Financial Literacy at the State Level: Texas

Financial Literacy in TexasThey say everything is bigger in Texas, but while that slogan is typically used in an endearing fashion, it’s unfortunately applicable to the Lone Star State’s financial literacy problem as well.  Texas is one of only 10 states whose citizens rank in the bottom 15 nationally in terms of both “financial literacy” (39th overall) and “financial behavior” (44th), according to FINRA (Financial Industry Regulatory Authority) .

Financial literacy – which in the most basic sense means knowing what you’re doing with your money – has become a hot-button issue in recent years as the struggling economy has made it clear how little most of us do know.  For example, we collectively owe credit card companies nearly $834 billion.  Well, a survey conducted by the National Foundation for Credit Counseling revealed that only about 40% of people actually maintain a budget and stick to it.  And roughly 12% of people report not knowing how much they spend on essentials like housing and food.  In other words, we don’t really know exactly how much we’re spending on stuff, and our innate optimism maybe lets us believe we can probably afford to buy more stuff, so we do.

Anyway, efforts to promote financial literacy have multiplied (it’s not a completely new cause, after all), and this look at how Texas does things is part of that.  CardHub’s Financial Literacy Series highlights issues and initiatives related to financial education in different areas of the country, and it is our hope that it will somehow help foster a more financially savvy populous.   By no means is the problem limited to the state of Texas, but in order for things to improve everyone’s got to step up.

The questions you therefore have to ask yourself are:  what do Texans do well, what do they struggle with, what are we doing to improve the situation, and should we perhaps being doing anything different?

Assessing the Situation

When it comes to the pillars of personal finance – budgeting, investing, everyday banking, credit management, dealing with taxes, and small business ownership (if applicable) – Texans are strongest at budgeting and weakest at credit management, according to Dana Edgerton, a public information officer for the state’s Office of Consumer Credit Commissioner.  The OCCC “regulates the credit industry and educates consumers and creditors,” according to its website.

That’s actually an interesting combination of answers because you’d think overspending would be the main problem someone would have managing credit, and that would run at odds with budgeting efforts.  Plus, none of the three biggest cities in Texas cracked the top 10 in our Best Budgeters rankings.  Overall, Houston ranked 12 out of the 30 cities we looked at, Dallas came in at 18, and San Antonio 20.  Each placed in the middle of the pack in terms of average debt-to-income ratio as well.  The average amount owed by indebted consumers in those cities equaled nearly $27,200 as of 2012, according to data from Experian.

Perhaps we aren’t as adept at budgeting as we might have thought.  Or maybe, that just speaks to how much work we need in the other major areas of personal finance.

“If I have to choose from that list, then yes, I would say that what I observe matches the OCCC’s findings,” Nicole Garrison, a professor of Business Principles and Personal Finance at Sam Houston State University, told Card Hub.  “However, what I observe is that some of my students have some experience with budgeting and almost no experience with any of the other topics. In terms of gauging actual competence in budgeting I would not say that my students are skilled in this area at the beginning of the semester. They are far less skilled in the other areas you mentioned. I guess it is the difference between an F- and an F+. Both are failing grades.”

Like the rest of America, it seems Texans must therefore re-evaluate what constitutes a necessity, come to the realization that pre-recession spending levels were inextricably tied to the housing bubble, and strive to ingrain more sustainable spending habits in order to strengthen their main personal finance “strength.”  Then they have to tackle the rest of the personal finance lesson plan.

“The only strength we really have is a strong job market that allows Texans to continue with their standard of living,” says Jared Pickens, a certified financial planner and the director of the undergraduate finance department at the University of Texas at Dallas.  “Texans do a very poor job of buying too much with credit. The Texas economy has been so strong that, in my opinion, has given many Texans the idea that we are immune to negative financial events.”

The OCCC is actually one of the organizations that is supposed to help impart the right lessons and fix flawed mindsets.  As Edgerton told Card Hub, “The mission of the Office of Consumer Credit Commissioner (OCCC) is to regulate the credit industry and educate consumers and creditors, thereby producing a fair, lawful, and healthy credit environment for social and economic prosperity in Texas.”  And while it isn’t exactly living up to that high standard, the OCCC does have a couple of interesting initiatives in the works.

