns charges a flat $1 monthly fee and between 0.25% and 0.5% of assets each year. The typical mutual fund has fees of 1% or more. Yet many index fund fees run lower. The Vanguard S&P 500 ETF, which invests in large company stocks, charges just 0.05%. If you have a few thousand dollars to open an account, and the discipline to invest a set amount each month, you might do better there. But remember that is just one fund. With Acorns you get diversification across six asset classes—along with the rounding up feature, which seems to have appeal.

Acorns has been testing the app all summer and says the average account holder contributes $7 a day through lump sums and a total of 500,000 round ups. Cruttenden says he is a typical user and through rounding up his card purchases has added $521.63 to his account over three months.

A New Twist on an Old Concept

Mortgage experts tout rounding up as a way to pay off your mortgage quicker. On a $200,000 loan at 4.5% for 30 years your payment would be $1,013.38. Rounding up to the nearest $100, or to $1,100, would cut your payoff time by 52 months and save you $26,821.20 in interest. Rounding up your card purchases works much the same way—only you are accumulating savings, not cutting your interest expense.

Bank of America offers a Keep the Change program, which rounds up debit-card purchases to the nearest buck and then pushes the difference into a savings account. Upromise offers credit card holders rewards that help pay for college. But Acorns’ approach is different: the money goes into an actual investment account with solid long-term growth potential.

One possible drawback is that this is a taxable account, which means you fund the Acorns account with after-tax money. Young adults starting a career with a company that offers a tax-deferred 401(k) plan with a match would be better served putting money in that account, if they must choose. But if you are like millions of people who throw spare change in a drawer anyway, Acorns is a way to do it electronically and let those nickels, dimes, and pennies go to work for you in a more meaningful way.

Read more on getting a jump on saving and investing:

 

MONEY Insurance

Why Millennials Resist Any Kind of Insurance

Young adults are the most underinsured generation of our time, which makes sense—up to a point.

Millennials are the most underinsured generation alive today—which makes a certain amount of sense. They have relatively few assets or dependents to protect. Still, the gaps in coverage are striking and offer further evidence that this generation has been unusually slow to launch.

Roughly one in four adults aged 18 to 29 do not have health insurance, twice the rate of all other adults, according to a survey from InsuranceQuotes.com, a financial website. (Other surveys have found lower uninsured rates, but this age group is still the most likely to go without.) Millennials are also far less likely to have auto, life, homeowners, renters, and disability coverage.

Young adults have always been slow to buy insurance. They often feel invincible when it comes to potential health or financial setbacks. But something additional appears to be at work here. This generation has famously overprotective parents who awarded them trophies just for showing up. Millennials may view moving back home or calling Mom and Dad for a bailout as their personal no-cost, all-purpose insurance plan.

Millions of young adults routinely boomerang home after college or get other family financial support. The trend is so broad that psychologists have given this new life phase a name: emerging adulthood, a period that lasts to age 28 or 30. MONEY explores this trend, and its costs, in the September issue reaching homes this week. Remarkably, the parents of boomerang kids don’t seem to mind providing the extended support.

A quarter of parents supporting an adult child say they have taken on additional debt; 13% have delayed a life event, such as taking a dream vacation; and 7% have delayed retirement, the National Endowment for Financial Education found. Yet 80% of such parents in a Bank of America Merrill Lynch survey say helping is “the right thing to do,” and 60% are willing to work longer, 40% to go back to work, and 36% to live with less if that’s what it takes to help their adult kids.

“Millennials have had very supportive parents throughout their life,” says Laura Adams, senior insurance analyst at InsuranceQuotes.com. “When you don’t have a fear of the unknown, a fear of life’s what-ifs, you are not likely to think about insurance.”

Yet young people overlook certain types of insurance at their peril—even though these policies may be relatively inexpensive. Most striking is how many skip health insurance, even though the Affordable Care Act mandates coverage and allows children up to age 26 to remain on a parent’s plan. Millions more young people now have health coverage as a result, recent studies have found, and their uninsured rate has dropped. But, still, as many as one in four still go without.

This may be classic pushback against a law young adults see as unfair. They understand that their insurance premiums subsidize the health benefits of older Americans who are far more likely to need care. Yet if Mom and Dad won’t pick up the bill, a visit to the ER can cost $1,000 or more for even a simple ailment. Things get much more expensive for broken bones and other treatments that even the young may need. Among other findings:

  • 64% of millennials have auto insurance, compared to 84% of older generations. Many millennials may have decided to skip car ownership. But if you rent a car or borrow one from your roommate, you have liability. It probably pays to have your own policy, which might cost $30 a month.
  • 10% of millennials have homeowners insurance, compared to more than half of those aged 30 to 49 and 75% of those 65 and older. Fewer millennials own a house, for sure. But this generation isn’t buying renters insurance either: only 12% have it. Renters insurance is cheap: $10 to $15 a month, and it comes in handy not only when someone steals your bike from the storage area but also if Fido bites a neighbor.
  • 13% of millennials have disability insurance, compared with 37% of those 30 to 49. This kind of coverage costs around $30 a month and may seem unnecessary. Yet one in three working adults will miss at least three months of work at least once in their life due to illness, Adams says, adding, “Anyone can throw out their back.”
  • 36% of millennials have life insurance, compared with 60% of those 30 to 49. Again, this coverage is relatively cheap: around $20 a month for $500,000 of term life. If you have no dependents you might skip it. But if you have debt that Mom and Dad co-signed, you should have enough coverage to retire the debt. It’s only fair, given your parents’ years of extended financial support.

