Starting early: Educating teenagers to make savvy financial choices

Marta Serra-Garcia is Assistant Professor of Economics & Strategy at the University of California, San Diego; Melanie Lührmann is Senior Lecturer at Royal Holloway, University of London, and Joachim Winter is Professor of Economics at the University of Munich

Insufficient savings and bad financial decision-making present a major challenge for people as the financial world becomes more complex and financial responsibility for old age provision shifts towards the individual.  Young people are increasingly users of digital financial services and face an evolving and challenging financial landscape. This calls for starting early in educating people about making savvy financial choices.

Fewer than one in three 15 year olds have a financial knowledge level that “signals the kinds of knowledge and skills that are essential for managing a bank account or a financial task of similar complexity”, according to the latest OECD PISA financial literacy test results.

In the United Kingdom, a recent survey of young adults, conducted by the Financial Conduct Authority, shows that 18-24 year olds make up more than 17% of the over-indebted population, and that 52% of them lack financial resilience. The UK survey also shows that student loans are source of high debt in young adulthood and that 18‑24 year olds rate themselves as the least confident and knowledgeable of all adults about managing money and financial matters.

While attitudes towards financial decisions such as shopping and saving are already important at a young age, they also have large cumulative effects over the life cycle. A study by Lusardi, Michaud and Mitchell finds that differences in financial knowledge account for 30 to 40% of retirement wealth inequality. This provides ample reason to target children and teenagers when designing interventions aimed at improving financial literacy. In addition, cognitive abilities peak in young adulthood and learning efficiency is highest at younger ages.

The OECD PISA assessment shows that financial knowledge is particularly low among adolescents from low socio-economic backgrounds. This may be because those endowed with more wealth have a stronger incentive to accumulate financial knowledge. An education programme in schools directed at teenagers from low socio-economic groups, may lower the (opportunity) cost of the acquisition of financial knowledge, and thus reduce the existing knowledge gap. Programme scalability is another important argument for interventions in schools: where school attendance is mandatory and dropout rates are low, coverage can be achieved across all population groups.   

Academics debate whether financial literacy training in schools has the desired effect. Most evaluation studies, e.g. Lührmann et al, report an increase in knowledge and interest in financial matters among students who receive financial education. While the evidence on financial behavior is not conclusive, recent results are encouraging:

  • A randomised experiment in Brazilian schools shows significant improvements in students’ savings and budgeting, but also an increase in students’ use of expensive credit to make consumer purchases.
  • A randomised trial in Spain, shows that financially educated youths display more patience, such as being more likely to delay payment at attractive interest rates.
  • A randomised study in Germany shows that financial education improves pupils’ understanding of the intertemporal trade-offs that are the basis of consumption and savings decisions, and sophistication in financial decision-making more generally.

In Germany, over 900 students from 25 high schools took part in a field experiment where a randomly assigned financial education programme was offered by My Finance Coach, a not-for-profit organisation. Since 2010, My Finance Coach, has provided financial education to over 1.5 million high school students in Germany. The programme offers a standardised set of materials for three training modules (shopping, planning and saving) and “finance coaches” go into schools to deliver three financial education modules on shopping, planning and saving. The shopping module focuses on making informed consumer choices. It emphasises prioritising spending (“needs and wants”), discusses criteria used in purchasing decisions, and advertising. The planning module addresses aspects of conscious planning by presenting the concepts of income and expenditure as the basis of financial planning. Students also receive training on budgeting skills. The third module discusses saving motives and investment options.

Following the training, an incentivised experiment studied how students who had received the training made intertemporal choices compared to those who had not. The main result showed that financial education does increase adolescents’ understanding of, and sophistication in, intertemporal choice. For example, students faced two sets of decisions – to receive a payment instantly or with a delay in a situation with a higher or lower interest rate. Those who had received the training made fewer errors. One such error would be to switch from receiving a payment in the future to receiving it immediately when the offered interest rate increases.  Trained students also become more adept at overall consumption planning: in the scenarios where they were offered high interest rates, the students were more likely to delay consumption to receive the interest payment, while they were more likely to choose immediate payment in the low interest rate scenarios.  The choices of financially trained students suggest that they took a comprehensive view of their financial budget, and better understood intertemporal trade-offs.

Thus, even short financial education programmes can change how adolescents make intertemporal choices, enhancing their understanding and broadening the set of alternatives they consider when making such choices.These changes could have implications for wealth accumulation in the long run, given the well-established relationship between quality of decision making and wealth accumulation. More evidence on the long-term impacts of financial education programmes, is needed to fully establish the impact of these programmes on the financial choices of young adults.

References and links

Lührmann, M., M. Serra-Garcia and J. Winter, 2015, Teaching teenagers in finance: does it work?, Journal of Banking and Finance 54, May: 160-174.

Lührmann, M., M. Serra-Garcia and J. Winter, 2018, The Impact of Financial Education on Adolescents’ Intertemporal Choices, American Economic Journal: Economic Policy 10(3), 309-332.

Bover, O., L. Hospido, E. Villanueva, 2018, The impact of high school financial education on financial knowledge and choices: Evidence from a randomised trial in Spain, Bank of Spain Working Paper 1801.

OECD PISA 2015 Results: Students’ Financial Literacy

Dollars and sense? Financial literacy among 15-year-olds

OECD work on financial education

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