It's Time to Teach Financial Literacy in High School
As a society, we spend a lot of time, money and effort helping prepare our young people for college. SAT preparation is a massive industry. And there are even consultants like Steven Ma, who will charge thousands of dollars to help students gain admission into the best schools.
Yet, for some reason, we do not spend a whole lot of time educating potential college students on the less exciting topic of financial literacy, which is the elephant in the corner.
At MagnifyMoney, we worked with Brooklyn College to design a basic course available to college freshman that focuses on four areas:
- The power of compounding interest.
- Your credit score and how it is calculated.
- How to understand the true cost of banking products and make informed decisions.
- The psychology of money and its impact on decision-making.
Few people understand the true power of compounding interest. We ask the students how long it would take to pay off a $5,000 credit card balance if you only pay the minimum due. Students always underestimate the time (over 20 years) and cost (more than double) that it would take to pay off the balance. I wish I could capture the look on their faces when the true cost is revealed.
But compounding interest does not have to work against you, if you save money. Earning interest on interest by starting to save early can have a huge impact on whether or not you will be able to afford retirement. Few students believe that just $100 a month put into an investment account can generate at least $500,000 in retirement funds.
I meet a lot of people who just recently graduated from college, and they are shocked at their low credit score. Students will often sign up for a college credit card and receive a $500 limit. Not really understanding that bad behavior stays on your permanent record for seven years, they make sloppy payments and have some fun with the card. And then they enter the real world, and they can't believe the impact of their carelessness.
In their mind, it may have only been $100 worth of fun money that they paid a few months late. But entering the workforce with a low credit score can make so much of your life more expensive.
So, we explain the weird world of credit scoring. Whether you love or hate our societal addiction to FICO, the addiction is real. It only seems fair that students should be taught how the system works. They need to know how important on-time payments are to your score. And they need to understand the concept of utilization, which is particularly important when average credit limits are so low.
The True Cost of Banking
This part of the course is my favorite. I ask students how they buy books. All of them talk about comparison-shopping online for the best deals.
I ask how they buy clothes. Again, they are incredibly savvy with comparison shopping online.
And then I ask them how they choose a bank or a credit card. Virtually all of them answer in the same way: they choose their bank because of their parents, or because the branch is close to them.
When I ask them how they might look if they chose their clothes in the same way that they chose their banks, I get a combination of laughter and horror.
Students need to know that banking products should not be treated any differently: Look for the best deal, and don't be afraid to compare, ditch and switch with frequency.
The Psychology of Money
Many people end up in financial difficulty because they can't control their spending. And it is rarely a big purchase. Instead, it was the accumulation of lots of little purchases over the years. Spending an extra $10 to $20 a day can be an extra $20,000 of debt in just a few years.
Not being able to say no is a big part of the issue. And you can start to see the warning signs early in life. Humor always helps and we show a video where Stanford University professor Philip Zimbardo re-enacted the marshmallow experiment.
%VIRTUAL-pullquote-In those 4-year-old faces, we see the same trade-off that we need to make. %Children are given one marshmallow. Before leaving the room, Zimbardo tells the children that, if they wait to eat, they will be given two marshmallows when he returns. And then we watch -- and laugh -- as we see the children struggle with something that is so fundamental to our decision-making: do I indulge now, or do I wait and have more later? In those 4-year-old faces, we see the same trade-off that we need to make. Do I buy those shoes, or do I save for retirement?
Although we can't take the marshmallow test later in life (most of us become much better at resisting that particular temptation), we can still take Zimbardo's Time Perspective test today. If you are a Present Hedonist, than you are still eating that marshmallow -- and are at risk of debt, delinquency and worse.
This is a fun way to get students to realize that resisting temptation and delaying gratification is ultimately the key to financial success. Although it is not easy, it can be learned. And, although we laugh at a 4-year-old giving into temptation with the marshmallow, it loses its appeal when you are in your 30s and have a family to support.
This Isn't Difficult
Hats off to Brooklyn College for trying to get financial literacy into the classroom. These are basic concepts, and they need to be taught earlier in life. If students are going to become the target of banking marketing, then we need to prepare them.
Nick Clements is the co-founder of MagnifyMoney.com, a free price comparison website that helps consumers find the best deals in banking and borrowing. He spent nearly 15 years in consumer banking and is a graduate of Stanford University.