Experts: Which Financial Topics Should Be Taught in School
According to the Council For Economic Education, 25 of America’s 50 states require students to take one economics class to graduate. In 23 states, a course in personal finance is a prerequisite for graduation.
In the other half of the country, kids can earn their caps and gowns without knowing that there are 100 pennies in a dollar — much less having the slightest idea of what to do with those pennies and dollars.
GOBankingRates spoke to financial advisors, money coaches and educators to find out which topics they would make sure schools were teaching if they designed the curriculum. Here’s what they said.
How Compounding Can Work Against You
Albert Einstein is quoted as saying that compound interest is the “eighth wonder of the world” and that “he who understands it, earns it — he who doesn’t, pays it.”
Upon leaving high school, young adults will be bombarded with credit card offers from the moment they turn 18, and if they don’t learn how interest compounds in school, the bank will teach them the hard way as soon as they’re legal.
“Many young people go into college and get a credit card for the points or free stuff and don’t realize how much they are spending on interest because they only make the minimum payments,” said Matthew Robbs of Smart Saving Advice. “Having that knowledge in high school could save many young people from long-term credit card debt.”
How Compounding Can Work for You
Just as high school kids should learn how quickly debt can pile up when a borrower is on the receiving end of compound interest, they should also learn how money can make money for investors who bend the power of compounding to their favor — but only if they give it time to work its magic.
“Thanks to compounding interest — money earned on money earned — longer is better for investments,” said Jennifer Seitz, certified financial education instructor and educational content lead for teen investing and banking app Greenlight. She even offers educators a sample lesson.
“If a teen invests $150 per month with an 8% annual interest rate starting when they are 16 years old, they can watch it grow to more than $1 million by the time they are 65 years old,” said Seitz. “And surprisingly, the $150 they set aside each month equals less than $90,000 of that. Waiting just five more years — until the age of 21 — to start $150 monthly savings would only reach about $730,000 by age 65. That’s nearly $400,000 less without the five-year head start, and only about $10,000 less original contribution.”
The ABCs of Investing
Even if students did graduate with a rudimentary knowledge of how investors can leverage the power of compound interest, most of them wouldn’t be able to apply those lessons in real life because most of them leave school without learning the basics of how to put their money to work.
“Students should learn about investing in stocks, bonds and mutual funds, including that buying a stock is buying equity in a business and buying a bond is loaning money to a business or government entity,” said life and money coach Elizabeth Chiang M.D., Ph.D. “It’s important to understand the expenses associated with investing and how this affects the return on investment.”
How To Avoid the Student Loan Trap That Many Will Fall Into
Some students will graduate from high school and get their first jobs. Without the right education, they won’t know how to manage the money they earn. Others will go to college, and many will pay for the privilege for years or decades to come.
“Given the more than $1.7 trillion in outstanding student loan debt owed by over 43 million individuals here in the U.S. and the challenges so many have in repaying it, America’s youth needs to be educated on ways to prepare for the cost of higher education as well as available ways to avoid or minimize student loan debt,” said Patricia Roberts, a financial educator with Gift of College.
“That includes the selection of post-secondary institutions whose net costs are as manageable as possible given family circumstances and available funds like scholarships and grants that do not require repayment,” she added.
How Income Is Taxed
No matter where they go to school or what they do after graduation, every kid will eventually grow up to be a taxpaying adult. And when it comes to paying taxes, learning as you go is a recipe for disaster.
“Students need to understand the basics of how the federal income tax works, how it is calculated, how it is withheld from paychecks, how taxes on earnings differ from taxes on investments, and basic ways to mitigate the tax,” said David Frederick, director of client success and advice at First Bank. “The federal income tax is complex, and many adults still just pay what the government says with little plans for mediation and celebrate, wrongly, when they get a refund. Students need to be told about this system and the basics of how to get ahead of it.”
The Basics of Budgeting
Finally, there’s personal finance — the art, science and skill of managing your household’s money. It’s a cornerstone of adulting, yet most kids never learn it in school and stumble through it for their entire lives.
“Even high school students understand the basics of earning more than you spend, I hope,” said Frederick. “But financial literacy classes should extend this basic lesson into long-term projects. Give the students a core income and set up options for borrowing, investing, and spending. Students should be instructed on how to match up expected income against essential expenses, and how to determine how ancillary expenses and savings figure in. Bonus points to the financial literacy class that can incorporate taxes into budgeting and allow the students to mitigate taxes by saving into a 401(k).”
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