If there is one thing the crisis has taught us, is that no one seems to have a clue what’s going in our financial system. And why would they? When were you taught about managing money? Now I know the financial crisis went a bit deeper than people mismanaging their personal finances. There was a lot of deceit, people with ulterior motives and subprime mortgages going on (watch the Big Short to get that explained to you!), but it boils down to people not understanding money, and what it can do for them. And what it can’t do for them.
We expect someone trained in medicine to understand medicine. We expect someone trained in law to understand the law (or to at least be able to interpret different laws and governance) And we expect someone trained in finance to understand finance. But not everyone in life will have to figure out how to perform open-heart surgery, or win a lawsuit. But everyone in life will deal with money. And then suddenly, not being trained becomes an issue.
Now not everyone can be an expert in finance. Nor is there a need for everyone to be an expert. But there’s also no reason for us to be ignorant. We know what to do when we get hurt/ill, we know what to do when we get into trouble with the law (and how to stay out of it. So why is it deemed acceptable that we’ve got no clue how to deal with money?
Here is my argument for adding personal finance to the curriculum:
You need to know what money can and can’t do
Knowing how money works is a key asset in life. Knowing and understanding money is called financial literacy. To be financially literate means to be able to make responsible decisions with regards to finance, or just plain simple: money.
Financial literacy can help you manage your money to the extent that it can prevent you from getting into debt. It teaches you that there is, in fact, a limit and that if your income doesn’t balance out your spending, either you’ve got some savings left, or you’re in debt already. This basic form of budgeting is something most of us never get taught until we get taught the hard way…
Talking about budgeting, you’re probably already in debt. At least in the current climate it is likely. What will financial literacy do for you then? It will allow you to be able to distinguish between both good and bad debt. “Good” debt being repayable investments (student loans seem inevitable, but need to be seen as an investment) and “bad” debt being non-repayable debt (you don’t have the money now, nor will have it later) that focuses on immediate consumption without monetary gains.
When in good debt, financial literacy helps managing it. You are more likely to understand how the debt can be paid off, according to what scheme, and how to do it most beneficially. Another key point is that you understand compound interest, something we will dive into a bit later in the article. With regards to bad debt, financial literacy will help you avoid it. More on this in the “financial products” section.
Having mentioned these two forms of debt and the fact that the most common one is student debt, it’s important to teach this to kids. Why? Because, even though we might think we were “oh so grown-up”, we were kids when making the decision to go university. Now parents are often helping out too. But they definitely are more prepared to do so when having had an education in finance. And not everyone can claim to have had that…
You need to know what financial products are good for you, and which ones are bad
Money comes in a lot of different forms these days. And this has had an immense impact on how people manage their money. I have written multiple articles on how different forms and shapes of money influence our behavior and I will link those below. Why is this relevant? Well, most kids have bank accounts, debit and credit cards around the time they get into high school. They have also got a phone which is effectively a payment method. So, now we have youngsters with all the means and none of the clue. Great.
Kids need to know that there is, in fact, a limit to spending, although their plastic card might not give them the same hints as cash would (once you run out of physical cash, you’re done). But more importantly, they need to know about what happens when all of the money is gone…
There are many financial products designed to help you bridge the gap between your current income and your prospective income. It can come in the form of a mortgage, a bank-to-consumer loan, a peer-to-peer loan, a shark-to-guppy loan and of course on a credit card.
First, people (in this case kids) need to learn that these sources of money are in fact a form of debt (they need to be repaid), and they are an expensive way of obtaining more money now. Let’s look at the debts I have just mentioned.
- Mortgage. There are many different mortgages. If you ever had to select one I am truly sorry for you. With a mortgage, you’re effectively stuck for multiple decades (often 30 years), to a debt that has your house as collateral. You don’t pay the mortgage, the collateral (your house) gets taken away from you and you’re on the street. Grim. Not only are you repaying the actual sum of money you needed to buy the house in the first place, but you will also pay interest. Which is effectively a fee for services rendered, these services being the lending of the initial sum. It’s here where most people start to lose track. Let’s look at some loans to explain interest better.
- Bank-to-consumer loan. You need money. Well, time to go to an institution that deals with money, a.k.a. the bank. You will go through some financial checks, but eventually, you get approved for a loan (good for you!). You take out $2000 to be repaid in 10 months plus interest of 5% (a month). Now I ask you, how much do you have to repay per month? This seems to be a question that kills everyone, but let’s work it out. 5% of $2000 (=$100, in interest) with a $2000/10 (=$200) loan repayment. The first month costs you $300. The second month will cost you 5% of $1800 (=$90, in interest), with a $1800/9 (=$200) loan repayment. The second month costs you $290. Loans are expensive ways of getting money now people. Check the interest rate. Within the first two months you have paid $190 to lend $2000 for less than a year, and in the 10 month, you will end up paying $550 (100 + 90 + 80 + 70 + 60 + 50 + 40 + 30 + 20 + 10). Meaning you have paid over 25% of the initial sum you needed to borrow, and not the 5% they are advertising. This is a form of compound interest. Something which I feel I will write an entire article on.
