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Roshawn Watson recently wrote a very interesting post on why young people are avoiding investing their money in record numbers. He outlines three main reasons: fear, ignorance, and inexperience. As a (still) young person, myself, I can relate to all three of these reasons. In my own experience, ignorance has been the predominant reason why I haven’t invested my own money in the past. I can walk you through some of the silly (and stupid) things I used to believe, as well as point out the dire state of our educational system.
School doesn’t teach our kids the tools they need to succeed in life.
I remember this sort of thing being said as far back as when I was in elementary school. “Sure, knowing about the settlers is great, but why don’t kids learn about paying a bill, and late fees?” Maybe the people saying that had a point. Now, I had a crappier education than others due to a turbulent childhood and getting bumped between schools in the middle of a grade, but I had friends that had much better backgrounds and stable lives, and many of them didn’t know much more about money than I did.
Throughout my elementary and high school “career”, I did remember learning a lot of things that were useful to me later on in life: How to write proper English, how to write an essay, how to do math, solve algebraic problems, and things like that. Some classes were interesting, like science and history, and some classes were useful in enhancing our coordination, like gym (even if I wasn’t athletic at all). However, can a kid really succeed in life just knowing how to graph “y = sqrt(x)” or learning about the colonization of North America?
At least in my time, I never learned a thing about credit card interest, about inflation, the stock markets, bonds, debt, mortgages, etc… nothing. I dissected a frog and a lamb heart, but I never dissected simple household finances. I think that some schools have started including some basic material in their cirriculum, but is it enough to teach children the importance of saving away a portion of their income? Do they teach kids about the power of compounding interest, especially if they are on the receiving end of it via credit card debt?
Educational costs have been spiralling upwards, in the name of the children, but this money has gone everywhere except toward actually improving the quality of their education. I know that there are a lot of great teachers out there, even if there are bad ones as well, but the problem is the same as it is in some countries around the world: Changing the figurehead of some government isn’t enough. You need to change the system.
Investing is made out to be more complicated than it has to be.
For a young person who doesn’t know much about finance, the jargon and terminology can be overwhelming. “What the heck is an option? Derivatives? Futures contracts? Sounds boring and complicated; I’ll just see a financial advisor.”
I remember when I was in college in my early 20s, and a fellow classmate was talking to me about “buying a RRSP”. I had no idea what that meant. Did you have to go to a government office to get one? Was it a special type of mutual fund? My classmate didn’t know much more than me at the time; our ignorance was appalling! I now know that a RRSP is just a special type of tax-sheltered account, and you can put any eligible investment into it. For example, you could have a guaranteed certificate of deposit, and have that in a regular account or in a RRSP. Same investment, but the tax treatment is different.
This whole bother with RRSPs and TFSAs is just one way that our finances are made out to be more complicated than they really are, and then we feel obligated to go see a financial advisor in order to take care of it. However, seeing a financial advisor without knowing anything about finance is like swimming with sharks. The advisor working for the bank has an interest in maximizing the bank’s returns and in maximizing his own bonus and salary, not your investment returns. He will use your fear to steer you toward investments that are profitable for him, but are expensive for you.
Knowledge is power
I am a lot less ignorant these days when it comes to investing, or at least I hope I am. 🙂 I’ve made my share of stupid mistakes, such as leasing two new cars while a student. I think that to a certain extent, everyone has to learn from their own experience and their own mistakes.
At the same time, isn’t it a shame that you had a bunch of 20 somethings in college, and they didn’t know a thing about investing toward their own future? Isn’t it unfair that banks are charging such high fees to retail investors, when the evidence points shows that they would do better by using index funds? In Canada, the average mutual fund is taking 2.5% off the top. If John invests $10,000 a year, and the markets return 7%, then John should end up with about $678,000 after 25 years. If he is also paying 2.5% a year in fees, he will only end up with about $462,000. Where did the other $216,000 go? To the bank.
Roshawn is doing a great job in doing his part to spread real education, and I am optimistic for the future because young people are increasingly turning to other sources to get their information, such as online blogs. A good friend of mine jokingly calls me a “index hugger”, but even he recognizes the valuable role that index investing plays in saving individual investors hundreds of thousands of dollars in fees.
