What Should High Schoolers Know About Finance?
I’ve seen the meme on Facebook asking why we learned Algebra or the Pythagorean Theorem, but we don’t teach our young adults about basic finance. I understand the idea: while you may not use a theorem on a daily basis, every single purchase you make affects your personal finances, and with so many young people in debt, we must’ve missed something.
However, the idea that young people don’t understand how to budget doesn’t ring true. If you earn 100 dollars and try to buy something for 101 dollars, you will immediately understand the very basics of budgeting. I think even when you throw in a monthly income, rent, taxes and debt, the level of understanding is there for most young people. Saturday Night Live lampooned the idea that buying things you couldn’t afford was a difficult concept. It’s a simple concept, but yet we continue to struggle to find financial freedom.
So, what should really be taught?
Assuming that we believe the basic math we learned in high school is adequate to understand spending more money than you have is not ideal in most cases, then there must be something else that is going on. Here are the things I think would go some distance in helping young people make smarter financial decisions:
1) Peer pressure: “Keeping up with the Jones’” is a real pressure you’ll feel throughout life. In studies, people are more concerned with relative pay than their actual pay. And if you surround yourself with people interested in money spending activities, you’ll struggle. In the “Millionaire Next Door”, the example of a dual income family where each earner earned $50,000 is more likely to live in a smaller house than a single earner with a family making $100,000 because the six-figure income is more likely associated with a white-collar job, where social expectations encourage higher spending.
2) Normalizing spending: in a similar vein, society sets expectations as to what is ‘normal’ spending, but you take these standards at face value at your own peril. I remember after graduating basic training and being on the hunt for a new car. My friend got a brand new 1991 Mitsubishi Eclipse and he figured that since his loan was approved, it must make financial sense. As a high schooler, I always wanted a Mustang and inquired about one. I could not believe the amount of my paycheck they were willing to take, and I ended up getting a Ford Escort. My friend rarely was able to go out with us because of his car payments, but he did really love that car. Salespeople, for the most part, are happy to sell you more car or house than you need, and it pays if you think it’s normal to spend lots of money.
An even better example of normalizing spending is student loans. The price of college has gone up much faster than inflation, and yet society still doesn’t question the cost and it’s only after graduation when students seem to learn about the concept of ‘return on investment’ and how excessive student loans rarely produce a good one.
3) Know yourself: to really understand personal finances, you must spend more time on the ‘personal’ part Why do you think your purchases will make you happy? What is your thought process when you buy something that you don’t need? Are you likely to buy frivolous things at the checkout line? Do you feel the need to buy things for your friends? Spending time with yourself and understanding where your priorities lie could help you make more deliberate spending decisions.
4) Know your future self: There is a concept that we believe our future self will be a better person than our current selves. That’s why our Netflix queues are filled with important documentaries while we watch ‘Forged in Fire’ every night. Also, it’s the best show ever. With money, we believe our future selves will earn and save more in the future than we will now. The easiest trick is to save money before you even see it. Have a manageable percentage of your income go to an investment account on a recurring basis and don’t think about it. If I was young, I’d probably pick a technology based index fund. This way, you only have to make one action, one time and then you’ll be surprised one day at how much you have.
These are just a few of the reasons we feel compelled to spend when it’s not in our own best interest. The more time we spend thinking about the why of our purchases, and what forces at play, the more often we’ll make healthy financial transactions. And while high school students probably receive enough education to understand not to spend more than they have, they may not understand the complex reasons they feel compelled to spend. In that area, I think we could make some real progress.
