Daily Links: Safe Banks, Pets, and Financial Literacy
Saturday, 26th July 2008 (by J.D.)This article is about Spare Change
“Are we a nation of financial illiterates?” asks Stephen J. Dubner over at the Freakonomics blog. Yes, he answers. And no. High school students are getting more economics education than ever before, yet their basic personal finance competency is dropping.
Dubner interviewed Annamaria Lusardi, a professor of economics at Dartmouth, about financial literacy. It’s an interesting conversation, but I think she misses the boat. What she believes are the important things for kids to know are meaningless to those who don’t understand the basics of personal finance. It’s the same dry stuff that turns people off from financial education already.
What would you teach high schoolers about financial literacy?
Meanwhile, Free Money Finance writes that his real estate agent has never met sane people before. “I had a conversation with our realtor,” he writes. “I told her that we were looking for a good house at a fair price (she agreed that our first offer was more than fair given the current market) and she said she just didn’t understand that. She told us that her other clients simply ‘found homes they loved’ and ‘would pay whatever it took to get into them.’” This is a great post.
“You must not have any pets,” somebody wrote to me recently. “You never write about them.” I have four cats, and would have more if Kris would let me. (Just call me the crazy cat man.) But because of either chance or adept “parenting”, they’ve never cost us too much money. Not everyone is so lucky. Andrea at Queercents takes a look at reducing pet costs, especially medical expenses. She provides an overview of various programs (such as pet insurance and preventative care) that can help reduce the cost of keeping your animals.
Finally, Bankrate has published their Safe & Sound ratings, which offer a quick way to determine the relative financial strength of your bank. Bank failures are uncommon in the United States, but with a couple of recent high-profile examples, people are worried. Safe & Sound offers depositors a chance to get some idea whether their bank is on solid ground. (Note: this tool seems of dubious use to me. What do you think?)
I think personal finance is best learned by doing. I’d have high schoolers research their post-college income based on the job they want, and then create a budget that includes taxes, student loan payments, food, car payments, gas, credit card payments, insurance, rent, utilities etc. I’d have them play around with that budget, adding and subtracting payments to get an idea of what their financial life might be like depending on the choices they make.
I’d also have them:
-Track their current spending
-Make short-term and long-term financial goals
-Fill out sample financial aid requests
-Research vehicle costs
-Make a grocery budget
They’d also learn about:
-Credit cards!!
-Retirement plan basics
-Basics of stocks, bonds and index funds
-Rent agreements
-The power of compounding
-Benefits (health insurance, vacation time)
-And more about credit cards!!
http://globaleconomicanalysis.blogspot.com/2008/07/dont-count-on-safe-sound-rating-of.html
Here’s some commentary about those ratings.
JD,
In regards to Bankrate’s new tool, I pulled the rankings of two local credit unions and the ratings seemed contrary. One had a Bankrate of 4 stars but had a safe and sound rating of 2. The other credit union was the flip. I would think that they would be in line.
Jon
In reference to Bankrate’s tool; I do not think it’s dubious at all. It would have been of great help to those of us affected by Netbank’s closing (or any of the other institutions that have closed lately.) Is this the only indicator people should use? No, clearly not, but it provides a good baseline to start.
We need to teach high school kids something about personal finance. There are so many kids getting out in the world that have no clue how money works.
disclosure: I am a banker, and my bank is listed as a five star bank. My job consists of making sure that we don’t ever have to worry about being closed down by regulators.
JD- The bankrate tool is actually quite good at assessing risk. Bankrate gleans numbers from the financial institution’s quarterly “State of Condition” filing with their respective examining agency (OCC, OTS, FDIC, FED, NCUA) to assess capitalization, real estate owned, etc. to give a genuine level of risk. They calculate this risk the same way that the feds do- looking at asset capitalization percentage, which is basically a fancy way of saying “how much cash do they actually have that could be used for depositor demand?” Anything less than 6% becomes troubling for regulators, and good banks usually have 8% or more. All the banks that have closed have had extremely low or even negative asset capitalization.
So basically, the bankrate tool is really good. It’s the same kind of thing that the feds will use as a basis for whether or not to close a bank.
Sorry, J.D. My dad is the crazy cat man. He has seven cats, although only one stays indoors. The others are outdoor cats who sleep in the greenhouse, which has been converted into a kitty condo of sorts.
He didn’t go looking for all of these pets, but we’re a family of suckers for stray animals.
I would teach high school age kids about spending less than you earn, compound interest, explore actual costs of living and risk and return in investing. Then I would teach them where to find good information.
