Fighting (Financial) Illiteracy

April is National Financial Literacy Month [1]. Here’s a pop quiz in honor of the occasion: This year, the average American is more likely to a) graduate from college, or b) file for bankruptcy.

The correct answer is “b”.

It’s not just a recession thing. The personal bankruptcy rate has risen steadily since the 1980s. It dropped after an overhaul of the bankruptcy laws passed in 2006, but now it’s going up again. In 2008, nearly 1.1 million personal bankruptcies were filed in the U.S.; couples accounted for more than 40 percent of them.

What’s pushing the rate so high? Gregg Mousley, director of the Resource Center [2] at the Vermont Student Assistance Corporation [3], suggests the increase is driven in part by a lack of financial literacy, particularly among 18- to 25-year-olds, who are the most likely to max out credit cards and fall behind on student loan payments.

One of many people working to reverse the trend, Mousley is also the president of Vermont Jump$tart Coalition [4], a volunteer-run group that promotes financial literacy education in schools. It’s the local chapter of the national Jump$tart Coalition for Personal Financial Literacy, founded in 1995.

Jump$tart encourages schools to step up their teaching of dollars and sense. Mousley points out that Vermont students can currently graduate high school without ever receiving a lesson in money management. Though Vermont includes financial literacy in its official educational standards, the state doesn’t test students on it. Sometimes motivated teachers take the initiative, Mousley reports, but others may not broach the money subject because they don’t feel comfortable with it themselves.

A 2008 Jump$tart survey, released a year ago this month, proved his point. The multiple-choice test asked graduating seniors about savings, investing and basic money management. The average score was just 50.3 percent — a failing grade. Only 3 percent of students who took the test scored 75 percent or higher.

And it’s not like the questions covered complex financial instruments such as mortgage securities and credit default swaps. Here’s a sample: “Under which of the following circumstances would it be financially beneficial to you to borrow money to buy something now and repay it with future income? a) When you need to buy a car to get to a much better paying job; b) when you really need a week vacation; c) when some clothes you like go on sale; d) when the interest on the loan is greater than the interest you get on your savings.”

Slightly more than half of Vermont seniors sampled chose the correct answer, “a.” Unfortunately, a third of the kids who took the test picked “d.” Apparently they believe that taking out a risky loan makes more sense than saving prudently. Yikes.

A recent survey conducted by the Girl Scouts of the Green and White Mountains [5] and the Vermont Commission on Women [6] drives home the point that financial education usually takes place at home — if at all. Of the 100 Vermont girls from 42 schools who were surveyed, nine in 10 reported getting most of their financial info from their parents. While nearly all said they accessed some kind of financial services, only one in five knew how to read a bank statement or balance a checkbook.

For the past four years, Jump$tart has focused on providing resources to teachers and parents to help them help their kids. The group hosts conferences for parents and teachers and a daylong “financial fitness fair” for teens that covers budgeting, spending plans and debt management. The next fair will take place in the fall.

This year, Jump$tart is also reaching out to kids through activities such as “The Reserve Cup,” a May event in Montpelier. Mousley describes it as a “game-show-type competition hosted by the Federal Reserve [7].” Now, does that sound fun, or what?

But schools shouldn’t be the only focus, says Jump$tart board member Judy Branch, a family and youth development specialist from the University of Vermont Extension Program. Branch says she’d like to see parents take a more active role in teaching their kids about money. She speculates that some adults may be too worried about their own financial woes to raise the subject. “It’s almost like parents don’t want to talk about money any more than they want to talk about sex,” she says. “But it’s a conversation that is absolutely necessary.”

And, according to Branch, it’s never too early to start talking. “At the time that Mom pulls out her credit card to pay for her groceries, and the preschooler asks something or looks at the credit card, Mom can say, ‘This credit card represents money that we’ve earned, or will earn, and we will pay for that,’” she says.

Branch cites a program called Thrive by Five [8], sponsored by the Credit Union National Association. “It talks about how parents can, with very few props, just incorporate those conversations into everyday life with their preschoolers,” she explains, “so that by the time they get to kindergarten, they know a lot about money.”

The Thrive by Five website includes activities designed to teach preschoolers fundamental lessons such as “Having fun does not have to cost money” and “When money is spent, it is gone.” Some parents might need a little refresher in those concepts, too.

From a consumer standpoint, the best thing about Thrive by Five is, it’s free. That’s the good news — if you’re feeling financially illiterate, plenty of resources can help you catch up. Surprisingly, Mousley recommends www.practicalmoneyskills.com [9], a website sponsored by Visa. “They’re actually one of the better places to get financial literacy information,” he says. “Believe it or not, Visa and Citibank have the money, and they do want educated borrowers.”

Mousley and Branch contributed their suggestions to the list of resources included with this article. “There are a lot of good materials available online for free,” says Mousley. “You just have to have the initiative to go out there.”

Nothing like a little financial crisis to motivate you, right?