by Susan Lyon
We were fortunate enough to speak this week with two experts who have dedicated their careers to educating young people about the advantages of smart financial planning and investing early on. We sat down with two finance professors, Tahira K. Hira of Iowa State University and Bryan Sudweeks of BYU’s Marriott School of Business, to hash out the details of what a well-rounded finance education really looks like.
Their message was crystal clear: Where school ends and life begins, it’s critical for young adults to have role models around them to teach them how to be smart with their money. We as a society have to teach the lessons that we also live by.
The takeaway? Schools aren’t enough. To fix society, we must start at home.
While both shared several key financial recommendations in common – start saving early, for instance – one of the strongest tools of personal finance they both argued for was for something we can’t just learn at school: the power of parenting and role modeling in financial decision-making. The nation’s personal finance experts overwhelmingly agree that some level of personal finance education should be made mandatory in high school or even sooner, but this values-based approach to personal finance argues that the education must come even sooner, and outside the classroom.
We asked the experts: In an age when financial illiteracy is rampant, how do we begin to change that?
- Professor Bryan Sudweeks, Professor of Personal Finance at BYU’s Marriott School, explains why personal financial education must start with the parents for basic investing principles to be accepted:
My purpose in life is to help people get their financial houses in order, and after 13 years of asset management I’ve been able to move to university teaching, as well as run the free online personal finance resource for public use.
We Need to Get the Parents On Board:
These resources are important, but at a societal level, financial education responsibility lies with the parents: how can you teach something you yourself are not comfortable with doing? People who experienced the Great Depression lived on to tell the stories to their children and pass along the lessons learned along the way. In contrast, our own parents did not: these days, just looking at the national debt figures, you can see we are in trouble.
If parents can’t defer consumption to make smart saving decisions, how can they teach their children to make it a priority? While mandatory education in schools is a good start, we’ve got to get parents to understand personal finance first.
Curbing Misunderstanding of Basic Investing Principles:
Young adults don’t understand the basic investment principles out there today – they are busy listening to hype coming from the media and Wall Street. The principles behind budgets, portfolios, low cost options, and long term investing are lost. People believe they can time the market, but they fail time and time again.
Principles to live by:
- Save twenty cents of each dollar
- Live scrupulously early on to reach your goals (set goals!)
- Learn to defer your wants
- Know what makes a good mutual fund, a good budget, and a good portfolio
The challenge? To start. Once you start, the resources are out there – you’ve just got to use them. We’ve got to break the cycle that the entitlement generation is stuck in by holding people accountable for their actions and breaking bad habits early on.
- Tahira K. Hira, PhD, Professor of Personal Finance and Senior Policy Advisor for the President at Iowa State University, lays out a universal plan for financial security guided by a moral barometer:
I spoke at a conference last week on two things: First, who is in charge of the collective plight of American consumers’ financial wellbeing? To the first question, let me tell you: no one is in charge of making sure the greater system is functioning well. Second, what are the rules of investment that young adults need to follow? Let me say that before any individual starts picking stocks or investing their money, there are basic principles behind investing that they need to fully grasp.
Putting the ‘Person’ Back into ‘Personal Finance’
Having been in the personal finance world for three decades before personal finance was ‘cool,’ I believe that we need to put the ‘person’ back into personal finance, not just focusing on the numbers. A lot of the educational materials out there ignore this component that focuses on the individual and how they come to interact with their finances. It is up to the individual to create a plan and stick with it. They need to learn how to overcome the external factors that influence their financial wellbeing, such as the financial crisis, devastating as it was for so many Americans.
The Role of the Family: Restoring Values
The role of the family is critical in passing financial values and guidelines on to children; good role models are essential, and this is fundamentally what is missing right now. The impact of morals on personal finance teaching – and the importance of the individual person’s thinking and decision-making – cannot be overestimated. We need to teach personal financial accountability to the next generation. Personal finance is fundamentally simple: we just try to make it fancy. So even if you aren’t an expert, you can listen to your gut and morals, and avoid complex financial scenarios that you do not fully understand. This barometer is what is missing in today’s society.
So What Should My Game Plan Be?
We must all come to understand the four pillars of financial security in relation to one another: income/expenses and assets/liabilities. For example, it isn’t worth making a bunch of new investments if you’re living underneath a pile of debt. There’s no investment in the world that can you get you the same high returns year after year that are as huge as the interest rates many credit cards are charging you.
It is important to gain a sense of your net income – after taxes – and then create a financial plan to reflect the real amount of money you have to spend. I recommend spending and saving something along these lines:
- 5-10%: charitable donations to the cause of your choice
- 10%: retirement savings
- 20%: ‘day after tomorrow’ savings (for travel, unexpected expenses, medical bills, and medium term needs) – I call this “pull in, pull out” money
- 60-65%: daily life expenses including rent, food, shopping, loan payments, etc.
How Do We Change Our Society to Reflect These Values?
When you look at the global financial crisis, you have to ask: how can we have good results if we keep continuing to do the wrong thing? We all know in our hearts what the right thing to do is, but we need to act on it.
Some things never change: these basic truths have been true, and will stay true, for millions of years. Though the financial instruments around us have become more complex throughout the last several years, we should still follow our most basic intuitions about money:
- Don’t spend more than you have;
- Don’t borrow for consumption, only for long term investments that you can hold onto (homes and education);
- We should build our lives the way birds build theirs: slowly yet surely.
Financial education should be taught in schools, of course, but it is a big source of confusion for kids when they are taught one thing and then they see their parents acting otherwise. Children need limits and burdens early on to help distinguish financial wants and needs as they grow up.