Few teach financial literacy to youths

Steve Rhode has a 14-year-old daughter who got her first debit card when she was 9 or 10. Back then, her friends would spot it when she opened her pocketbook.

"They would say, 'Wow! Cool! You have a credit card,'" says Rhode, founder of Myvesta.org, a financial counseling agency. "It's a status symbol for them."

In a few years, Rhode's daughter will acquire another prestigious plastic card -- a driver's license. She'll have to undergo training and take a test. She'll need insurance to use the card. If she misuses it, the government can take it away. If she is caught exceeding the limit while using the card, she'll pay a fine.

What a difference from credit cards. Many teens and young adults receive virtually no training for the safe use of credit cards. Instead of taking a rigorous test, they fill out a short application. If they exceed their card's limit, they might pay a fine -- and then be "rewarded" with a higher limit.

A lucky minority of children take personal finance courses at school. Some soldiers get personal finance instruction, as do a few lawyers-in-training, and children with conscientious parents such as Rhode. Because our society has decided that it's not important to teach kids how to manage money, more parents will have to emulate Rhode.

80 percent ignorant
According to the American Savings Education Council, one-fifth of students ages 16 to 22 say they have taken a personal finance course at school. That leaves four-fifths who haven't taken such a course. Lots of high school graduates don't know how to balance a checkbook.

The situation isn't likely to change unless questions about personal finance are included in the standardized tests that are so in vogue because instructors are forced to teach to the tests. High school grads are more likely to know how to calculate the volume of a sphere than how to calculate how long it takes to pay off a $500 credit card balance at 21 percent interest.

And apparently the topics of debt, credit cards and budgeting don't come up often enough in most families.

Dave Gretsch is a retired Army veteran who coordinates a mandatory eight-hour personal finance course for all new recruits when they arrive at Fort Hood, Texas.

"I ask them, 'How many of you had your parents sit you down at the kitchen table with the bills? How many taught you how to write a check, how to budget?'" Gretsch says. "Less than 5 percent have been told how to budget."

New soldiers at Fort Hood are taught how to budget, and during the workshop they are required to make one. They learn the basics of credit and interest, the importance of saving, and how to set realistic financial goals. Then, if they mess up later (some fall into the payday loan trap), trained sergeants counsel the soldiers and even negotiate repayment plans with creditors.

Incoming college students are just as ignorant about money matters as the recruits who show up at Fort Hood, but few of them get as much training. If colleges hold personal finance workshops at freshman orientation, students rarely can recall the lessons later. One-on-one financial planning is virtually unknown on campuses except when students ask for it. They ask only after they're already in trouble.

Insert lawyer joke here
Sometimes students are more receptive right before graduation. The Georgetown University Law Center offers financial counseling to graduating law students.

"We offer a variety of things, but the one for life after law school doesn't click with people until they're approaching graduation. It's too abstract a concept," says Ruth Lammert-Reeves, assistant dean of financial aid.

The financial seminar focuses mainly on two subjects: saving for retirement, and paying off student loan debt. Law students tend to come out of school with tremendous debt loads, and many are surprised at how much their payments are. A rule of thumb says that student loan payments shouldn't exceed 8 percent of net income, but lots of law school grads pay a higher percentage than that.

Because student loan payments don't start until six months after graduation, recent graduates can get caught in a bind when they buy cars and clothes on credit. They think they're doing OK for a few months, and then the student loan payments come due and the financial worries begin.

"We tell students to try from the first paycheck to know what their student loan payments will be, and to write a check for that amount to savings so they don't ratchet up their spending," Lammert-Reeves says.

She knows of no other law school that offers similar financial counseling.

Up to the parents
If high schools and colleges aren't going to teach students how to deal responsibly with credit, it has to be up to parents to pass along those lessons. Unfortunately, even that isn't a guarantee of good results.

Take the example of Tamara, an employee of New York City who requested to be identified by first name only. The 29-year-old owes $23,000 in student loans (she borrowed a lot to get a master's degree) and about $20,000 in credit card debt. Her combined debt is a little less than her annual income.

"My parents really don't use their credit cards," she says. "My parents set a great example. They always pay off their balances. I would have loved to be able to follow their example."

But she doesn't, mostly because they live in upstate New York, where the cost of living is much lower than in Manhattan, where Tamara lives and wants to remain.

If a good parental example is no guarantee of good results, it's better than setting a bad one.

"I would think that parents who have trouble with debt would speak the right words but their kids will follow their example," says Steve Soderlind, a professor at St. Olaf College in Minnesota who recently wrote a textbook on consumer economics.

Soderlind believes that a child needs three things to fully absorb lessons about the wise use of credit: 1) a good example from parents, 2) basic information about personal finance and 3) a capacity for introspection -- an ability to assess one's own strengths and weaknesses.

"I think they have to know something about themselves," he says. "They have to know that they're impatient and vulnerable."

Maybe Rhode, the father of the 14-year-old girl with a debit card, is putting it all together -- setting an example; teaching the basics of personal finance, and instilling some self-knowledge in his offspring.

He has given his daughter a Visa Buxx card, a debit card that allows him to monitor her spending online. He can transfer money to her account online, paying her allowance electronically.

Rhode requires her to keep a running balance and to reconcile the account monthly. She has to show him that the account is reconciled.

"If it doesn't reconcile, she doesn't have it for 30 days," he says. "It's good training for her. Although it's not a credit card, it helps teach her now to use a credit card responsibly in the future."