As a parent, I would never dream of handing my car keys to a teenager who hasn't first completed a driver's education class and spent significant time behind the wheel, ideally with me sitting (nervously) in the passenger seat. But every day, parents across America allow their children to obtain keys to the financial world -- credit cards, debit cards, student loans and car loans -- with hardly any instruction on how to safely steer their financial lives and avoid crashes.
This is incredibly dangerous. In many situations, someone who lacks basic financial skills is arguably in as much danger of inflicting long-term damage on themselves, their legacy and others as someone driving a car who has no idea what they are doing. Teens and young adults who don't understand the basics can easily find themselves mired in a traffic jam of financial woes that lasts a lifetime.
At least in a modern car, your teenager is protected by seatbelts, airbags, and an inkling that cars can kill. A credit card or a car loan looks positively harmless by comparison. In the hands of some teens, that makes financial products even more dangerous.
Not too long ago, Jean Chatzky, the financial editor on the Today Show, recently had a great idea for how we can drive this point home, making a clear, strong connection between safe driving on the roads and safe driving in our financial lives. Before teenagers get their driver's licenses, every DMV in the country should include questions about basic financial literacy on their driver's test.
Don't understand the difference between a credit card and a debit card? Can't name the five top factors that determine your credit score (which governs whether you can even get a loan)? Call me the Soup Nazi of the DMV: No license for you! Next!
I know that to some, this proposal may sound extreme. But in reality, the effort to make financial literacy education mandatory enjoys broad support. In honor of National Consumer Protection Week, I recently commissioned a poll to test out this idea. Over 63 percent of consumers of all ages believe that kids in the U.S. learn little to nothing about personal finance. Agreement was even high among young adults, 56 percent of whom agreed that they know basically nothing about how to manage their finances.
How best to address this problem? A whopping 92.3 percent of survey respondents agreed that high schools should offer mandatory courses about personal finance.
These results clearly demonstrate that Americans understand the perils of going through life financially unprepared. For anyone who doesn't understand personal finance basics, the road ahead is pocked with dangerous hazards. Just consider our nation's recent history, where predators in the financial services industry established a dangerous co-dependency with millions of borrowers who had scant knowledge of financial basics. Banks, mortgage brokers and others deliberately used tricks like low "teaser" interest rates and hidden balloon payments to lure millions of Americans into mortgage loans they knew were problematic. Voraciously grabbing for the ring of upper-middle-class life, consumers borrowed to the hilt -- only to drive headlong into an historic pileup of foreclosures and bankruptcies.
How did we careen into the ditch? By failing to teach and learn the basics of personal finance. Only 14 states require schools to offer courses in personal finance, according to the latest study by the Council for Economic Education.
The situation is actually getting worse. The number of states that require students to take tests on financial life skills dropped from nine in 2009 to just five in 2011.
At the federal level, attempts at teaching the basics of finance are scattershot at best. As of last summer, the U.S. Government had 16 overlapping programs that teach this stuff, according to the Government Accountability Office. That number doesn't include the Consumer Financial Protection Bureau, which assumed primary responsibility for coordinating such programs when its 10-member Office of Financial Education opened last summer.
Do all these programs succeed in helping consumers make better financial decisions? For the most part, the GAO said it couldn't tell.
This is particularly troubling because we know the difference that effective financial education can make in young peoples' lives. Teens and young adults who grow up in states that require financial education courses are significantly more likely to put money into savings and pay their credit card balances in full every month, and less likely to max out their credit cards, make late credit card payments or become compulsive shoppers, according to a study by Dr. Michael Gutter of the University of Florida.
Classes and testing on financial basics help people thrive all the way into their golden years, according to research by Annamaria Lusardi, a professor of financial literacy at Dartmouth. Answering just one additional question correctly on a financial literacy test boosts the chances that a person will plan responsibly for retirement by up to 10 percent.
What's important is to help young people see that financial basics are both easy to learn and vital to their long-term well-being. Tying that education to something many teens care about deeply -- like getting a car -- is one path to accomplish that.
"It is a low-cost, low-barrier option for getting a student interested, and they have an incentive to do so," Nan J. Morrison, CEO of the Council for Economic Education, says about the proposal.
When we commit to including financial literacy questions on state drivers' tests, we need not start from scratch. The council has 60 years of experience developing curricula and training teachers on how to make financial life skills fun and accessible. Other organizations including the Georgia Consortium for Personal Financial Literacy do similar work for people of all ages.
Since the questions will appear on driver's tests, they should be car-related, Lusardi says. Here are some good potential questions:
- If you want to buy a car for $15,000 using a five-year loan with an annual interest rate of 4%, how much will you pay in interest over the life of the loan?
- If you are saving for a car or another large purchase, what percentage of your income should you set aside in your savings account every month?
- If you miss a few car payments, how much damage will that cause to your credit score? A lot, a little, or none?
Whether it's a car, an auto loan or a credit card, it's our parental responsibility to make sure that our kids are safe.
Adam Levin is chairman and cofounder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.