Should We Teach Personal Finance?

Two recent articles in the NYT made me ask the question, “should we be teaching personal finance in school?”  The first article chronicled one man’s loss of a $14 million inheritance; and the second article was about a former investment banker dying of cancer wishing to pass on investment lessons that he didn’t know despite years in the banking industry.  What struck me in the first case was that the man, despite having three young children, did not create college funds or a special emergency fund, but put a huge amount of the inheritance in real estate.  What struck me in the second case was that there are very few avenues to learn about life-long investment lessons and financial planning. While I think I would have been  tone deaf to most financial planning information at a young age (after all who thinks of very long term when you are a teenager?), I think there are important principles that should be conveyed to young people:

–You can’t have everything you want all the time — as a kid, my brother and I were given modest allowances and learned that if we wanted to purchase something significant, we would have to save up for it.  As a kid, I had no access to credit and couldn’t pre-purchase and then pay off the loan (interesting that I never thought about asking for that).  In the above article, the man who lost his inheritance spent a lot of his windfall on houses, cars, horses, and high monthly expenses; the market downturn may have amplified some losses, but clearly the lack of disciplined spending was at the heart of his problems.

–Diversify - it took me a while to fully appreciate this advice with respect to personal finance and investing.  I used to wonder why any one would invest in high quality bonds when specialized high risk equities had a much higher expected return.  Currently, I have my investments in a mix of bond and equity, both domestic and international.  I tend to avoid individual stocks since they are prone to too much specific company risk.

–Learn about the benefits of compound interest — if there is any argument for starting to invest at an early age, it has to be the beauty of compound interest.  If you have not worked through some of the math tables yourself to see how regular monthly savings can accumulate, I encourage you work though this exercise.

–Continue to learn and upgrade you knowledge — although my investment strategy seems simpler today than before (I tend to emphasize index funds and ETFs), this has come about from a long journey of reading, trial and error, and then more reading.  If you are starting out, I would encourage a read through bogleheads.org, an interesting forum where the broad investment philosophy tends to be fairly close to my own.

shared at this week’s Carnival of Personal Finance