Personal finance education is important. Everyone agrees that managing personal finances is an important life skill that, when used correctly, can lead to a more comfortable life and avoid a lot of heartache. To that end, there has been a national effort to make personal finance education mandatory in every state. In 1998, only 14 states required personal finance standards to be implemented in their schools’ curricula, according to the “Survey of the States (PDF)” report. By 2022, that number had risen to 40, according to the Council for Economic Education’s biennial survey.
But there is a risk associated with these mandates. With a limited number of hours in a school timetable and many subjects to teach, administrators, teachers, and program directors must make sacrifices when allocating a scarce educational resource (class time). As a result, administrators too often see economics and personal finance as substitutes and drop time spent on the econ; that is, mandating personal finance pushes back the teaching of economics.
In reality, materials are not substitutes, and the economy should not be sacrificed to personal finance. Economic reasoning can be used to make decisions in all areas of life, but especially to make decisions about personal finances. In fact, personal finance can be thought of as the application of economic thinking to day-to-day decisions. On the contrary, economics and personal finance are complements and not substitutes.
Economics is a core subject in social studies
Economics is one of the foundational disciplines of social studies. The economic standards are part of the College, Career, and Civic Life (C3) framework developed by 20 states (five of the states are part of the Federal Reserve Bank of St. Louis district) and published by the National Council for the Social Studies. (NCSS). The NCSS and its members believe that social studies, including economics, prepares students for their post-secondary future. This includes “the disciplinary practices and knowledge necessary for college-level work in university social studies courses, as well as the critical thinking, problem-solving, and collaborative skills necessary for the workplace,” according to a statement. revised NCSS position paper published in 2016.
“The National Council of Social Studies reaffirms that an excellent social studies education is essential to civic competence and to the maintenance and enhancement of a free and democratic society,” the statement read.
Economic thinking – applying informed decision-making and cost-benefit analysis and recognizing opportunity cost – is central to economic standards. This content applies to the decisions students will make as consumers, employees, employers, savers, investors, and citizens.
The economy shows the bigger picture beyond personal finance
Although it can be difficult to find space during the school year for personal finance and economics, both contribute significantly to the education of students. Learning about economics has additional benefits: students’ understanding extends beyond their personal shopping and spending to the issues we face in a global economy. As the economy goes through periods of growth and recession, having knowledge of economics helps people understand what is happening around them and how they fit into the bigger picture.
The Federal Reserve Bank of St. Louis (along with other Reserve Banks) offers a wide variety of free, hands-on courses and resources for teachers to incorporate economics, including personal finance, into their teaching. in class.
Here are some examples of important economics content and some resources to help students become familiar with some of these concepts.
“Once Upon a Decision” is part of the St. Louis Fed Ella’s Adventures series.
make decisions
Developing strong decision-making skills is important for all aspects of life. Ill-informed decisions and policies can have unintended consequences. Applying cost-benefit analysis can help people make more informed decisions.
learning tools
The online module “The Art of Decision-Making” offers five steps to making a thoughtful decision.
The Once Upon a Decision online module for elementary students presents a five-step decision-making process.
Invest in yourself
Investing in human capital generally results in higher incomes and can, to some extent, help protect people against unemployment. The decisions young people make about whether to pursue education and seek training or post-secondary education have important consequences throughout their lives.
That doesn’t mean everyone should go to college. This means that post-secondary education and training are essential. The teaching of human capital investment is relevant to economics, personal finance, and vocational and technical training.
learning tools
“Invest in Yourself” is an online module for upper primary school students.
“It’s Your Paycheck—Lesson 1: Invest in Yourself” is an online module for high school students.
Both modules emphasize that people invest in human capital through education, on-the-job training and practice and that their investments pay dividends.
Inflation
Inflation erodes purchasing power. Understanding the difference between nominal (values measured in current prices) and real (inflation-adjusted) interest rates is important for financial decision-making.
But not everyone has this understanding. For example, respondents to financial capability surveys are frequently asked this question:
Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After a year, how much would you be able to buy with the money in this account?
- more than today
- Exactly the same
- Less than today
- Don’t know/Refused to answer
According to 2011 work by Annamaria Lusardi and Olivia S. Mitchell, less than two-thirds of respondents in the United States were able to answer the multiple-choice (“C”) question correctly, with consequences important to them.
learning tools
The “Inflation” episode of the Lowdown economic video series below provides an introduction to inflation.
The “Getting Real About Interest Rates” episode of the Economic Lowdown podcast series explains nominal and real interest rates.
Fiscal and monetary policy
Fiscal policy and monetary policy have an impact on household budgets, savings, spending and investment decisions. Fiscal policies are the spending and fiscal actions taken by the federal government (Congress and the President) to influence the economy. Monetary policies are actions taken by the central bank (the Federal Reserve) involving the use of interest rate or money supply tools to achieve goals, such as maximum employment and stable prices.
learning tools
In the Government Budgets online module, students play the role of a first-year legislator in the United States House of Representatives trying to serve their constituents’ goals and the long-term goals of the United States.
Teachers and students can earn digital badges:
And they can learn about the Fed’s monetary policy tools and how central bank policy decisions affect the economy.
Measure the economy
Gross domestic product (GDP) is a measure of the annual output of the economy. There’s a lot to learn about GDP, and it’s important because it tells us whether the economy is growing or slowing down over time. If we compare economic output from year to year, we use GDP adjusted for inflation, called real GDP. We also use real GDP to determine real GDP per capita, which is sometimes used as a proxy for standard of living.
The “GDP and Pizza” videos cover some key gross domestic product concepts.
learning tools
Watch the “GDP and Pizza Video Explainers,” a series of short videos that provide insight into this very important measure of economic output.
Other resources to help teachers and parents learn about economics and personal finance are available at stlouisfed.org/education. Our students, especially the most vulnerable, need to understand economics to better navigate our economy and improve their financial stability.
To note
- See the 2011 Journal of Pension Economics and Finance article “Financial Literacy and Retirement Planning in the United States” by Annamaria Lusardi and Olivia S. Mitchell.
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