Personal Finance: It Isn’t an Elective Anymore

Remember checkbooks? Back in the day, I learned how to balance one (by hand, trudging miles uphill barefoot through the snow, etc.) in my high school’s personal finance class given by one of our PE teachers. It was an elective, but not one many kids took—perhaps understandably. The subject matter wasn’t exactly scintillating. Also, I can’t say it was very useful, either, especially nowadays, what with banking on your phone and all. Still, financial literacy is vital and under-taught in America today. However, it may be making a comeback in high school, as more state legislatures are requiring a personal finance class to graduate. Georgia and Michigan became the 13th and 14th states in April and June, respectively, and now more than a third of US students have to take such courses as back-to-school season gets in full swing.^[i] I doubt the curriculum features checkbook balancing, but that got me to thinking: What would be some good topics to cover? Here are a few I think kids—of any age—might appreciate.

First: Compounding!

If there is one lesson to impress on young (and young-at-heart) folks, it is the magic of compound growth—earning a return on returns. In my view, finding ways to let your money compound is the surest of the roads to riches humanity has discovered (although decidedly not the quickest). Stock-picking contests like many experienced in school may be exciting, but instilling an appreciation of compounding’s power is way more impactful, not to mention practical.

Say you saved $10,000 and invested it, earning 10% after one year—$1000. If you invest it all again, earning the same return (unrealistic, I know, just going for the basic concept here), you would get $12,100 for a gain of $1100. The $100 bump up is the return from reinvesting your return. This may seem modest at first, but it can add up over time, multiplying your principal—if you let it. Over 30 years letting compounding work at a constant 10% annual rate would net you almost $175,000 on that $10,000 investment.

Knowing how compound growth works also provides the basis to build other lifelong lessons helping you further along in the journey to financial success. Why should you budget and save? Why does time in the market trump timing it? Answer: To put compounding’s long-term power on your side. As Charlie Munger—Warren Buffett’s less famous, but no less legendary business partner—once put it: “The first rule of compounding is to never interrupt it unnecessarily.” Easy to say, harder to put into practice—especially when it isn’t front of mind. Even more so if no one ever brought it to your attention.

Note, too, compounding can work in reverse if you owe money. Ratcheting up high-interest debt, say from a credit card, and letting that compound by making only the minimum payment pits this legendary force against you. The difficulty of digging out from under a heavy debt load—as your borrowing costs continually snowball—is way better to learn about in class than by experiencing the crushing financial weight firsthand.

Next up: Opportunity costs.

Not to be that guy, but choices have consequences—particularly financial ones. Deciding to do one thing (say, going with the extra trim on a new car) means forgoing others (more of your paycheck going to car payments instead of your investment account). No judgment! Do what makes sense for you.

The point, though, is to consider the tradeoffs from a “current you” and a “future you” sense. Money spent now isn’t only money you can’t spend later, but also all the money you could have made investing it—potentially affording you more later. Now, of course money is for spending—says current you!—but keep in mind future you (and future people who might depend on you), who also reminds current you it takes money to make money.

Understanding the opportunity costs in front of you from a financial perspective allows you to be more deliberate about balancing current you and future you’s wants and needs. Future you will thank current you. That, ultimately, may be the most rewarding part of a financial education.

Adventures in financial planning for fun and profit.

How can you make what future you wants more concrete? That brings us to lesson three: Make a financial plan—for yourself or your family. Go through your income and expenses. Then think about your financial goals. How do you see yourself in the future—where would you like to be? Then chart a course from here to there. In all likelihood, though, it won’t be a straight line. Try different scenarios, stress testing your assumptions along the way. This isn’t easy! But it doesn’t have to be exact. These are just basic steps, which you can get more or less into detail over, to help you think about—and through—life’s challenges ahead.

To not lose heart? Don’t lose your head.

Speaking of challenges, I don’t think a personal finance curriculum would be complete without a section on critical thinking. From possible scams to less pernicious—but potentially no less damaging—economic theories and forecasts that proliferate every time you watch a financial show or open up an investment publication. So, how do you go about evaluating supposed experts’ claims? In my experience, when it comes to money, don’t take their word for it. Try verifying theories or claims for yourself. Be skeptical! For crucial decisions, if you don’t understand something, ask until you do. It also helps to check history—not that it ever repeats exactly, but a grounding in reality provides a good place to start assessing probabilities, if not the best and only one.

Financial and economic matters often seem complex, too complicated or just plain confusing. But that doesn’t exonerate experts’ claims—particularly when they don’t hold up. It also doesn’t disqualify anyone from comprehending the issues involved—with a little time and effort, and perhaps a bit of help from trusted sources. Indeed, I think it behooves everyone to do so.

In my view, this is what a personal finance education should be about—learning how money works and the practical solutions to make that work for you. It is a way to identify what is important and how to put those forces on your side while avoiding common pitfalls along the way. That is something I find endlessly interesting and I think kids—of every persuasion—might, too, when given the chance.