Photo (cc) by Jim, the Photographer
I graduated from high school with all the core courses but just a single elective class in money management — Recordkeeping 101. As I recall, beyond showing students how to balance a checkbook, the course wasn’t particularly valuable.
Without astute parents and a natural interest in personal finance, entering the adult world with such a sparse fiscal education would have been like leading a lamb to slaughter. And, if you’ll pardon the simile, I’m sure many of my classmates met just such a financial fate.
It raises the question, in a nation founded on capitalist ideals and driven by consumer activity, of why we don’t do a better job educating our kids about money. Shouldn’t personal finance be part of a core curriculum that helps students avoid some of the more common pitfalls and promotes strategies for success?
Without such a curriculum at hand, I’ve put together a list of 10 things every high school graduate should know about money (or be willing to learn quickly):
1. Consumer debt is servitude
According to a 2010 report by the Federal Reserve, about 55 percent of the U.S. households with credit cards carried a balance. The median balance for those carrying a balance was $2,600 and the average was $7,100. Now, while that number may not seem insurmountable, imagine how it might affect the life the average debtor. What would happen if there was a job loss or an illness not covered by health insurance? What level of stress would it add to life?
Debt, especially unsecured consumer debt, is servitude. The debtor is beholden to the creditor because every day the debt remains unpaid, interest charges pile up. Over time, it’s easy to see how the unchecked use of credit can erode wealth and foreclose opportunities.
2. Financially successful people tend to live below their means
Financial success is usually the result of years of self-control, and a big part of that self-control involves living within or below your means. If every dollar that comes into your life has to go out, there’s little hope for getting ahead. Work to keep your overhead lower than your income, pocket the difference, and don’t let every bump in income mean a boost in lifestyle.
3. And they pay themselves first
Learning to pay yourself first is an important part of financial security. Direct a healthy portion of your income into an IRA, a 401(k) plan or savings account before your paycheck even hits your account. Otherwise, you’ll have to constantly fight the temptation to spend every dollar you have easy access to. Automating savings and making it an unwavering part of your routine puts the twin forces of time and compounding interest on your side.
4. Looks can be deceiving
It’s easy to access some of the trappings of wealth in our society, but it’s difficult to actually afford them. Instead of being clues to wealth, new cars, big houses, exotic vacations and designer handbags might just be signs of high debt and a precarious relationship with credit.
Don’t confuse easy access to credit with real wealth. Though it doesn’t seem nearly as sexy, real wealth is usually the product of responsible spending, maximizing the value of every dollar, and trading glamour for modesty and security.
5. Saving aggressively early may mean having to save less overall
Saving is a long-term proposition. No matter how modest the amount, starting the savings habit early pays off. A broader time horizon means more years to benefit from compounding interest, more opportunities to experience upswings in the market, more time to recover from downturns, and more time to refine your investment style.
6. Discomfort and disruption sell products
As consumers, selecting and acquiring the items that fill our basic needs is a fairly straightforward process. Advertisers discovered a long time ago that in order to keep the money flowing, we consumers needed to live in a constant state of slight discomfort and unrest — slightly dissatisfied with what we have and not sure how to distinguish a need from a want. The art and science of blurring the lines between wants and needs is what our modern advertising and marketing industries are built on.
Consumers who clue in to this reality early can (at least sometimes) rise above it and jump off the treadmill of materialism.
7. It’s important to have clear financial goals
We often go through life with financial goals that are much too broad — buy a house, save for retirement, and keep our bills paid, etc. But in order to succeed financially, those goals need a big dose of specificity and they need to be supported by smaller tactical objectives that we can work toward day by day. What kind of house suits your needs and lifestyle? What size of down payment would leave you with a comfortable mortgage? What’s your target retirement age and how much will you need to save each year to retire on time?
The answers to each of these questions translate into better defined goals that, in turn, can drive our motivation and inform our financial decision-making.
8. Popular methods of money management can have disastrous results
Looking to popular culture for cues on how to manage your money is a bad idea. After all, with seven-year car loans gaining in popularity, and the current credit card interest rate averaging 17.18 percent, it’s clear that the masses aren’t models of financial responsibility.
Instead, read websites like this one and learn from the mistakes and experience of others. To rise above the financial clutter, become a student of personal finance and critically assess the information that’s at your fingertips.
9. Buying a new car seldom makes financial sense
According to Investopedia, depreciation is the single largest factor in the total cost of ownership of a new car, accounting for a 48 percent loss over a five-year period. What’s more, depreciation can account for as much as a 20 percent loss in value the minute you sign the papers and buckle up. When you combine depreciation with financing charges, higher insurance costs and potentially higher registration fees, buying a new car usually means getting taken for a ride.
Let someone else take the depreciation hit for you; buy a good used car instead.
10. Other people will always try to decide what you can afford
From credit card companies setting your credit limit to banks determining how large a mortgage you qualify for, there’s no shortage of cooks in your financial kitchen. But don’t let the information they provide be your personal spending ceiling. Instead, decide for yourself what you can afford, what you’re comfortable with, and what your priorities are. You’ll likely find that your personal limit is much lower than others say it is. Remember, you are in charge of making your money and you decide how it gets used.
Whether you’re graduating from high school or graduating from the school of financial hard knocks, these lessons can shift the way you think about money and that’s often the first step in changing your fortunes. Remember, it’s never too late to learn a different way and embrace a lifestyle of financial literacy.
What financial advice do you have for new graduates? Share your thoughts below or comment on our Facebook page.