Financial Literacy

In January George Bush appointed Mr Bryant vice-chairman of his new President's Council on Financial Literacy. This was launched as part of his administration's increasingly frenetic response to the financial crisis that followed the meltdown in subprime mortgages, many of them given to borrowers who may not have understood the risks. Often borrowers did not even realise that their monthly payment would rise if interest rates went up, says Mr Bryant.

I agree that financial illiteracy is rampant in the US and the need for financial education is great. I am amazed by how many college graduates don't understand how credit cards work and get into large debt due to their ignorance. I think this financial illiteracy has lead to America's historically low savings rate, and historically high number of bankruptcies.

This Council on Financial Literacy seems like a good start, but I am skeptical that the curriculum (found at this post) that came out of this will actually help that much as it is too divorced from actual money. It reminds me of this anti-smoking curriculum that while well designed and administered was found to have no impact on smoking rates.

Instead I like two other approaches highlighted in the article.

Meanwhile, on March 17th a new campaign to promote financial literacy in the developing world was launched at
a conference in Amsterdam. Called Aflatoun (“Explorer”), after a cartoon character based on a Bollywood star, it is the brainchild of Jeroo Billimoria, a social entrepreneur who previously worked with street children in India. Among other things, she founded a successful emergency 24-hour telephone service, called Childline. She found that many of the children she helped were entrepreneurial (indeed, such spirits may have played a part in their decision to leave home) and became convinced that, given better education, they would have done well in life.

Ms Billimoria addresses herself to children aged between six and 14, whom most educators consider too young to understand money. Having begun with experiments in rural India, her non-profit organisation, Child Savings International, has piloted the Aflatoun course in 11 countries, including Argentina, South Africa, Vietnam and Zimbabwe, since 2005. It is now extending the course to 35 developing countries. Only recently, after suggestions from the Dutch central bank and the European Commission, has Ms Billimoria started to adapt Aflatoun for rich countries such as Britain, the Netherlands, Ireland and perhaps America.

Ms Billimoria encountered a great deal of scepticism when she developed her financial-literacy programme for six- to 14-year-olds. Yet she was convinced that starting with youngsters would be more effective, because that is “when their concept of themselves is developing and by 14 most of their habits have formed.”

An important part of the teaching is getting the children to start saving, ideally by opening bank accounts. Typically, they have only tiny amounts, but this is enough to get them used to handling money properly. At first this faced a lot of resistance, as people asked, “How can young children handle money?” recalls Ms Billimoria, but “it soon caught on and parents started giving children money to save.”

I agree that beyond cognitively understanding why to save, saving needs to be turned into a habit that people just do by default. This is most easily accomplished when we are young.

I also like this idea:

He is enthusiastic about schemes such as the Child Trust Funds introduced in Britain. These “baby bonds” give every child a fund that matures at adulthood, letting everyone start out with a nest-egg. Mr Mandell is particularly excited by the curriculum being designed to be taught in conjunction with these funds, starting when children reach the age of seven. “Teachers will be able to talk about money realistically, because the kids will have ownership of wealth.”

This idea sounds similar to my Baby Bonds + Financial Education bold idea to change America I wrote about previously. The education will be much more effective if students had real money that they were working with. Too bad Hillary got shot down when she proposed this.

The whole article is good and is worth a read, and you might want to check out Operation Hope and Jump$tart as well.

via The Economist