Teaching Personal Finance? Don't Forget the Economics!
Day, Harlan, Social Studies Review
The past five years have been challenging ones for many people in managing their finances. The collapse of the housing market, volatility in other financial and commodity markets, and high rates of unemployment have all contributed to financial insecurity and hardship for many people. As discouraging as this sounds, there is one obvious solution for helping with these problems, and that is to teach people how to manage their finances more effectively. In fact, in my dealings with people over many years as an economics educator, I have yet to meet a person who doesn't think financial literacy is a crucial issue that should be addressed.
Some encouraging news is that according to the Federal Bank of New York, since the height of the financial crisis at the end of 2008, there has been a reduction in overall household debt of $1.3 trillion. This has primarily come through reductions in loans secured by real estate and also through reductions in credit card balances (down 23% from their peak in 2008). However, there has been a major increase in debt since 2008 from student loans (an increase of $303 billion, nearly 50%), as students have borrowed heavily to finance further education during the very tight job market. Unfortunately, recent evidence shows that students are having difficulty repaying these education loans. The delinquency rate on student loan balances more than 90 days delinquent is now 8.9% and has increased in recent years. So despite some recent improvements in certain areas, it is fair to say that Americans are still burdened by much debt and often struggle to manage their finances (Federal Reserve Bank of New York, 2012).
One purpose of this essay is to reinforce the view that improving financial literacy is a "team effort." That is, the issue is just too important to be left only to educators who happen to teach a personal finance course. All teachers need to be aware of this important issue and do their best to help students become financially literate. Certainly, teachers must focus primarily on teaching the specific content of their courses. But there are real opportunities to reinforce personal finance concepts in disciplines such as math, consumer and family sciences, business, and economics. Doing so also helps students see valuable connections in what they are learning. Furthermore, because of the seriousness of this challenge, I believe that we must think even more broadly. We cannot leave the responsibility of financial literacy to schools only. In our various societal roles as parents, siblings, aunts and uncles, non-profit volunteers, business supervisors, and religious leaders, we all should try to be more purposeful in helping our young people learn how to manage their finances more effectively. There are many opportunities, ranging from teaching specific personal finance lessons and activities to reinforcing financial literacy in more informal ways, including general conversation.
The other purpose of this article is to encourage readers to consider using some of the basic principles of economics to help students learn about personal finance. For some readers, this statement probably seems confusing. After all, isn't personal finance the same thing as economics? Well, not really. Certainly, economics and personal finance are related. However, it is helpful to view economics as a set of fundamental principles that provide a foundation for the teaching of personal finance. The good news is that knowledge of these fundamental economic concepts equips students with some very powerful tools for mastering the basic ideas of personal finance. The other piece of good news is that these fundamental economics concepts really aren't that difficult to understand and apply; most people have an intuitive understanding of them, even though the terminology may be new. In the rest of this article, we will examine some of these concepts and give examples of how to use them to teach some key ideas in personal finance. …