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By the time you graduate from high school, every American should have a basic working knowledge of budgets, interest rates, various saving strategies and how amortization works. Financial literacy should be taught alongside the traditional curriculum.
I am constantly surprised by how many young (and not so young) people suspend all logical thinking when it comes to money. There are some simple truths: 1) if you spend more than you bring in, you have a problem; 2) credit only goes so far for so long; 3) it’s prudent to save for a rainy day… eventually it always rains; 4) you usually need a little more than you expected; 5) it requires attention, if you ignore it or take it for granted, you will not keep it.
Plenty of intelligent people make basic financial mistakes. Financial literacy is not regularly taught in school. Most college students arrive on campus with little financial experience. Luckily most colleges have food plans to save college students from themselves. Many don’t seem to realize that they simply can’t afford to order pizza several times a week if they are also picking up a latte every morning on the way to class. Few have any idea how much interest they are paying on the books they charged at the beginning of the semester. Most would be shocked to learn that a hundred dollar book can end up costing several hundred depending on the interest rate and the length of time they take to pay it off.
Some are star struck by having access to money or a spending limit they’ve never had before. If you have never had more than a few hundred dollars at a time from your summer part-time job, a credit limit of even $5,000 seems like it will last forever. This is especially true for the student who doesn’t understand or account for the interest that the unpaid balance is racking up.
A Sallie May study from 2009 showed students carried an average balance of more than $3,000. Even responsible students can quickly accumulate credit card debt. Buying required books and equipment, a few groceries, a college sweatshirt and other necessary semester kick-off expenses adds up quickly. By only making a minimum payment, those expenses become very expensive very quickly.
College students aren’t the only Americans suffering from a lack of financial literacy. A study from 2010 by the National Foundation for Credit Counseling found that over 76 million Americans graded themselves at a C, D or F grade level in personal finance. That is 34% of Americans that don’t rate even a B average in personal finance.
During the housing crash and the subprime lending debacle I saw a news report of a woman who was in foreclosure. She had bought a house that cost over half a million dollars. She was a maid. She didn’t understand the adjustable rate mortgage and could no longer make her payments when the interest rate changed. She was crying and asking over and over again “how did this happen?” She lost everything. With a little financial education, she might have chosen a house that was more realistic for her income and avoided the adjustable rate mortgage that was inconsistent with her budget.
In grade school, we learn the names of each coin and dollar. We learn the amount each coin is worth and how many shiny coins you need to get a paper dollar. We didn’t learn what to do with money once we got it. I still remember as a child, reaching into a bag the teacher was holding, grabbing a coin trying to guess what I held before I pulled it to show the class. The teacher softly coaxing along, “is the edge smooth or ridged? Is it small, medium or large?” Many of our neighbors are still fumbling in that dark bag trying to figure out what they are holding. We need to help our children by teaching them to examine their money in the light of day. Every high school student should know the 5 simple truths about money.
Gena Bigler is passionate about public service and credits her time serving nonprofits in AmeriCorps and Volunteers in Service to America (V.I.S.T.A.) with teaching her extreme budgeting and bargain shopping. Gena is now CFO of a Kentucky business and serves on the board of the Kentucky RiverKeeper. Gena would be happy to hear from you at email@example.com.