By Scott Wolla, Senior Economic Education Specialist, Federal Reserve Bank of St.Louis.
In a general sense, to be “literate” is to have knowledge or skill in a particular field. So literacy in reading, for instance, involves developing the skill of reading. If you are literate in this sense, you can read a novel by Charles Dickens, your local newspaper, or a comic book. But it does not usually involve the student memorizing facts about reading, such as how many books the typical child reads (or should read) in a given year. While those facts might have value, they probably have little value for learners.
I think about financial literacy in a similar way. Too often, the media report facts and statistics related to the lack of financial knowledge, and it might be tempting to focus on these statistics when teaching personal finance. But if financial literacy is a skill, as I believe it to be, then students need fewer facts and more of an educational framework to make good decisions. Clearly, our perspectives as educators affect the way we approach financial literacy: A robust perspective for teaching students will balance the personal (“micro”) view and the broader (“macro”) implications.
Alfred Marshall described economics as “the study of mankind in the ordinary business of life.” To me, applying economic theory to ordinary life is the essence of what personal finance should be. (The “micro” perspective.) For example, the first concepts we teach in economics are scarcity, choice, and opportunity cost. Learning about opportunity cost (the value of the next-best alternative when a decision is made) informs specific personal decisions in the realm of personal finance: Saving an additional dollar means that same dollar cannot be spent, and likewise a spent dollar cannot be saved. Knowledge of inflation and interest rates and the ability to calculate the real interest rate (or real return) informs personal decisions of where to save for retirement. The framework of economic thinking informs daily personal financial decisions.
But financial literacy is also important on the larger “macro” level. Literacy in general has implications for individual success and failure, but also for the success and failure of the broader society (and the economy). Federal Reserve Chairman Ben Bernanke said it this way:
“Financial education supports not only individual well-being, but also the economic health of our nation. As the recent financial crisis illustrates, consumers who can make informed decisions about financial products and services not only serve their own best interests, but, collectively, they also help promote broader economic stability.”
These factors force us to respond to the question of how and what should we teach. A group of economic educators from the Council for Economic Education and Federal Reserve System has recently completed the National Standards for Financial Literacy—a comprehensive set of personal finance content standards that have economic principles at their core. Hopefully, it will help define how we teach and what we teach going forward. The benefits will stretch from the “micro” to the “macro.”
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