 

 

MONEY Financial Planning

Why Millennials Aren’t Getting Love from Financial Advisers

Financial advisers are aging and mostly targeting their peer group. Where can a dedicated Millennial saver get answers?

“Follow the money” was sage advice in All the President’s Men, and “show me the money” worked well enough for the characters in Jerry Maguire. Now financial advisers are taking the same approach in their pursuit of new clients.

A third say they aren’t interested in your business if you have less than $500,000 to invest and 57% want at least $250,000 in assets to get on the phone, according to a survey from Principal Financial Group. Okay. These are business people following the money in their quest for higher fees and more commissions.

Yet this approach pretty much ignores the next mega-generation—the 80 million Millennials, the oldest of which are now turning the corner on 30. Just 18% of financial advisers say they are prospecting in this demographic. Millennials don’t have a lot of assets at this point in their life, and 29% of advisers say this generation has little interest in their services because of the cost, Principal found. So why bother?

Well, anyone building a wealth management business for the long term might find plenty of gold in this group. Millennials are hell-bent on saving and investing long term, and providing for their own financial security. Eight in 10 Millennials say the recession convinced them they must save more now, according to the 2014 Wells Fargo Millennial Study. Meanwhile, the financial industry, banks in particular, have a long way to go win this generation’s trust. They might want to get started.

Most wealth advisers are focused on Baby Boomers (64%), high net worth clients (64%) and business owners (62%). For those willing to work with the less well-heeled—advisers who just getting started and willing to build a practice over time—these twenty-somethings offer a huge opportunity. One issue, though, is that there aren’t a lot of young wealth advisers out there. Like bus drivers and clergy, this profession has a slow replacement rate and is aging fast. Among the 300,000 or so full-time financial advisers, the average age is about 50, and 21% are over 60.

The result is an industry filled with people that largely do not relate to Millennials and do not care because they have so little to invest. At the same time, we have a generation that has got the message on saving and wants to get serious about investing for its financial future. So it’s not surprising that a growing number are turning instead to online financial advice firms—start-ups such as Betterment, Wealthfront and Personal Capital—to get investment guidance with little or no minimum and at lower cost. Millennials may be broke and fee averse. But they won’t be that way forever. This time, “show me the money” may be bad strategy.

MONEY Kids and Money

Go Figure, Grandkids Want to Hear About Your Money Memories

Having seen tough times already, young adults crave money conversations with grandparents who have seen it all before.

What young person doesn’t enjoy a good story? And it doesn’t have to be about vampires or super heroes. The top thing young adults want to hear from grandparents is about experiences and decisions that shaped their life, new research shows.

This is especially true of events having to do with money, according to a survey from TIAA-CREF, a financial firm with $613 billion under management. The finding suggests that grandparents who are willing to talk about their financial follies can play an important role in helping their grandkids learn early to save, manage debt and stick to a budget.

Only 8% of grandparents say they are willing to start a conversation with their grandkids about money, the survey found. Yet 85% of grandkids aged 18 to 24 say they are open to such a conversation. In a further sign of this divide: only 30% of grandparents believe they could have an influence over their grandkids’ money habits; but 73% of young adults say their grandparents already have such influence.

How can perceptions be so different? For one thing, young adults have got the message and are intensely interested in understanding how to manage their money. In the survey, 97% said they were concerned about saving for their future. They see their grandparents as a role model: 59% rated their grandparents as very good or excellent savers.

Grandparents may be missing their influence due to cultural differences, the survey authors say. Many grandparents today are Baby Boomers, the generation that once upon a time didn’t trust anyone over 30. They wonder why young people would listen to them about anything.

But Millennials are coming of age in different times. They embrace the new multi-generational workplace and family. Through the Great Recession, they have seen first hand how tough life can be and they tend to respect elders who have muddled through despite life’s many ups and downs, says Joe Coughlin, director of the Massachusetts Institute of Technology AgeLab, which collaborated with TIAA-CREF on the study.

Coughlin suggests initiating the money conversation with grandkids when they are teens or earlier. Saving for college is a great starting topic. This may require crossing another divide, however. Grandparents are largely in the dark as to how expensive college has become. Four-year university costs easily run to $100,000 and can shoot to $160,00 or more at a private school. Yet one in five grandparents believe the total to be under $50,000 and a quarter believe it to be $50,000 to $75,000, TIAA-CREF found.

In speaking to grandkids about money, the trick is framing the discussion as a personal experience. Kids love to hear stories about rituals, big decisions, frugality and home life, he says. Grandparents can find ideas and conversation starters for teens here and for younger kids here and here.

