Why are many smart people clueless about investing/personal finance?

[Rustward]

I am having trouble figuring how to make retirement planning into a HS or college class. First day of class you could spend 5 minutes explaining LBYM, 5 more minutes talking about compounding, 5 more minutes talking about the advantages of tax deferred plans, 5 more minutes talking about the magic of employer match, 5 more minutes talking about dollar cost averaging into an assortmant of funds, 5 more minutes talking about leaving it alone till you have enough to retire. Then a quick five minute review and class dismissed. What else do you need to teach for the rest of the semester? Saving and investing basics which is all you really need for at least the first two decades of the accumulation phase really is dirt simple.

Good luck with that.
I am not sure that most people of high school age can envision ever 1) accumulating enough money to retire, or 2) ever getting older. That is just an audience that is not going to have a very good absorption rate. I sent my 19 year old great nephew a check for Christmas and found out that he doesn't even have a bank account. Had a friend who worked in an insurance agency about 12 years ago. The owner decided that all paychecks would be direct deposit only. The office was in an uproar because most did not have checking accounts. Adults. 401K participation rate: very low. In the little software company where I last w0rked the owner was not doing the 50+ catch-up deferral correctly and in the process of asking him to fix it, I found out that I was the only one doing catch-up and less than half of the employees were participating in the 401K.

 

[jollystomper]

I am having trouble figuring how to make retirement planning into a HS or college class. First day of class you could spend 5 minutes explaining LBYM, 5 more minutes talking about compounding, 5 more minutes talking about the advantages of tax deferred plans, 5 more minutes talking about the magic of employer match, 5 more minutes talking about dollar cost averaging into an assortmant of funds, 5 more minutes talking about leaving it alone till you have enough to retire. Then a quick five minute review and class dismissed. What else do you need to teach for the rest of the semester? Saving and investing basics which is all you really need for at least the first two decades of the accumulation phase really is dirt simple.

I actually think it is easy. In addition to talking about it, run a game, case study, or simulation to reinforce those principles. You could have at least one class day devoted to each of those topics. You could add in additional topics as well, again giving the class "hands-on" to reinforce the concepts. In fact, you've given me an idea for a post-ER activity...

 

[Arifriekinel]

I am having trouble figuring how to make retirement planning into a HS or college class. First day of class you could spend 5 minutes explaining LBYM, 5 more minutes talking about compounding, 5 more minutes talking about the advantages of tax deferred plans, 5 more minutes talking about the magic of employer match, 5 more minutes talking about dollar cost averaging into an assortmant of funds, 5 more minutes talking about leaving it alone till you have enough to retire. Then a quick five minute review and class dismissed. What else do you need to teach for the rest of the semester? Saving and investing basics which is all you really need for at least the first two decades of the accumulation phase really is dirt simple.

I mentioned before that we were required to take two financial classes in high school called Keystone and Capstone.

In Keystone, which you took freshman year, they mostly started off teaching us about workplace savings. They did an overview at first, then taught us how to get certain jobs, which degrees or fields paid which amounts, and then taught us about benefits and how they can help you save, like health plans, pensions, 401ks, and other work-related things. Then we spent some time on the bank accounts you should have as a working individual. We went pretty in depth, so that took a decent amount of the class time if I'm remembering correctly. We did a decent amount on savings out of work as well, learning about IRAs, stocks, and other investment vehicles before moving onto loan management. There we learned about building credit safely, taking responsible loans for your car, mortgage, and business. Entrepreneurship and individualism are really pushed for our generation, so managing your own business finances were also taught during that time.

Then in Capstone during senior year, we spent a short time reviewing the benefits you can get at certain jobs and varying degrees, and spent a lot more time on investment knowledge for the first semester. For Freshmen, instead of placing it in such a far away concept, they really just pushed the idea that your money will grow if you invest it wisely. Senior year they put it in the general context of retirement accounts, putting it away and not touching it. We also spent time looking at car and mortgage loans as investments rather than just money you have to spend. Elective economics, which I never took, discussed it in more detail, but at this point the class taught us about good times to buy and sell in the housing market, and treating your property like an asset.

We learned a few more things here and there, mostly about taxes, but that was split into the affect each lesson would have on your taxes (Self-employed, first-time homebuyer, ROTH vs traditional, etc) but those were the general standards and ideas we covered as a high school class. For reference, I am 19 and graduated in 2011, so the lessons are probably still what is employed in our schools here today.

