First, a story from Dave Ramsey:
“Ben and Arthur were friends who grew up together. They both knew that they needed to start thinking about the future. At age 19 Ben decided to invest $2,000 every year for eight years.” This may seem like quite a bit but keep in mind this could be done by saving wages from a part time job while going to school. Back to Ramsey’s story. “He picked investment funds that averaged a 12% interest rate. Then, at age 26, Ben stopped putting money into his investments. So he put a total of $16,000 into his investment funds.
Now, Arthur didn’t start investing until age 27. Just like Ben, he put $2,000 into his investment funds every year until he turned 65. He got the same 12% interest rate as Ben, but he invested 23 more years than Ben did. So Arthur invested a total of $78,000 over 39 years.
When both Ben and Arthur turned 65, they decided to compare their investment accounts. Who do you think had more? Ben, with his total of $16,000 invested over eight years, or Arthur, who invested $78,000 over 39 years?
Believe it or not, Ben came out ahead … $700,000 ahead! Arthur had a total of $1,532,166, while Ben had a total of $2,288,996. How did he do it? Starting early is the key. He put in less money but started eight years earlier. That’s compound interest for you! It turns $16,000 into almost $2.3 million! Since Ben invested earlier, the interest kicked in sooner.”
When I was a freshman in college, I, like many, did not understand compound interest, much less investing. I learned budgeting basics by trial and error, but I at least understood how checking accounts worked. In my first semester I overheard a few interesting conversations from others just learning how to manage their finances. Here are two of the most memorable:
In a panicked voice, “What do you mean it bounced? … But, I just wrote a check. I didn’t do anything! ” And on another occasion by a different student I heard in a confident voice, “I’ll go to the ATM, and if nothing comes out I’ll just write you a check.”
We are setting them up for failure
The average credit score for ages 18-24 is 630-643. It is the lowest of all age brackets. I believe one of the main causes of this is because most schools in the U.S. either don't offer personal finance education at all or it is not prioritized. I heard a story about a math teacher who wanted to teach personal finances and was told it wasn’t rigorous enough. In one school I visited they did teach personal finance, but it was a remedial math course. At another school I frequented, the teacher snuck in some personal finance in her elective business class.
Yet one of the first things our children will have to consider when they become adults is how to finance their higher education. We do not come close to adequately preparing students for that immense decision. In my time as a college and career coach I discovered that a surprising number of students didn’t even know the difference between a scholarship and a loan. Some students thought both were free money and yet others thought both were borrowed money. I discussed the college investment topic more specifically with a financial expert in an earlier article that you can read here.
When we don’t teach students financial understanding, we set these kids up for financial stress. Money is in fact the biggest cause of stress in the United States. Stress, as many of us know, causes many health problems, such as high blood pressure, heart disease, obesity, and diabetes.
By not teaching even the basics of personal finance, then expecting kids to go to a college they can not afford, we are literally setting them up for failure. They begin life in debt that they don't fully understand. The effect that this has on their lives and their health could easily be avoided with proper education.
It's more imperative now than ever before
The times are changing. Past generations could depend on pensions for the bulk of their retirement funds. The financial burden fell on the companies or government funding them. Consumers didn’t contribute their own funds or have to make decisions. However, today pensions are rare. Some employees will be offered the ability to contribute their own funds to a 401k in which they will make investment decisions. For those with no 401k options they will need to educate themselves entirely to find retirement funding options and make decisions on their own. Also, Social Security, which was a major source of retirement income, may not be available at all in the future. The Social Security Board of Trustees reported that "funds will be depleted in 2034."
Consumers are also faced with far more complex options for any major investment - home, education, car - than in the past. Products offer many more interest rates and maturities than previously. One often needs to consider things like fixed vs variable interest rates, long term rent to own products, and add on impulse items. Based on this, it is more imperative now than ever before that we ensure individuals receive financial education.
Many sources have shown that the top causes of bankruptcy in the United States are medical expenses and job loss. However, not too much further down on the list is misuse of credit. This includes loans for cars, homes, and education. While unexpected events like job loss and medical expenses are relatively uncontrollable, credit choices are perfectly within our capabilities and only requires proper education.
It's not just us
CFA Kristina Zucchi of Investopedia points out that the lack of financial literacy is not just a U.S. problem. It is a global problem regardless of socioeconomic status and regardless of a county’s economic development. More than half of populations in nations across the world don’t understand financial basics. In our fast-changing world economy, financial ignorance is more dangerous than ever before. For many, personal bankruptcy is just one bad decision or even a major illness away.
But why worry kids with stressful money matters?
Many people don't want to concern kids with money or budgets. They may fear they will burden a childhood with financial concerns. However, this isn't about sharing money stress that the child's family may be having. It is giving them the chance to objectively learn about finances so that their money stress level can remain relatively low throughout their lives. Being up front with children about monthly bills, budgeting, making payments on time, shopping, paychecks, and for the right ages, even investments, loans, and insurance, will teach them that money does come from somewhere and it has a purpose greater than buying ourselves fun things. All students deserve to be given the tools to have a positive money mindset and understanding that they can take into adulthood.
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Emma B Perez