Financial education. It starts with simple questions. Just like this one:
For her 9th birthday, Emma asks her parents to put money on a savings account, instead of buying her presents. She rather wants to celebrate her next birthday in style, with party assets worth 200€. At a yearly interest rate of 5%, how many Euros must be put into the account to fulfill Emma’s birthday wish?
Sound familiar, such questions, right? We all had to answer a fair share of them in math class during 8th grade. Looking at them today, they still are tricky to answer for many of us. And you would have to explain your child, that putting €4000 on a savings account tears a big hole in your financial planning. And only under the premise that you would find a bank providing 5% interest on savings accounts. Which you wouldn’t. Emma, who already showed prudence in her financial behaviour not normally seen in her contemporaries, still has to face some hard truths.
We see financial education doesn’t stop at mathematics. To reach full financial literacy, it’s not enough to know just the numbers. Just like it’s not enough to teach children the letters if you want them to read and understand a text. It’s important that they understand how everything comes together: Banking, personal finance, the cultural and economic workings of money.
So the next question is: What is the state of financial education in Germany and what priority do teaching facilities and decision makers assign it? This answer will be a lot more difficult to work out.
Financial Literacy – Decisions and Definitions
Definitions first. At its core, financial education refers to all didactical measures taken to establish and foster financial literacy in a group of learners. In turn, financial literacy denotes the skills and knowledge required to make informed decisions regarding financial resources and processes, including investment, lending/loans, and savings.
In Germany, financial literacy is often referred to as general financial education (Germ. Finanzielle Allgemeinbildung) or financial competence (Germ. Finanzkompetenz). This hints at its nature as a practical requirement for not only informed but also productive participation in the financial ecosystem. Accordingly, high levels of financial literacy can have a huge impact on the financial well-being of a society and the individual persons in it.
What’s more: The financial world has become more complex to navigate. Cash is increasingly replaced by card-based or fully digital payment methods all over the globe. In addition, consumers nowadays are driven to more agency in and responsibility for their financial life. The globalization proceeds. New financial products concepts are emerging by the day. Longer life expectancies combined with an unstable job market require careful weighing of retirement and life insurance options.
Consequently, improving financial literacy is a topic that ranks highly in the boardrooms of financial institutions and governments. And for good reason: Generally speaking, the level of financial literacy in the world is fairly low, as the OECD (Organization for Economic Co-operation and Development) found out. Countermeasures against this condition vary in scale. The International Gateway for Financial Education, launched by the OECD itself or the National Financial Literacy Month in the United States are just two prominent examples. Germany did not remain passive as well. During its G20 presidency in 2017, the Germans put financial literacy and inclusion on top of the agenda.
The State of Financial Literacy in Germany
By sheer comparison with other nations, Germany doesn’t get bad grades in Financial Literacy. According to the S&P Global Finlit Survey of 2014, around 65% of adults in the country can be considered financially literate. In this regard, Germany ranks among the top countries in Europe – only Sweden, Norway, Denmark and the UK beat the Germans by a margin of 2 to 5%.
No reason for discontent then? Well, self-evaluation shows a different picture. A 2011 analysis by Tabea Bucher-Koenen and Annamaria Lusardi, based on the data evaluated in the annual SAVE studies, hints at insecurities in financial competence. Only 53% of the respondents were able to answer all three questions asked by the survey correctly.
Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
More than $102/ Exactly $102/ Less than $102/ Do not know/ Refuse to answerQuestion from SAVE study, Munich Center for the Economics of Aging, 2009
Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?
More than today/ Exactly the same/ Less than today/ Do not know/ Refuse to answerQuestion from SAVE study, Munich Center for the Economics of Aging, 2009
Please tell me whether this statement is true or false: “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”
True/ False/ Do not know/ Refuse to answerQuestion from SAVE study, Munich Center for the Economics of Aging, 2009
Especially women and inhabitants of East Germany struggled with the questions. Findings by the Commerzbank AG, published in 2003, also show that Germans tend to overestimate their own financial literacy.