 

[Midpack]

I am having trouble figuring how to make retirement planning into a HS or college class.

Good luck with that.

The suggestion was for a Personal Finance course to provide a foundation, not retirement planning for HS or college. From another thread...

I don't think anyone was proposing kids should study retirement planning, asset allocation or the mechanics of the stock market. To me personal finance is topics like:

Wage income and occupations
Expenses and budgets
Taxes
Credit cards
Loans and banks
Savings and savings instruments
Life, home and auto insurance
Buying a home
Basic investing
Basic economics

I took a college level elective in Personal Finance, easily filled a semester. And it won't soak in with some students, but that's true of any course. Some kids aren't exactly riveted in math, science, history, English classes - but they're required. And several people have suggested education is a root cause...

 

[kmt1972]

I do not feel it has anything to do with taking classes. It has to do with parents exposing to their children the world finite resources and trade offs. They should be showing to their children as early as possible how much they make and how the budget the money. Shielding them from this I feel really prepares another generation of poor financial planning.

 

[bUU]

I do not feel it has anything to do with taking classes. It has to do with parents exposing to their children the world finite resources and trade offs.

That only gets you so far, though. I think we need to draw a line between the folks suffering from consumer debt stemming from over-consumption and those suffering from more generalized financial weakness stemming from inadequate income to cover basic needs. What you mentioned would help the former, but not really make a difference with the latter.

 

[MichaelB]

The suggestion was for a Personal Finance course to provide a foundation, not retirement planning for HS or college. From another thread...
I took a college level elective in Personal Finance, easily filled a semester. And it won't soak in with some students, but that's true of any course. Some kids aren't exactly riveted in math, science, history, English classes - but they're required. And several people have suggested education is a root cause...

I agree with the early foundation comment. At he very least people need to be exposed to things like the time value of money, the value of saving and the need to budget. These are critical factors needed to escape lifetime poverty.

 

[nun]

I do not feel it has anything to do with taking classes. It has to do with parents exposing to their children the world finite resources and trade offs. They should be showing to their children as early as possible how much they make and how the budget the money. Shielding them from this I feel really prepares another generation of poor financial planning.

Most parents don't have the knowledge to do that and would be bad examples. In most cases if the child followed the parents' example they'd live pay check to paycheck and carry a credit card balance.

 

[MDJO]

My family: three brothers, working class parents who never invested in anything outside of a home or a bank, but always LBM. All have graduate degrees now. One brother gives everything to EJ and doesn't know anything about how he is invested, but seems to "know it all" about everything else. Other bro is slightly more interested. Both think I am a large risk-taker because I have individual stocks in addition to my mutual funds (BRKB, PFE, AEP, LLY, etc - not what you'd call a speculative portfolio). Fortunately all of us are going to be okay in retirement, but vastly different paths.

 

[Midpack]

I do not feel it has anything to do with taking classes. It has to do with parents exposing to their children the world finite resources and trade offs. They should be showing to their children as early as possible how much they make and how the budget the money. Shielding them from this I feel really prepares another generation of poor financial planning.

And if the parents are financially illiterate? In any event, both (parents teaching & a formal class) would be advantageous even if the parents can teach their kids personal finance. I'll probably get flamed, but I'd say it's more important for kids to graduate HS with some personal finance fundamentals than some of what they're already required to take...

 

[MDJO]

And if the parents are financially illiterate? In any event, both (parents teaching & a formal class) would be advantageous even if the parents can teach their kids personal finance. I'll probably get flamed, but I'd say it's more important for kids to graduate HS with some personal finance fundamentals than some of what they're already required to take...

Some schools already do this - both of our children took a personal finance class in HS - but we live in an affluent district, don't know if all schools can provide this

 

[nun]

And if the parents are financially illiterate? In any event, both (parents teaching & a formal class) would be advantageous even if the parents can teach their kids personal finance. I'll probably get flamed, but I'd say it's more important for kids to graduate HS with some personal finance fundamentals than some of what they're already required to take...

Why not "kill two birds with one stone"; do literature and finance at the same time. Just let them read David Copperfield. I remember reading it in my early teens and the character of Mr Micawber made a big impression on me.......I believe that my frugality and saving nature was greatly influenced by the example of Mr. Micawber being carted off to debtor's prison. We obviously got compound interest, geometrical progressions and linear programming in maths and I remember some examples that involved choosing the best investment given certain time dependent returns and costs.