  • Grant Program:  The OCC is currently developing a two-year grant program that will support non-profits that promote financial education.
  • Website:  The OCCC website makes financial resources available to consumers and connects them with unique educational opportunities, such as the series of more than 100 free webinars being offered by the Consumer Credit Counseling Service of Greater Dallas this month.

However, there is only so much the OCCC can do with an annual budget of only $73,900 for financial literacy initiatives.

Eying a Solution

Research shows a distinct connection between early-childhood education and financial performance later in life, so it’s important to start teaching money management at the earliest stages of formal education.  After all, would it be fair to ask people to begin learning how to read when they enter college or hit the job market?

“I think that education is always the answer,” says Jeanne Gerlach, the dean of the University of Texas at Arlington’s College of Education.  “But, in my opinion, college is too late.  We need to work with children very early on to help them understand what the value of a dollar might be.”

Alas, other than standard math, little related to financial literacy is set forth in Texas public school curriculums.  That’s probably why Lee Alvoid, chair of the Department of Education Policy & Leadership at Southern Methodist University, believes “Texas is behind on financial literacy in the pre-K – 12 curriculum.”   But while she notes that institutions of higher learning like SMU are beefing up their personal finance offerings, there doesn’t seem to be much of a groundswell of support for changing things at the lower levels.  And if you ask Timothy Jones – an assistant professor of education at Sam Houston State and editor of the School Leadership Review – that’s because the state has become overly focused on meeting standardized testing requirements.

“In Texas teachers are very focused on teaching TAKS skills, now STAR skills,” Jones said, mentioning two common types of standardized testing used across the state in recent years.  “It’s not a surprise to me that perhaps other things as part of the well-rounded child are getting missed. … We’re a state very focused on state accountability.”

Gerlach doesn’t subscribe to that theory, but she does see the value in teaching children about money from an early age.  She also says school districts and even individual teachers can take it upon themselves to do so.

“The legislature certainly can make changes … or, you know, teachers in a school district can work to make those kids of changes – subtle changes.  As long as they’re meeting the criteria that’s set forth by the state, they can add that in,” she noted.  “A superintendent could say, ‘Look, this is what we’re going to do for my district.”  Gerlach also recommends requiring students to display a minimum level of financial literacy in order to move from grade to grade and ultimately thinks having a sound plan to pay for higher education would make an effective prerequisite for admission.

Ultimately, it’s clear that consumers in general have grown up in an environment where people leverage debt to buy whatever they desire in the short-term and worry about the consequences later.  We can certainly help educate people about the dangers of that approach as well as teach key specific personal finance skills, but a more fundamental shift in mindset is needed to prevent future generations from repeating our mistakes.

“The United States is going through a change in culture, particularly about debt,” Jones said.  “We’re going to have to reprogram kids about debt. …  The idea of if the loan officer says you can afford it, you can afford it – we just about brought our economy to the brink of total failure with that concept.  So I think our biggest challenges are ahead of us.”

Tips for Now

Changes to the subject matter being taught in Texas public schools aren’t going to manifest themselves overnight, so it bears mentioning some commonsense steps you can take to improve your individual financial performance in the short-term.

  • Build an Emergency Fund:  Establishing financial reserves that you can fall back on if you lose your job or unexpected expenses arise is actually more critical than paying off amounts currently owed.  After all, even if you manage to reach zero balance, you could easy find yourself back in the red if you don’t have some cash saved up.
  • Maximize Your Credit Score:  Your credit standing impacts a number of things across your financial life, including the loan terms you can get, your insurance premiums, your ability to lease a car or rent an apartment, and even your job prospects.  In other words, the higher your credit score, the more you save.
  • Use the Island Approach:  The basic premise is that using different accounts to manage different types of transactions enables you to garner the best possible collection of terms as well as benefit from improved financial visibility.  For example if you transfer your existing debt to a 0% credit card and get a rewards card for everyday spending, you’ll not save more money but also give yourself an inherent overspending warning system.  Since you should never have to leverage debt in order to make everyday purchases, finance charges on your everyday account will signal it’s time to cut back.
  • Force Yourself to Budget:  Whether it necessitates asking your credit card company to lower your monthly spending limit or setting up monthly payments from a checking account to ensure payment in full every month, there are a number of ways to make yourself spend within your means.

Those are just a few tips, and while you’re likely familiar with most of them already, it’s time to apply them in earnest.

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