Did you take a personal finance course in high school? How about university? Depending on when you attended classes, you might have learned now-outdated information such as “how to balance a checkbook” and “why you should put your money in a high-interest savings account”.
(Remember when savings accounts used to offer, like, nine per cent interest rates? If you’re a millennial or younger, you probably don’t.)
Even if you did get the privilege of squeezing in a personal finance class between World History and English, you probably aren’t using much of the information you learned — if any of that information is still relevant.
You’d be more likely to recall the symbolism in To Kill A Mockingbird than the details of the budgeting exercise you did in Year 10 (probably on paper, and probably only including a handful of the expenses you currently manage every month).
Today’s high school graduates are in the same pickle dish.
As Timothy Ogden, managing director of the Financial Access Initiative, explains, making high school students study “financial literacy” is a waste of both time and money:
According to the Council for Economic Education, 19 [US] states now require the study of the subject as a condition for graduating from high school, up from 13 in 2011. The irony is that requiring schools to spend time and money teaching financial literacy is a worse financial decision than any that those high-schoolers are likely to make anytime soon.
Why? Two reasons.
First, the information presented in these courses is often unrealistic — that is, it has very little relevance to the financial situations and budgeting challenges today’s students will experience. To quote Ogden:
Financial literacy is often measured by whether you can correctly answer a question like, “You have $100 in a savings account paying 10 per cent interest, compounded annually. After two years, will you have a) $100, b) more than $120, or c) $120?” To borrow a joke from Bloomberg columnist Matt Levine, the correct answer is: You will have zero dollars, because anyone offering 10 per cent interest these days is a con man who is going to steal your money.
Second, teachers give this information out too far in advance. The simple budgeting worksheet you fill out in high school doesn’t really teach you how to balance your actual income and your true expenses, nor does it help you make choices such as “how to choose the best health insurance plan for your family”.
There’s too big a gap between the education and the reality — plus, the reality is much more complicated.
As Ogden puts it, the best time to educate yourself on the potential benefits and/or consequences of a financial decision is right before you make that decision.
Yes, this means that students should learn as much as they can about the pros and cons of student loans before they go to university — but they shouldn’t spend too much time studying how to evaluate different mortgage offers until they’re ready to buy a house.
This advice goes for adults, too; a young person reading about collecting a pension now will have to re-educate themselves once it actually comes time to do so. At that point, their financial situation will likely have changed, the pension rules may have changed, and they’ll have a whole new set of benefits and consequences to consider.
That doesn’t mean, of course, that students shouldn’t learn how to balance budgets, compare interest rates or evaluate fee structures. However, that type of knowledge isn’t necessarily gained in a financial literacy course. Instead, Ogden argues, students should study maths — and he has the data to prove it:
Maybe we could design financial education more closely aligned with the financial needs and choices of average Americans, and divine a way to deliver it at the exact right moment. But until we do, kids would be much better off spending more time in ordinary maths classes rather than trendy financial-education courses. One study — which also found no effect for financial education — found that additional maths courses did lead to better economic outcomes for students in adulthood, including increasing home equity by about $10,000 and lowering risk of foreclosure by about 3.5 per cent.
So if you’re an adult who wants to prepare yourself for the financial challenges of the future, focus on getting good with numbers. Learn how to identify which banks or investments offer high interest and low fees. Ask yourself whether you’ll get a better return on your dollar by putting it towards debt repayment or stashing it in an index fund.
Remember that financial-guru tips such as “pay off your smallest debt first” might be helpful, but you should always do the maths on your own.
And if you’re a parent who wants your child to make smart financial choices, suggest they take an extra maths class next year.