Financial Education for the Young
But what about the younger generations? With all the online payment and banking options around, we would expect digital natives to surpass their parents in modern, financial knowledge. It’s the same with computers and smartphones, right?
Not quite. First off, it’s important to not lump together children and teenagers.
The former group doesn’t have much exposure to the financial sphere if for the simple reason they are not contractually capable. This doesn’t mean that they should be left out in financial education, though. Quite the opposite: Regular pocket money, which can be spent or saved in piggy banks is a great introduction to the concept of financial management. Additionally, the Bundesfamilienministerium (Ministry of Family Affairs) published guidelines on how much pocket money is appropriate for which age. And even plastic money is not fully off-limits for kids: Some banks offer special kids accounts or prepaid credit cards, which can be stocked with money by the parents. Speaking of which: Children often learn new concepts through imitation, so a parent’s handling of money rubs off on the kids as well. This is where the overestimation of one’s own financial literacy, as mentioned above, can lead to problems.
As kids turn into teens, the parents remain the main reference persons. In a 2018 Forsa survey for Schufa Holding, 82% of young respondents have stated, that they ask their parents for guidance in financial matters. So, for the period after grade school, many experts find it essential to complement financial education by the parents with formal financial education – such as school subjects like Money or Economy. In fact, the kids couldn’t agree more themselves: In 2018, 84 percent among young people aged 14 to 24 speak out in favor of such subjects. A look further back, into the PISA Study of 2015, also highlights the need for special education for teenagers. As an OECD country average, only one-third of students reached higher levels of financial literacy.
While the parliaments in the German federal countries still estimate the pro and contra of the school subject Economy – except when they already got it, like Baden-Württemberg – non-school institutions already work together with schools to provide financial education material. For instance, many German Banks offer learning material to students and teachers, who want to get into financial education – examples include the Sparkassen SchulService by the German Savings Bank and the Jugend und Finanzen platform by Volksbanken/Raiffeisenbanken. For a more unbranded approach, teachers can rely on independent education providers such as Wertvoll macht Schule or Finanztip Schule, who started a pilot project in 2018 and 2019, furthering financial literacy in 170 classes across Germany.
And What Else?
Parents, who don’t want to leave financial education all to teachers and banks also have many options to get accustomed to the topic. The following websites, books, and other media products, as well as projects and events, will provide a good point of entry:
- FiBi-Box by Sparkasse
- Handelsblatt macht Schule
- Initiative Finanzielle Allgemeinbildung by Deutsche Bank
- Jugend und Finanzen-Portal by Volksbanken/Raiffeisenbanken
- Kursraum Geld
- Lehrer Online
- Ökonomie im Unterricht
- Educational Material by the United States Mint
- Financial Education by the OECD
- Money and Kids by Family Education
- MoneyTree (Asia)
- National Financial Educators Council (USA)
- Teaching Financial Literacy to Kids by Investopedia
- The Financial Literacy Education Project
- “Ein Hund namens Money” by Bodo Schäfer
- “Niemals pleite” by Barbara Kettl-Römer and Cordula Natusch (German)
- “Unser Geld und die Wirtschaft” by Angela Weinhold
- “Was ist was: Geld” by Andrea Schaller
- “Growing Money” by Gail Karlitz and Debbie Honig
- “How to Turn $100 Into $1 000 000” by James McKenna, Jeannine Glista and Matt Fontaine
- “Make Your Kid a Money Genius” by Beth Kobliner
- “Teach Your Child To Fish” by Holly D. Reid
- “The Kids’ Money Book” by Jamie Kyle McGillian
- “CashVille Kidz”
- “Personal Finance Education in High School”
- “The Surprising Way to Teach Your Kids How to Be Smart With Money”
But before you dive in, remember, that money should also be something to spend, to enjoy and to have a good feeling with. Not all kids are fond of financial math text problems. Sometimes, they just want to play Monopoly.
Any financial education tips you want to share? Did we miss out on a book or a video? Share it with us in the comment section.