 

[JoeWras]

No flame from me. I think it is a great idea. I have no idea what it would replace though.

I just looked at my county's HS curriculum, and there is only one personal finance elective class, that you would only take under a certain directed content group.

Instead, my state (along with 42 others) spend a lot of time "educating" us on the joys of life after winning the lottery.

And hey, if you miss the lottery, there's always getting drafted into a major league sport as a backup plan.

 

[JoeWras]

So here's the course syllabus offered in our school system for "Personal Finance"

[FONT=&quot]This course prepares students to understand economic activities and challenges of individuals and families, the role of lifestyle goals in education and career choices, procedures in a successful job search, financial forms used in independent living, and shopping options and practices for meeting consumer needs. The course also prepares students to understand consumer rights, responsibilities, and information, protect personal and family resources, and apply procedures for managing personal finances. English language arts and mathematics are reinforced. Work-based learning strategies appropriate for this course include mentorship, school-based enterprise, service learning, and job shadowing. [/FONT]

 

[ER Eddie]

I don't know, this stuff seems like common sense to me. Save money, stay out of debt, stay on a budget, put some away in case of an emergency, live below your means, put your savings in a place where it'll earn more money. I remember Dave Ramsey's line, "We give you the same advice your grandmother gave you, only we keep our teeth in." I'll go back to the motivational angle -- a lot of this stuff is common sense, readily available to anyone with even a modest amount of interest in the subject. People would just rather not exert the effort to learn and apply this stuff. It is simple conceptually, you don't need an IQ above 85 to understand most of it. But once you know it, you have to pay attention, discipline yourself, act differently than other people, buck the cultural tides, say No to yourself, delay or deny gratification, etc. -- all things that people don't like to do. I think a class would help -- more information is always good -- but in the end, I do think it's more about motivation than information. imho, of course.

 

[kmt1972]

That only gets you so far, though. I think we need to draw a line between the folks suffering from consumer debt stemming from over-consumption and those suffering from more generalized financial weakness stemming from inadequate income to cover basic needs. What you mentioned would help the former, but not really make a difference with the latter.

True. On the other hand the thread is "why are many smart people clueless about investing/personal finance?" If these people are smart then I have to assume from a correlation point of view their parents are also likely to be smart and have higher income than normal. I agree that if there is a lack of resources and no prospects of increasing them no amount of financial knowledge will help.

 

[Arifriekinel]

True. On the other hand the thread is "why are many smart people clueless about investing/personal finance?" If these people are smart then I have to assume from a correlation point of view their parents are also likely to be smart and have higher income than normal. I agree that if there is a lack of resources and no prospects of increasing them no amount of financial knowledge will help.

Personal experience, me and one of my brothers have always tested and been considered very well above average, but growing up, we didn't have much money at all, though I think it was a result of so many kids around and my mother being so young more than a lack of intelligence on my mom's side. We got no financial education from her. I watched her bounce check after check out of necessity. When she got a better job, she managed her finances well and these occurrences stopped, but we never talked about how.

Coming out of it, I'm the saver. I share an apartment with my older brother, age 21, who rarely saves any money. I try and push him to even put $20 a month into an IRA while we're so young, but he doesn't seem interested.

I'm not sure how my younger siblings will be. They have different fathers than us, so there would be that influence we never had, but they only visit them periodically. Right now they're too young for me to guess how they'll be with finances, only time'll tell.

 

[mickeyd]

My friends who love to exercise are pretty fit. I don't enjoy exercise, and I'm not very fit. I am smart enough to understand the benefits of exercise, but I am still not motivated to take sufficient action.


SIS

I can relate to that idea SIS. I have always been a LBYMer (have said in the past that I have been LBYMing before I knew how to spell LBYM) so saving/investing has been a no-brainer. But I have always hated to exercise/run distances etc. Several years ago I began to have health issues and decided that a regular exercise program would be to MY benefit in the long term. Wanting to be healthy for whatever time I have left on this earth, I began to work out regularly.

I now exercise M-F for about 1-2 hours a day and have been doing so for the last 8 years. I still don't particularly like to exercise/run/walk, but I decided to do so every weekday and will continue as long as I live. I guess I just got motivated.

 

[jon-nyc]

Dickens has a lot to answer for this as Chrismas Carol has forever given us Scrooge and made it a bad thing to be concerned about money unless yo spread it around and spend it.

