I remember two things from the "Personal Finance" class taught at my high school:
- It was taught by the shop teacher.
- It was a complete joke.
I'm not alone in finding primary education severely lacking in teaching smart financial skills.
With Americans now saving a paltry $354 a year, we need a radical change in spending, saving and investing habits. "Good times" don’t last, and my generation (in high school during the dot-com boom) is experiencing its first financial shock.
So, how do we deal with it? Also, how do we prepare future generations to avoid the mistakes that we've made? If we're going to reduce our dependence on debt, improve our financial literacy, shun materialism and give our children a better future, we have to get creative. We have to get radical:
1. Mandatory Classes Before Your First Credit Card
Before a personal bankruptcy is discharged, you are required to a take a personal finance course. The course can be taken on line, and the curriculum isn't complete fluff. I should know. I had to take the class last year. While my personal finance transformation was already in progress, the class was useful.
So if the government makes debtors take a class once they've hit rock bottom (and file for bankruptcy) why not require people to take a finance class before they can get their first credit card?
Is it really so absurd? Teenagers must pass both a written and driving test before getting their learners permit, yet they can get a credit card without having any clue as to what they are getting themselves into. Why not have credit card companies require first-time credit card holders to pass a credit literacy test?
2. Subsidize Personal Emergency Fund Accounts
Many employers, including the federal government, have great 401K and other plans to entice employees to save for retirement. Many will match employee contributions by 100% or more. Regardless, many financial disasters occur well before people hit 65 years of age.
Why not have employers or government matching emergency fund accounts? We should be encouraging all Americans to have a fund set up for the unexpected. For every dollar saved up to a set limit (say $1000) it would be matched.
Why is an emergency fund so important? It can mean the difference between staying afloat and entering a deadly financial crisis. Half of all bankruptcies are due to medical bills, mostly from average Americans with health insurance. If you have a fund to cover a huge bank overdraft or unexpectedly large medical bills, you've just avoided a potentially huge setback.
3. Require New Hires to Complete a Budget
When a worker starts a new job, they should be required to complete a basic personal finance course before they receive their first paycheck. It could be done completely online. Don't finish the course = Don't get paid. It's simple.
The course could easily be tailored to with the new employee's salary or pay information. At the end of the course the new employee would have a basic budget set up, including their new salary.
4. Stop Watching Commercials
I don't care if you have to pay a little extra on your cable bill. Get a DVR or Tivo so you can skip commercials. Weather you realize it or not, the constant bombardment of advertisements on TV affects your behavior. If you can't skip commercials, take a lesson from my super financially savvy grandparents: Hit the Mute button.
What radical ideas do you have for how to cure our low financial literacy?
Leave your best and most radical ideas in a comment below.
People say that hindsight is 20/20, meaning that looking back we see things most clearly. Reviewing our financial transactions after they are complete can be a valuable learning experience that will help prevent you from repeating prior mistakes.
Performing a financial transaction post mortem, as I like to call it, is most useful for financed purchases that we pay off over a long period of time. The true cost of these transactions is most complex, and thus most insightful when analyzed. A typical example might be to review the cost of a car when you finally sell, donate, or have it hauled away.
The standard argument as to why buying a car is better than leasing one is that at the end of the payments, you’ll have an asset if you buy and nothing if you lease. The fact that monthly payments are higher, the asset in question is worth significantly less than when you bought it, and it continues to depreciate, makes the comparison difficult. Once you finally get rid of the car, then the true costs can be compared.
Crunching the numbers on the first car I bought went something like this: I put $2,500 down, paid a total of $19,630 in payments and ultimately traded the car in for $4,500. I owned the car for 67 months, which means that it cost $17,630 / 67 months or $263.13 per month. Had I leased the car, I would have put $2,000 down and paid $149 a month over 36 months. This route would have cost $205 per month (monthly cost plus the down payment amortized across the 36 months) and I would have to find a similar deal on another car after the lease ended.
What this analysis shows is that it would have been better for me to lease the car than to buy it. Of course, there are other factors that make the lease seem even better (maintenance I paid for that would have been included had I leased, giving me a more reliable car all the time) and some that make the lease seem worse (mileage restrictions).
I’m not saying that leasing a car is less expensive than buying one. In fact, I’ve seen cases where either option could be less expensive. The point of reviewing prior transactions is to learn from the experience. If you find yourself in a similar situation to the last purchase of a given item, you may reconsider how to approach it. Even if your situation is significantly different, as mine was when I was ready for another car, reviewing your prior transactions will make you better informed and help you make smarter decisions going forward.
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