Financial Education Is The Key To Economic Prosperity
Posted on June 22, 2008
Another school year has come to an end. Graduations have taken place and hundreds of thousands of economically handicapped young adults have entered the workplace. We continue allowing young people to begin life’s journey without knowing how to balance a checkbook, prepare a budget, understanding the consequences of debt, and other basic principles of money management. No wonder so many of them struggle to make ends meet as adults.
It seems our entire public educational system is devoted to teaching students how to get a job and make money, while it allocates virtually no time to teaching them how to manage it. Income and wealth are not the same things. Wealth is created from the earnings you don’t spend, not from the money you do. Granted, big houses, fancy cars and expensive clothing project an appearance of wealth, but if these are coupled with debt that consumes a substantial portion of future income to support, they could be more of a precursor to bankruptcy than a sign of wealth. Students aren’t learning this!
Learning how to properly account for expenditures is critical to financial success. How can you plan for the future and prepare a budget to keep within your means if you don’t know how to track your expenses. The vast majority of students graduate without ever taking a basic accounting course. My youngest son didn’t get his first exposure to accounting until early in his MBA program. He said it was one of the toughest courses he had ever taken, but also one that had more practical applications than any he had ever taken. He learned that online bill pay, while convenient, is not accounting.
A young lady who works with me said she never learned to balance a checkbook in middle or high school. She said that was not part of the curriculum she needed to graduate and she probably wouldn’t know how today if it weren’t for participating in a Junior Achievement program.
One way to learn just how financially handicapped new graduates are is to ask a few of them to explain the cost difference between saving for a purchase versus financing it. Want to bet that less than 2 percent can answer correctly? How about teachers? Don’t be surprised if you find that less than 10 percent of them understand that it’s the total of interest earned plus interest paid. Here’s an example.
Suppose you want to buy a new HD television that sells for $3,500. The payments on a loan for 48 months at 9 percent interest would be $87.10 per month. That’s a total of $4,180.80 you’d have to pay for the TV. On the other hand, by saving for the same number of months and earning 5 percent interest on your savings, you’d only have to deposit $65.75 per month to have $3,500 in 48 months. Then you could pay cash for the TV. The difference between financing the purchase and saving for it is $21.35 per month 4 years, or a total of $1,024.80. Why aren’t schools teaching this? Is it worth over $1,000 just so you can get the TV quicker?
J. R. Rosskamp, managing director of Veritas Partners, a business consulting firm in South Florida, hits the nail on the head when she says it’s because everyone’s a consumer two-year-old with an “I want it now mentality.” She says that this slap-happy “I’ll pay for it later mentality” is bankrupting our country and asks, “Where are the adults�isn’t delayed gratification a tenet of maturity?” I couldn’t agree more.
And then we wonder why so many people are struggling financially.
Here’s a tip! If you’re one of those who are buried in credit card payments, car payments, house payments and other payments, it’s probably because you’ve become spoiled by a lifestyle built on debt. Grow up! Stop whining! Pay off your debts and start saving! People, who rely on debt to support their lifestyle, never have as much in the long run as those who save first and then spend.
When you pay cash for purchases, they belong to you. When you finance them, it’s almost like renting. Not only are you committing future earnings to pay for today’s purchases, you’re paying a huge premium to do so. But what’s most devastating is that much of what you buy on credit wears out before you get it paid off. This starts a cycle of borrow and spend, borrow and spend, that can last a lifetime and deprive you of the higher standard of living you might otherwise enjoy if you were more patient.
Two-year-olds are notorious for throwing temper tantrums if they don’t get what they want immediately. Some parents teach their children to have restraint and be patient. They teach them to finish their meals before they get dessert, they teach them to do their homework before they go out to play, and they teach them to save part of any money they receive. Then there are those who think they are being better parents by giving their children everything they want as soon as they ask. Guess which children grow up to become the most responsible and productive adults?
It’s sad, but many of today’s parents are so financially irresponsible they aren’t capable of teaching their children good money management skills. That’s why we need to demand that consumer mathematics and accounting become a major part of school curriculums. These are skills everyone from a ditch digger to a doctor needs to know. If we don’t do this taxpayers are going to find themselves subsidizing an increasing number of people each year.
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