Right on, JD. I’m an economics student (will graduate in May), and there’s a HUGE difference between economics literacy and personal finance literacy. I was literate in personal finance before I even went to college. I learned economics in classes and on my own, and I learned very little in my study of economics that was pertinent to basic personal finance from a low-level, How-To, day-to-day PoV.
I learned personal finance from my mom and from my boss.
Yeah, you can see how the higher level concepts apply to the day-to-day stuff once you begin to think like an economist, but such knowledge is not necessary to be successful at managing one’s finances. It’s also helpful to make informed political choices (like the stupidity that was Hillary’s plan for a gas tax hiatus).
Conflating the ideas of financial and economics literacy is dangerous and ignorant. And quite frankly, sad:
Sounds like Dubner, despite being the journalist who co-wrote Freakonomics, has never taken a college-level economics class — Econ I and II, which is what most kids will take if they take any econ at all — these classes teach nothing about personal finance, IME.
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In economics, we spend quite a bit of time dealing with the concept of choice, especially informed choice. It’s rather stupid actually. Most people will not make any decision at all if the choices are too numerous, in which case choice is a bad thing. (How many people do not contribute to a 401k simply because of the complexity in choosing which option to use?)
This is one of the reasons Apple is wildly successful: their product lineup doesn’t have 1001 options. Your ability to customize is limited, and baseline models are usually adequate for a normal person’s usage. That makes it very easy to choose.
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When I was in pharmacy school, I longed to teach a personal finance class. Most of the kids I went to school with thought that making $100K/year your first year out meant you were rich. It was sad, really. I wanted to teach a class to teach them how to be rich. We took a class on how to manage your own pharmacy, and how third-party reimbursement worked, but we never did anything with personal finance.
It’s a gimmick, albeit an interesting one. For most, their banking is protected by the FDIC, and a bank folding is mostly a non-event. (According to someone I know whose bank folded.)
I think they should talk more about finance and the ‘real world’ in school. It could be a real benefit to many children.
That could be a great idea for me one day when I am older. To create a wealth course for high school students
@Joel
I guess I should elaborate on why I find the Safe & Sound tool of dubious use. For one thing, in many cases it’s difficult to know which bank I’m trying to find a rating for. The tool lists six different Wells Fargo banks, each with different ratings. How do I know which one is mine?
I’m not doubting the tool’s accuracy. I just don’t know what I would use it for.
Questions like this would be great for school kids:
If you have a credit card with an APR of 19%, a balance of £1000 and you pay the minimum payment of 4% each month, how much interest will you pay in the first year?
Extra credit for determining the total interest paid over the lifetime of the credit card assuming you continue to pay the minimum payment.
This would be more practical but just as beneficial as learning calculus!
I like her list, but not at the “101″ level.
My one-word list:
1. Consequences - “Van Down By The River!”
2. Budgeting - zero based, pay yourself first
3. Frugality - yes it exists, wants vs. needs
4. Interest - consumer side, investing side
5. Careers - relative earnings, cost of .edu
Joel, while I don’t question the validity of what the tool is showing a consumer, I just don’t see the value of such a tool for the consumer. They’d be better of spending their time learning about personal finance than worrying over whether their bank is going to collapse tomorrow.
For most people’s use, one bank is the same as the next, if things like fees and interest rates are equal.
@Rian
I agree with you. I think that the purpose of the bankrate tool was for consumers to know the safety of their bank. And while it isn’t an issue for my generation (Z), you’d be surprised at the conversations I’ve had with some of our 80 year old customers who are genuinely concerned that their $500,000.00 CD is going to go belly up, just like their parents did during the 1930’s. And when I try to steer them elsewhere with their money, they are much more likely to address safety than rate of return. At my bank, we have received about 2 million dollars total from all of 8 customers in the last week who are genuinely concerned that the bank down the street (a much much bigger regional bank) is going to be going the way of the dinosaur in the near future.
But yes, when I personally shop for a bank, the first thing I think of are rates and fees, mostly because I don’t have near 100,000 in my account and because I know that even if the bank does go belly up that I won’t be affected.
Actually it would be more beneficial. There is little real world benefit to learning calculus for the vast majority of people going through their daily lives. There’s a reason it wasn’t invented until the 1600s. (Because we didn’t need it.)