- Peer-to-peer loan. This is an up and coming form of lending, where friends, acquaintances or perfect strangers on an app, lend money to each other. Often you will find there is no to very little interest on these loans and there is an implicit, but mostly social, agreement between the two parties. Very informal. Can easily cost you a friendship, so be cautious when participating.
- Shark-to-guppy loan. This is one of my favorite types of loans because it’s absolutely insane. Having mentioned bad debt before, no debt is as bad as debt that grows exponentially, per day. Something a little like a payday loan. This is where compound interest is at its finest. With these loans, they advertise that you will receive a (relatively small) sum of money immediately, against a certain repayment rate (time + interest). What they often “fail” to mention is that this is per day. This rate tends to easily be above 10% (more likely 20%). Given how quickly you saw the interest accumulate per month on the bank loan, how quick do you think this one moves? VERY quickly. Let’s say you took out $500 to be repaid in 5 weeks, against 20% (per day!). Day 1 is $100 in interest, and so are days 2-7. On day 7 you also repay the first installment, which is another $100. In total, week 1 has cost you $100 in repayment + $700 in interest, totaling $800. Ouch.
Some payday loan schemes offer 20% on a weekly or monthly basis, but it still accumulates like crazy. You’ll end up paying so much more than the initial sum. Stay away from these types of loans. You don’t want them, you don’t need them. You might be better off gambling your money away, and this comes from someone who is anti-gambling.
- Credit card debt. This is a form of debt that is much more widely accepted but just as dangerous. Why? Because this debt also suffers a 20% interest rate, be it on a monthly basis. We have seen what compound interest does, so you can imagine how expensive taking out $5000 on a credit card is. Sure, often you can get a deal on a credit card, say have the first 6 months interest-free, but after that, it’s payment time! Some people have turned this into an art: maintaining multiple (10+) credit cards, all free, until they’re not and then they move their debt to something new. It doesn’t cost money, but it takes a lot of time and cognitive effort and is of course very easy to get wrong. So, still not ideal. Another trick of the credit card is the option to only do minimum repayments. Meaning the credit card company calculates you how much the minimum repayment (on the debt, not the interest) is you can get away with. This makes people happy. They can get away with very little to still get a lot of money. But the interest is quietly accumulating in the background. And suddenly, repaying the minimum, but having interest calculated on (close to) the full sum of money, is becoming very expensive. Also important: you’re going to have to pay this back. Defaulting on your credit card is extremely bad for your credit score. And your credit score determines whether you are likely to get other loans, such as a bank-to-consumer loan or even a mortgage. So yes, this stuff does matter!
Now it may seem as if I’ve just given you a very long list of possible pitfalls in the current day economy. And well, I have. But why would I do this?
These types of debt (ok maybe not the mortgage) are something we come into touch with at a young age. If you know nothing about compound interest, you’ll have no clue how bad some of these debts are, or can be.
To teach people at a young age means they see through these schemes when they might need them the most, say after high school, in college, in their first job etc. As I said before, being in debt is bad. It ruins your finances, your mental health, your credit score and as such can have devastating effects on your future. And the future is very long for the youth. We don’t want to ruin the decades to come by letting them fall into these traps. We need to teach them personal finance.
You need to be taught young, otherwise it might be too late
Now if you’ve read this far you’re probably thinking to yourself: “This all makes perfect sense. The world would be a lot better if all of us knew this. But why teach it to kids at such a young age? Is that part really necessary?” Yes. Yes, it is.
I’ve known (and still know) plenty of people who have grown up with parents who taught them about money, by being absolutely terrible with money. Some of them took over their habits and ended up doing financially not-so-well (read: terrible), others took their parents’ example as the one thing they had to avoid and did quite okay.
The issue is, it can go either way. And isn’t education there to prepare us for the real world? One that seems to revolve around money?!
Primary and high school education are forms of education that are inescapable no matter how hard you try. But maybe, more importantly, primary school kids are at an age where they are the fastest at learning, but also the fastest at learning new habits.
The habits we learn when young are the ones that are so ingrained in us are the most difficult to break. Habits are based on the knowledge we have at a certain moment in time. We owe it to “the youth” to actually give them the knowledge to survive in this financial climate. Otherwise, we will be repeating the same cycle over and over again. And to be quite frank, I don’t need a repeat of the last decade. It was terrible.
Now at the end of the day, if you’re interested in money you can choose to do a degree in it, at whatever level you desire, just like people interested in saving people (physically) study medicine and become doctors, nurses and researchers. However, not all of us will deal with health emergencies big enough to need to be a doctor. But all of us deal with money.
We deal with money constantly. Whether it’s income, spending, savings, debt, mortgages, pension schemes or investments. We need to get into the habit of thinking that when it comes to money, we need to know what we’re doing. And there’s no better age to be taught than as early as possible!