Financial literacy among teenagers

Diana Clement used some of my recent research in an article in the New Zealand Herald on Saturday about teenagers and money. Diana writes:

The University of Waikato tested the financial literacy of more than 300 students at Hamilton secondary schools. It showed that the longer teens had held a bank account the more financially literate they were, says co-author Michael Cameron, a senior lecturer in economics.

We did evaluate the financial literacy of 15-year-olds in Hamilton in 2013, using a New Zealand adaptation of the U.S. Financial Fitness for Life survey. This resulted in two publications: (1) comparing financial literacy between students in Japan, the U.S., and New Zealand (here; ungated earlier version here); and (2) identifying the factors associated with financial literacy (here; ungated earlier version here). Co-authors included Steven Lim, Ashleigh Cox, and Richard Calderwood (all from the University of Waikato), and Michio Yamaoka (Waseda University, Japan).

The first paper can essentially be summarised in a sentence: New Zealand teenagers' financial literacy is similar to those in the U.S., but not as good as those in Japan. In this blog post, I'll elaborate a bit on the second paper, which has some interesting results.

In our sample of Hamilton teenagers, we found that financial literacy was lowest among financially poorer students, those with less English ability, and those with less mathematical ability. We also found that older students, those who had studied economics or business studies, and those who had held a bank account for longer, had higher financial literacy. The data came from a cross-sectional survey, so these are correlations - we can't directly attribute causality here. However, I'm going to speculate on what the results mean nonetheless.

Students with less English ability have more trouble interpreting written questions in general - so it is unsurprising that they perform less well in the multiple-choice financial literacy test (we see similar results with international students in our test of economic literacy in ECON100 - see here for example; ungated earlier version here). Similarly, students who have studied economics or business studies and those with higher mathematical ability are likely to be more able students - so their higher financial literacy scores probably reflect a greater test-taking ability (much as we might hope that high school economics or business studies instills students with financial literacy, student ability is more likely to be driving these results).

The other results are more interesting from a policy or intervention perspective - students from households in richer parts of the city (a proxy for parental wealth), those who are older, and those who have held a bank account for longer, have higher financial literacy. There are plausible causal mechanisms here, even if we can't say so definitively. If richer parents are better at managing their money (that might be a big 'if'!), then that might pass onto their children - particularly if the parents are modelling good savings behaviour (another big 'if'). So, having parents and their children in joint financial literacy education programmes (such as this one based in Tauranga), especially if they are parents from more deprived areas, may be a useful way to increase financial literacy in both groups. Having parents understanding saving and budgeting better can hardly be a bad thing in any case.

Older students and those who have held a bank account for longer have probably been interacting with the market and managing (to some extent) their own finances for longer, developing useful skills and financial understanding along the way (hopefully!). The effects were small (an additional year of having a bank account was associated with 0.2 additional correct questions out of 50 in the financial literacy test), but highly statistically significant. Getting teenagers to take responsibility for (some of) their finances is probably useful, particularly while the environment can be easily controlled by parents. Diana writes:

Bart Frijns, director of AUT's Centre for Financial Research, says that children learn more about money by setting up and using a bank account than they do in a general education programme on savings.

I agree with Bart - financial literacy programmes for teenagers have shown a remarkable lack of success (e.g. see here (PDF)). Probably it is better to just get on and let teenagers take on some responsibility, make some (relatively minor) mistakes, and then provide them with guidance and education when they need it. Want a credit card? Want to take out a student loan? Or a car loan? Or a mortgage? Complete this short course on how best to handle credit. Such a just-in-time learning approach for financial literacy means that it is less likely that the learner will forget before they go to apply their knowledge. This is handy for credit, but might not be as useful for savings. Which is what I am working on now - what do teenagers really know about savings? More on that in a later post.