Taking on this subject can be a fun and rewarding way to get to know a grandchild better—and it may be a huge help to parents. “Life has gotten very busy for dual income households,” Coughlin says. “Grandparents can fill in the gaps. They have the time and the stories to tell.” They just need to understand that, unlike themselves in younger days, the kids will listen.

Related stories:

 

MONEY Aging

Why It’s Never Too Late to Fix Your Finances

Those over 50 may become less sharp, but a little personal finance instruction can make a huge difference in their financial security.

When we speak of financial education today, in most cases we are referring to the broad, global effort to teach students how to stay out of debt and begin to save for retirement. But what about those who already have debts and may already be retired?

Clearly, we should teach them too. It’s never too late to improve your financial standing—and unlike financial education among the young, elders exposed to basic planning strategies adopt them readily, new research shows. This underscores the sweeping need for programs that address financial understanding at all ages and why even folks well past their saving years may still have time to get it right.

Last year, AARP Foundation and Charles Schwab Foundation completed a 15-month trial of financial instruction designed specifically for low-income people past the age of 50. After just six months of training, the subjects exhibited significant improvement in things like budgeting, saving, investing, managing debt and goal setting.

For example, only 42% of participants had at least one financial goal at the start of the program and 63% had set at least one financial goal after six months in the program. The rate of those spending more than they earned fell by a third and 35% had paid down debt. Many had begun to track spending and stop overdrawing accounts and paying late fees.

Participants saying they were “very worried” about money dropped to 14% from 22%; those saying they were “not very/not at all worried” jumped to 42% from 34%. These are remarkable gains in such a short period and among such a generally disadvantaged group. Half in the group had saved less than $10,000 and average income was about $35,000.

The research suggests that the 50-plus set can make big strides toward a secure financial life with some instruction. It jibes with other reports illustrating the value of financial inclusion for the unbanked millions and how a higher degree of personal financial ability might even save our way of life for everyone.

But let’s be clear: this isn’t just a way for low-income households to improve their lot. Plenty middle-class and even affluent households have a savings problem. And as we age we tend to make poorer money decisions regardless of our net worth. So it’s nice to see the financial education effort move beyond the classroom—increasingly to places of employment as part of benefits counseling and now, maybe, to community centers and retirement villages where willing adults can find it’s never too late to learn something new and feel good about their finances.

MONEY Personal Finance

Money Know-How? American Teens Are, Well, Just Average

Students taking test in classroom
Roy Mehta—Getty Images

A major study shows that American 15-year-olds are barely average when it comes to knowledge of personal finance—and way behind the kids in Shanghai.

For a country whose grandest export might be capitalism, we don’t do very well with our own kids. American teens land smack in the middle of the pack when it comes to simple personal financial know-how, according to a groundbreaking new global study.

Topping the list are kids in Shanghai, Belgium, Estonia, Australia and New Zealand. Bringing up the bottom are teens in Colombia, Italy, Slovak Republic, and Israel. The U.S. rates just below Latvia and ahead of France.

These findings come in the newly released 2012 Program for International Student Assessment (PISA), a widely recognized comparative measure of student proficiency in 65 countries. In the past, PISA has focused on math, science, and reading. For the first time, in 2012 it added testing on personal financial concepts.

Only 18 countries opted into the financial literacy component, which is a statement all by itself. This is a relatively new field of education and most countries have little more than a fledgling effort. Some who take it seriously and have broad financial education programs, like Australia and New Zealand, scored relatively well. But Shanghai, which is not regarded as a leader, produced the best results of all.

The assessment looked specifically at 15-year-olds. Those in Shanghai had a mean score of 603—well ahead of second-place Belgium (541) and 9th-place U.S. (492). In last place was Colombia’s mean score of 379. PISA is part of the Organization for Economic Co-operation and Development (OECD).

The 2012 results, eagerly awaited in education circles (and especially in financial education circles), were a bust in at least one big way. The goal is to figure out how to raise the financial I.Q. of people around the world by starting early and teaching in classrooms about budgets, credit cards, saving and investing. Asked what seems to work best, Michael Davidson, head of schools at the OECD, said, “The easy answer is we don’t know.”

The strong scores in Shanghai correlate with strong math scores there, he noted. But in other countries, the highest scores correlated with simply having a bank account. In general, strong financial literacy scores were also highly correlated with students demonstrating problem-solving skills and perseverance. So it may be that the best approach is a focus on math, offering kids some exposure to real world financial decisions and cultivating their will to ask questions and not give up so quickly in all spheres of life.

Among U.S. students, the OECD found that:

  • A worse-than-average 17.8% do not reach even a baseline level of understanding about money concepts, meaning that at best such students will understand an invoice or the difference between a want and a need. They have little aptitude for even simple things like a basic budget or loan.
  • A nearly average 9.4% is a top performer, meaning they understand things like fees and transactions costs and can make financial decisions with no immediate benefit but which will be good for them in the long run.

These are discouraging numbers, especially when weighed against the results in Shanghai, where just 2% of 15-year-olds do not reach the baseline and 43% are top performers—and efforts at formal financial education there are way behind those in the U.S.. With numbers like these, it’s the Chinese in Shanghai that soon may be exporting capitalism.

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