I don’t think kids are going to listen to most personal finance advise because they don’t have any money so why should they care? If I were teaching a class on it, the first day of class I’d offer a lot of extra credit to anyone that opened up high yield savings account or an IRA. Then I’d teach about compound interest and tax-free accounts and all that after they all have a reason to care. The kids that bothered setting up an account would be much more responsive when they heard how much money they could have if they just put $10 a month into that account.
Getting started is the hardest part of personal finance so I think the focus should be on getting people to start. Once you do that, most people will take that momentum and actually learn this stuff themselves.
@Rian:
I agree with you completely. My wife and I both care about personal finance because we don’t want to become like some in our family who have declared bankrupcy and are always hurting financially. I graduated from HS 5 years ago and I did learn advanced placement physics, but I didn’t know how to balance a checkbook until I cared enough to seek out the information. This is a huge problem.
Compare that to a friend of mine who asked me last week (because I’m good with money, according to him) if it was a good idea to empty his 401k to put a downpayment on a car (he has one that’s perfectly good). He wanted a car that was faster. He’s a year older than me.
I worry about my generation.
I think the answer to teaching personal finances to high school students exists, though it’s not where most people look: it is available in “alternative education” or “adult education” centers…
I am a high school drop out (on my own since i was 17) and when i went back at 19 to get my HS diploma, the ‘economics’ course was based largely around personal finances… It included everything from balancing a check book, 401k, compound interest, credit cards, grocery shopping and unit price, budgeting, how to file a basic tax return, etc. (interesting note- when i took civics, they taught about how local taxes were used, what local officials did, and why it REALLY matters to vote, especially in local elections…)
Compared to the economics class I had at the regular high school (which was at a great school in Southern California) which basically taught me _nothing_, it was completely relevant to my situation and taught me a great deal….
it’s too bad you have to be a “bad” kid to get quality education like that… I’m now 28, have graduated from college (which i budgeted so no student loans), paid off my car, purchased a house (with 20% down!) and live debt free and below my means… in large part because of the lessons i learned in a very simple economics class designed for HS drop-outs…
I do think we are financially illiterate - although the next generation may be getting a better education on finances. I grew up with parents who were P.A.s and worked in the business posting accounts from the age of 10 on up. As an adult I’ve worked for several entrepeneurs who were so clueless I just couldn’t believe it. Imagine me (and I actually never graduated high school - took my GED) having to carefully explain to a 50 year old “businessman” that if you don’t pay your suppliers they don’t send you any more merchandise - and then you’ll lose the nice new customers who were coming in to buy that line of merchandise (collectors in this case), and if you take something on commission you have to contact the owner when you sell it and give them their part. I very much doubt he could do a bank reconcilliation - nor did he see any reason to do so. He had been born into wealth - but by the time he died, he left his kids with nothing but debt. That’s really sad considering his Dad built that wealth in one generation.
Speaking of banks - I was living in Oklahoma in the 1980s when we closed 77 banks in one year. I don’t know about big depositors, but a friend of mine who had saved all his life for college got 10 cents on the dollar for his savings - several years after the bank closed. So I can see the need for something like Bankrate’s Safe & Sound ratings. Myself - it’s the Old South in me - I don’t put all my money into any one bank or institution.
What I’d like my kids to know about personal finance when they graduate HS:
– What categories should go in a budget
– How to figure out “what you can afford”?
– Dealing with peer/ad pressure to spend
– The reasons to track money
– How interest works, both for savings/investments and for debt
– The tradeoffs between guaranteed rates of return (savings, CDs, treasuries) and investment/speculations (stock market, etc).
– How bank accounts, checking accounts, credit cards, and debit cards work, how to use them well, and how to avoid mistakes that cost money.
– What is a mortgage? What does it mean to own a house? What are the tradeoffs between owning and renting?
– Choices for paying for school
– Job vs. starting a business: pros and cons
– What kinds of careers are high-paying?
– Even you will get old or might want to stop working for pay someday. How to save for the very long term.
I know that I didn’t learn anything about personal finance in high school. When I started college, I was horrible at managing my finances. It took a lot of overdraft fees for me to start learning how to manage my finances.
I’d teach them a philosophy of money before dealing with the nuts and bolts. Which would be intended to teach them a way of thinking about money which would make them want to save and invest. Chiefly–
The main goal of TV advertisers is to teach you a gigantic lie– that the world is a friendly place which is to be trusted.
The world is not to be trusted, and savings and investments are castles, moats and bulwarks.
Money works differently at different levels.
If you try it and practice it, you can learn to control your lifestyle, be just as happy short-term spending far less, and be more happy long-term by becoming the owner of companies.