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The world of personal finance can be confusing, but it doesn’t have to be. One of the biggest reasons for struggles in personal finance is it’s not often taught in school. Unless young people are lucky enough to learn about managing money from their family, they are likely to start their financial lives with misinformation and a lack of knowledge that can cost thousands of dollars and mistakes that can take years to fix.
Here are five personal finance classes that should be part of the high school curriculum to teach young people how to manage when they get out on their own.
Intro to Bank Accounts
How do checking and savings accounts work? Bank accounts lie at the center of our financial lives, so understanding how they work is vital for long-term financial success.
A checking account is your primary bank account for daily needs. This should be where paychecks and other income are deposited. Bills and other monthly expenses should be drawn from this account, not savings. Personal checking accounts generally offer unlimited transactions but little if any interest, so you should think of this account as an active account, not a savings account.
A savings account, on the other hand, offers unlimited deposits but a limited number of withdrawals per month. Federal Reserve Regulation D limits the number of withdrawals to six per month. However, thanks to the long-term nature of savings account, they also offer interest which is a great way to encourage you to save more.
Other accounts like CDs (certificate of deposit) and money market savings should fall into the curriculum too. With a CD, you lock your savings away for a specific period of time, for example 6 months, 1 year or 3 years. The longer you are willing to lock your funds away in a CD, the higher interest rate.
Money market accounts are a special type of savings account that earn more interest than a regular savings account. You can withdraw from a money market account at any time, so the interest rate is lower than a CD. However, to get that higher interest rate compared to a regular savings account, you typically need to keep a higher minimum balance.
Interest 101
Albert Einstein is famously quoted as saying “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” It is a little unclear if Einstein actually said this, but the concept is important nonetheless.
When you put money into savings, investments and other income-generating assets, you can earn more money while you sleep. However, the same is true of expenses such as credit cards, mortgages and other loans that accrue interest that you will need to pay.
Every student should graduate from high school knowing how compound interest works. Building on what we learn about percentages by covering how loans and interest works could be a huge help. A small misstep when young can lead to tens of thousands of dollars in additional costs over the years from credit card, mortgage or other interest debt.
Credit and Credit Cards Lab
Credit cards are one of the biggest sources of trouble for college students and young adults. When walking around campus, you may come across someone offering you a free pizza or t-shirt in exchange for signing up for a new credit card. If you make purchases with your shiny new credit card and do not pay it back in full at the end of the month, you will likely owe enough interest to have bought yourself more than a few pizzas.
Credit reports are like a transcript for credit account history. And your credit score is like your GPA. Making consistent on-time payments and using credit responsibly will increase your credit score. Racking up big balances and missing payments will cause your score to drop. A good credit score can help you buy a home, get approved for other types of loans and ensures you get the best interest rates possible on new credit accounts.
While it may feel like free money when you swipe your credit card, remember you have to eventually pay it all back, plus interest. Credit cards can be used as tools to help you reach a goal. But if you ignore or neglect them, it can cost you big time. If you pay off your credit cards in full every month, you will never owe interest.
Investing, Saving and Retirement Planning
While the Interest 101 class explains how interest rates work when it comes to savings and investments, students need to know a heck of a lot more when it comes to saving and investing strategies. Otherwise, it is easy to ignore or make costly mistakes when choosing investments.
More than two thirds of Americans have less than $1,000 in savings. And about a third have nothing in savings, according to a GoBankingRates survey. This means most American families could not weather a financial emergency without taking on debt, if they could make it through at all.
Retirement savings offer an equally gloomy picture, with 29 percent of households 55 and older having no retirement savings, according to the Government Accountability Office. In a post-pension era, saving for your own retirement is vital, and graduates need to understand this important concept.
Insurance 101
Almost all states require drivers have auto insurance, but that is just the start of protecting yourself and your family from the unexpected. Homeowner’s insurance, renter’s insurance and life insurance are important products that most Americans should buy. However, going without life and renter’s insurance is all too common.
Term life insurance is surprisingly affordable for a huge benefit, but few know the difference between term and whole life, or could even tell you how life insurance works. While most adults own life insurance, about half have insufficient coverage for their needs. If you are worried about your own life insurance, get a free, no-obligation quote today to find an affordable policy for your family.
Life insurance, along with auto and home insurance and other policies should not be guesswork. Calculate your needs to find the best insurance policy for your needs at the best possible rate.
The Golden Rule of Personal Finance
It’s never too late to learn, even if you graduated high school without a financial education. The first thing is to keep in mind the Golden Rule of Personal Finance: spend less than you earn.
If you consistently spend less than you earn, you should have leftover cash in your checking account at the end of each month. Use that cash to pay off debt, build an emergency fund, boost retirement savings and meet other financial needs and goals. Get educated and build a plan to make your money work for you.
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