In his defense, he also gave us Wilkins Macawber, and perhaps the best prescription for LBYM in all literature:


"Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

 

[nun]

True. On the other hand the thread is "why are many smart people clueless about investing/personal finance?" If these people are smart then I have to assume from a correlation point of view their parents are also likely to be smart and have higher income than normal.

Assumptions are often wrong

 

[nun]

In his defense, he also gave us Wilkins Macawber, and perhaps the best prescription for LBYM in all literature:

"Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

Yea he did and the Micawber Principle is the foundation of my financial philosophy. But Scrooge is a cultural touchstone, everyone knows him. Very few have heard of Mr. Micawber. So that well known portrait of the dangers of being careful with money is just another way our culture discourages saving.

 

[Olbidness]

n

I now exercise M-F for about 1-2 hours a day and have been doing so for the last 8 years. I still don't particularly like to exercise/run/walk, but I decided to do so every weekday and will continue as long as I live. I guess I just got motivated.

I started a exercise routine about 2 years ago. I Also started taking a more active role in improving my health. I see it a normal outgrowth of the disipline I use to maintain my financial health. Once I felt how good it feels to have control of one aspect of my life I use some of the same tools in other areas.


The first wealth is health. Emerson

 

[Shanky]

n

I started a exercise routine about 2 years ago. I Also started taking a more active role in improving my health. I see it a normal outgrowth of the disipline I use to maintain my financial health. Once I felt how good it feels to have control of one aspect of my life I use some of the same tools in other areas.


The first wealth is health. Emerson

Interesting since both saving and fitness have an element of self discipline. But..... Anecdotally, there seems to be very little correlation between physical fitness and financial fitness.

Many unfit folks are that way because they are workaholics, who have little interests outside of work, so they tend to have high earnings and relatively low spending. I have known many very fit folks who are poor savers and very poor earners. I guess my point is that "self discipline" is only a component of financial "sense" and a small one at that. At the point income exceeds someone's "perceived" needs, savings or philanthropy is the result. Some people have very low needs or very high incomes.

 

[Beryl]

Interesting since both saving and fitness have an element of self discipline. But..... Anecdotally, there seems to be very little correlation between physical fitness and financial fitness.

Many unfit folks are that way because they are workaholics, who have little interests outside of work, so they tend to have high earnings and relatively low spending. I have known many very fit folks who are poor savers and very poor earners. I guess my point is that "self discipline" is only a component of financial "sense" and a small one at that. At the point income exceeds someone's "perceived" needs, savings or philanthropy is the result. Some people have very low needs or very high incomes.

I agree despite Suze Orman's claim that they are correlated. I know too many fit folks to are financial dullards.

 

[Malcolm2]

Interesting replies. It seems so far the whys include:

• Lack of (personal finance/investing) education
• Ability and interest are not necessarily correlated
• Simple 'keeping up with the Joneses' is a (much) higher priority
• [edit add]Some people plan to work as long as they can, retiring isn't a priority (yet)

If I missed another, it's unintentional.

I think the first criteria that cannot be over-emphasized is personal discipline. This must be number 1.

Without personal discipline in your life, it is hard to think beyond what you want today and what you need to do to secure my future. Without that it may be hard or impossible to decide at age 30 to take the 15 year mortgage instead of the 30 (or 40 year!). Without that is may be hard to insist that our kids learn these skills at an early age, and to lead them by example. Without that it is hard to resist 'tapping' our retirement accounts for a variety of reasons. Without that it is unlikely we will self-educate ourselves to questions fees, avoid chasing the next hot stock tip, or blindly expect to survive on Social Security.

A previous poster mentioned that personal discipline in physical fitness is not correlated to financial fitness. I agree, but think it should be looked at in a different way. There is overall personal discipline, and there is the type that is localized. Many have localized (i.e. physical fitness, not to take drugs, or alcohol or food to excess), but lack _overall discipline_. Overall discipline means you place your _wants_ in a secondary position behind your overall life plan. Most would agree that physical fitness and financial fitness are good goals. Some people have issues with any sort if internal discipline, and in this way those that have at least physical fitness discipline know what it takes.

Also, I wish to add that overall and financial discipline is not the same thing as being frugal. If you must be frugal by necessity, ok, but to be simply dramatically frugal without the need to be is not the same thing as personal discipline. We all have only one life, and should enjoy it. Doing so however requires personal discipline to achieve those goals for yourself and your family.