Teaching personal finance in schools

If any teacher wants to convert their math problems to have a financial element, please email ([email protected]) and I will be happy to do it.  If you know any teachers, please share this with them.

Prepare for a rant.  However, I will include a solution at the end, so maybe that makes it a little easier to stomach.

As a loyal Stocky Fox reader you know succeeding with personal finance can be extremely beneficial (no kidding).  Also, personal finance is a skill learned just like any other skill.  It’s not really hard to learn the basics—asset allocation, tax optimization, long-term view—but you definitely need to know them.


Financial literacy is low among adults

There are a lot of challenges we face as a society.  We all have our own lists.  At or near the top of my list is financial literacy, or the lack thereof.  Not knowing this has a crippling impact on someone’s ability to achieve their life’s goals.

FINRA, which is the governing body for financial advisors (when I took my Series 65 it was administered by FINRA) has a handy little quiz you can use to test your financial literacy.  I have listed the questions at the end of this post if you want to take it.

There are five questions (plus a bonus question that is quite a bit harder) that have to do with finance, but really they are math questions dressed in financial clothing.  They fundamentally test addition, multiplication, and division.  We were all taught the mathematical skills needed to answer these by 5th grade.

Do you know what the average adult scores on this test?  3 of 5.  60% correct.  Knowing the answers to these questions will mean the difference of hundreds of thousands of dollars.  Knowing these answers will help keep people out of the nightmare death spiral of credit card debt that will limit their opportunities for their entire lives.  Knowing these answers can allow people on a moderate income to build generational wealth.

Yet people don’t know these.  What’s even worse is the problem is getting worse.  In 2009 people got at least 4 of the questions right 42% of the time; in 2015 that number dropped to 37%.  YIKES!!!

Reasonable people can debate, but I can’t think of a life skill that can have a more direct and enormous benefit on someone’s life, but which is lacking across such a wide swath of the population.


Status Quo

School got very real for us this year since ‘Lil Fox just started elementary school.  We love the school and his teacher (Mrs Sheppard-Jones) is awesome.

I have volunteered at his school the past three years, and several years before that at the local elementary school when we lived in Los Angeles.  I work on advanced math concepts with 3rd and 4th graders.  I am no expert, and certainly I am not as close to it as the dedicated teachers who do it all day every day, but I have been struck by how little personal finance (let’s say that’s anything with a “$”) comes into the math curriculums.

That’s not to say that it’s not there at all.  There are some math problems that involve money and finance, but I wonder if it’s enough.  Why doesn’t every single math problem incorporate finance.  Every.  Single.  Problem.

I’m not talking about hard core personal finance concepts; students are welcome to come to this blog for that ?.  If you have an addition problem like 3 + 5, why not make it $3 + $5?

Suzie has five apples, and she gives 3 to Steve.  How many apples does she have left? Could easily become Suzie has $5, and she buys a toy for $3.  How much money does she have left?

Byron has already filled 6 buckets with water.  If he can fill 2 buckets per minute, how long until he has 20 buckets filled?  That could just as well be: Byron has $6 saved.  If his weekly allowance is $2, how long until he can buy a $20 video game?

Obviously, each of those questions are identical, testing the exact same mathematical concepts.  The difference is for the second of each pair, there is a financial layer that also gets the student thinking about money, saving, investing, etc.  Those financial layers are going to pay major dividends, literally and figuratively, if the student retains them.

The questions on Suzie and Byron are real questions that I have seen given to students.  As important as counting apples is or filling buckets of water is, managing your finances is much more important.

Pretty much every math problem can be written as a math/financial problem, with the possible exceptions of some geometry and trigonometry concepts.  Even then, I think if you are creative enough you could pull it off.


The mother of all concepts

This is obviously up for debate, but I think that compound interest is probably the most important concept in personal finance.  If you are a borrower, it’s impact can be devastating.  If you are an investor, it’s impact can be liberating.  Thanks to this little jewel, I was able to quit my job in my mid-30s and live off our savings.

As powerful as it is, it’s a purely mathematical concept.  We’re first taught it as exponents like 34=?  It starts to look a little more like finance with something like 1.085=?  This isn’t a hard concept to learn.  Most scientific calculators have a specific button for this, so all you have to do is enter the numbers.   

My major complaint here is exponents tend to be taught in a very sterile environment, at least in my experience.  Sure, you can do all the mechanics of 53, 76, 28, 34.6, and on.  As a high schooler I remember doing pages of them.  I became a robot punching buttons on a calculator, producing answers that I wrote on my paper.

What if instead you had questions which involved $1 of debt at different interest rates for different lengths of time like 1.15, 1.0820, 1.210, 1.25, 1.0920?  You still pushed the exact same buttons, but now there is some upside.  Worst case is the student learns exactly what he would have anyway.

Best case is that a student notices that 1.0820 is surprisingly larger than 1.0720.  If she makes the link that a 7% interest rate over twenty years produces a much lower amount than an 8% interest rate over the same time frame, she’s learned a powerful concept.

Right now it would just be a seed, but eventually that seed will grow.  That exponent problem shows the difference between a 7% return and an 8% return over 20 years.  That’s the difference between using an index fund with a low management fee and an actively managed fund with a high fee.  That’s the difference of several hundred thousand dollars over her investing lifetime.  If that seed never grows, she’s no worse off than she was.  If it does, then when it’s time to pick her investments for her 401k, she will realize how big an impact one little percentage can have when compounded over time . . . well, you know how I feel about that.

This is real—we live in a world where millions of homeowners could refinance their mortgage at lower interest rates to save billions, but they don’t.  I guarantee you the biggest reason is that most people don’t realize how much money they could save by lowering their mortgage rate a measly 0.4%.  Why aren’t we teaching that very thing when we teach exponents?


I am ready to do my part

There’s nothing I like more than when people find a problem but not a solution.  It’s awesome to hear people bitch on Facebook about some difficult issue, and then implore other people to do more.

So we have this big problem and I am going to ask everyone other than me to do something about it.

JUST KIDDING.  For all the teachers, educators, parents, or anyone else out there who works with kids in math, I am here to help.  I’m being totally serious.  Email ([email protected]) me any questions you have in a regular format, and I will change them so they are finance-related math problems.

Financial literacy is a huge problem, but it also has a really easy and costless solution.  Incorporating math won’t take away from any other learning; it won’t consume time that right now is spent learning other skills.  The kids are already doing the math, let’s just put a financial watermark on all those math problems.


FINRA quiz

  1. Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, do you have more than $102, less than $102, or exactly $102?
  2. Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same or less than today?
  3. If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?
  4. True or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less.
  5. True or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.
  6. (BONUS) Suppose you owe $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double?

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