Note: This article was originally published on Sept. 20, 2021.
Without a Clue
When I started college, I was unaware that mutual funds existed, could not explain the difference between public and private corporations, and did not understand how banks stayed in business. For goodness' sake, they gave away money! How could banks stay solvent if they paid interest, without getting anything back in return?
My high school had failed to answer that question. It taught me how to make wooden boxes (very shoddily, in my case), as well as the basics of sports, civics, and sex. I could also have learned auto repair, typing, cooking, and sewing. Plenty of my high school's classes offered practical instruction. None, however, addressed what seemed to me the second most important item: money.
Things don't seem to have greatly changed. My former high school now has economics classes, but they emphasize theory. Meanwhile, thanks to Illinois' consumer-education graduation requirement, as well as to its large budget, the high school that is now nearest to me includes additional fare, including a consumer seminar and a class in financial management. But those classes don't quite hit the mark, either.
I propose a different path, through a course entitled “Money.” The course would fulfill a dual purpose, by showing 1) how wealth is created and 2) how personal assets should be managed. As with economics classes, Money would provide intellectual rigor by teaching fundamental calculations. However, Money would be thoroughly practical. The course would cover only material that directly affects the lives of all students, whatever their future occupations.
To put some specifics behind those generalities, Advanced Placement economics classes teach, among other items, supply/demand curves, price elasticity, monetary policy, and exchange rates. All would lie outside of Money’s scope. Some students will need to know about such topics when they are adults, but many will not. One can go quite comfortably through life, even while holding a white-collar position, being fuzzy about what drives movements in exchange rates. (Raises hand.)
Conversely, while there are various sample curricula for high school courses in financial literacy, the suggestions lack bite. They are useful "how to" guides, but because they do not present many "whys," their lessons are likely to be recalled for today's test and forgotten tomorrow. In contrast, Money would drill students in the essential financial math, including: 1) discounting future cash flows, 2) determining internal rates of return, and 3) computing compound interest.
This is how I would structure the course:
1) Business Finance
Money’s initial section might seem to contradict my claim that the course will be consistently practical, because few high school students run businesses. What’s more, many will never do so, working as adults either for somebody else’s company or in nonprofit or government sectors. However, when managing one’s own financial affairs, it’s very helpful to recognize how wealth originates. The best-informed consumers are those who understand corporate motivations.
This section establishes the groundwork for future sections. For one, it covers the time value of money, so that, unlike my younger self, students realize that when banks pay interest on their deposits, they do so not out of charity, but instead from the desire to turn a profit. This insight would be supported by teaching the discounted cash flow and internal rate of return calculations.
Understanding the time value of money not only reveals the logic behind many business practices, such as seeking up-front cash (Morningstar funded its early growth by accepting customer checks first, then publishing its research later) or outsourcing nonessential tasks, but also supports many consumer decisions.
2) Personal Decisions
This module addresses the most popular topics in today's financial literacy classes: budgeting, credit card debt, mortgages, and so forth. It also provides, at a very high level, the investment basics of stocks, bonds, and cash. The Personal Decisions section teaches students how to spend appropriately, given their incomes, as well as how to invest the excess, should they accumulate some.
Because the students will have learned how to conduct discounted cash flow analysis, they will be able to evaluate personal-finance services. They can calculate the benefit of zero-percentage automobile financing, as well as the true cost of rental furniture. They will also be able to appreciate the fundamental reason to own stocks: not because of the hope that somebody else will wish to pay more, but instead because of the inexorable math that underlies growth in corporate profitability.
There will be no stock market contest! The last thing today’s students need is reinforcement of the idea that buying equities is a gamble, that the goal of the gamble is to outgain others, and that the best way to achieve the goal is to assume more risk than the other competitors. For that “lesson,” they can download from thousands of gaming or sports-betting smartphone apps.
3) Behavioral Issues
People often make irrational decisions. Money's third section addresses such mistakes. Inevitably, even the most diligent students will botch some of their financial choices, perhaps because they become overconfident, fall prey to the sunk cost fallacy, or adopt a herd mentality. Such is human nature. However, those who have been trained to recognize behavioral biases will likely make fewer such errors, thereby enjoying greater financial success.
Once again, Money will examine the issue from both perspectives. After all, one party's loss tends to be another party's gain. The course will illustrate how companies appeal to consumers' behavioral biases through the products and services that they create, how they price their offerings, and their advertising. And not just companies. Money will look particularly closely at state-sponsored lottery programs and how they capitalize on the lottery effect.
4) The Lifecycle
Money’s fourth and final section will provide students with a high-level view of the conventional consumer lifecycle, beginning with their unpaid school days, proceeding through their working careers (including evaluation of how salaries vary by education, occupation, and age), and finally into retirement. While it is unrealistic to expect teens to pay much attention to retirement planning, the Lifecycle module will introduce the topic, including the features of 401(k) plans.
As with Money's other sections, Lifecycle will be supported by a broader conceptual framework, in this case the difference between human capital—that is, the wealth that consumers obtain through working—and investment capital. Appreciating the distinction will help students to appreciate the trade-off between earning more now, and spending time and money to improve one's human capital, so that one may earn more later. (Discounted cash flow analysis can also contribute to the discussion.)
This proposal is far from a finished product. (Feel free to send your suggestions for improvement, should you have any.) However, I do firmly believe that, absent being raised in a family that understands the subject, the best way to learn about money is from a school other than the one of hard knocks.
Postscript: As many readers subsequently informed me, this curriculum is ambitious, with aspects that are better suited for a college-preparatory class than for a general requirement. Fair enough. For a broader audience, the framework could be retained, while gliding over the math.
John Rekenthaler (email@example.com) has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.