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MONEY SMART KIDS
Kids Show Financial Literacy
by Janet Bodnar

For the first time since 1997, high school seniors have reversed declining scores on a test of financial literacy. The survey, conducted for the Jump$tart Coalition for Personal Financial Literacy, tested how much students knew about such topics as credit cards, insurance and retirement funds. Students in the 2004 survey answered 52.3% of the questions correctly, up from 50.2% in 2002 and 51.9% in 2000.

That's good news. But I'd like to focus on an interesting finding of the study. It seems that students who said they receive a regular allowance did slightly worse, scoring 50% on the test. If an allowance doesn't improve a child's financial literacy -- at least as measured by this exam -- should parents bother to give one?

Yes, yes, a thousand times yes. The Jump$tart study also showed that young people who are thrifty didn't score better on the exam, yet we consider thrift a virtue. So, too, is knowing how to manage an allowance -- which I define as a fixed amount of money that kids receive at regular intervals, along with specific financial responsibilities.

There are limits to what an allowance can do. It will not teach kids that they could lose health insurance if their parents become unemployed (a question that fewer than one-third of the students answered correctly). It will not teach kids that stocks are likely to have a higher average return than savings accounts over an 18-year period (a fact that less than 20% of students knew).

Children will only learn that kind of information if adults go the extra mile to discuss it. Yet it's precisely those "advanced" financial topics that parents are reluctant to tackle. A survey by Northwestern Mutual showed that only 39% of parents discuss responsible use of credit cards with their kids, and just 23% have broached the subject of investing.

That's where schools come in. Parents can certainly do better, and in this column I offer painless and practical advice. But classrooms are the perfect venue for teaching big-picture lessons about the stock market or social security, while parents focus on day-to-day money management skills.

To be successful, however, an allowance has to be easy to administer, and both you and your children have to be clear on how it will work. Next week, I'll tell you how to set up a foolproof system.