Dear reader, how can we help the young better understand the role of finances, and investing? What role can parents play here? Is it a good idea for parents to keep their kids isolated from the household finances, or can getting involved be a valuable lesson for them?
Hey Kevin,
Thanks so much for the shout out!!!!
Honestly, I’m right with you. I knew so little about personal finance during undergrad it was an embarrassment. I could have done a lot worst than I did, but I also could have done better. That’s the entire reason I blog: it puts the info out there.
2.5% off the top is a rip-off!!!!
Cheers!
It was a great blog post, and got me thinking. 🙂 2.5% is definitely a rip, especially if you have loaded fees on top of that.
I agree with everything you have said 100%. You are totally right. I wasn’t prepared to manage my finances when I moved out like I should have. It was definitely a learning curve. School is supposed to give you the knowledge you need for life and in this aspect it is failing. I wonder if this why we ended up in the recession in the first place?–lack of knowledge perhaps.
I don’t know, but it’s probably a contributing factor. I’ve learned much about finances since then, and I’m sure that I’ll learn more but we really should learn something real in school, too. We don’t expect kids to teach themselves how to write a good essay, so why do we expect them to learn finance from the hard school of life? Some lessons do need to be learned on one’s own, but it sure helps to get a leg up beforehand.
I was in the same boat as you. College didn’t teach me jack taco about personal finance. Accounting is the closest then my college had and that is hardly personal finance. I wish personal finance courses were mandatory electives instead of the other crappy selections we had
That could help, and it doesn’t even have to be boring. You can make it a scenario based on many situations that a household goes through. Hopefully if the teacher is good then something will stick and kids will remember.
I write about this constantly. As a teacher in the public school system I get so frustrated at the blank stares I receive when I try to explain that we should have a mandatory personal finance course. Honestly, investing can be so simple. If people work to get out of debt, invest 10-15% of their gross income in index funds, and just follow other basic principles, they’d be better off than 90% of the people our there! It would be so easy.
I completely agree. 10-15% of gross is about 20-30% of net in Canada, but that should still be achievable once you’re out of the education path and into the career path. You just need to scale down up-front expectations a bit. I see people going crazy with the new homes, new furniture, new cars, etc…. but if they boosted up the savings a bit they’d have a lot more freedom 10 years down the road.
I knew nothing about investing or personal finance in college. I remember that my college even offered a class in it, and I saw the listing and thought: “Sounds boring.” So I enrolled in a theater improvisation elective instead.
Fast-forward just a few years. I write about PF for a living. I think its fascinating. And I see my clueless friends make (what seems to me to be) obvious mistakes, like taking out a new credit card to pay off another credit card. Eiiii!!!!
And eventually having to consolidate the debt, right? Sigh, the mistakes we make when younger and not knowing. I think with the right teacher PF material could be quite interesting… maybe instead you could call the class “Early retirement” or “Growing rich” something like that. People might be more interested. 😉
I always wonder why some introductory course on general PF is not mandatory in high school!! why not cover credit cards, loans, fees, interest rates in an easy manner and save these students the pain of learning the hard way!
It would be a better way of teaching students how to use exponents, I bet.
Thanks so much for contributing your knowledge to the rest of us. Ditto on the above comments re: financial knowledge upon graduation = nil! I am a homeschooling mother and after years of fighting with my husband over our finances your blog has highlighted the importance of buckling down and learning some of these basic principles for myself so I can help my kids be better prepared for real life than I was!
Thanks for the comment and compliments! I am happy to hear the feedback, and my fellow bloggers are also great resources. See, this is what I love about the Internet and how it makes it easier for people to share what they’ve learned with each other.
Nice post! I’m with Mich. Seems the educational and financial industries are rigged against us! 🙂
Haha, who knows… sometimes it seems a bit that way!
Wow, I had no idea annual fees were so high in Canada. 2.5% is nuts! I agree, I even had an interest in personal finance and investing and didn’t learn any of it in my undergrad; had to do an MBA for that. I also agree investing is made out to be way more complex than it needs to be.
Yep and the big banks are very skilled at directing investors toward the more expensive products. Since regulation I’d presumably making it more difficult for low cost competitors such as Vanguard to enter the market it makes it more difficult to find alternatives. I’ve heard they nay be entering soon though which would be great!
At one of our local high school they now teach a series of classes on finances. It starts simply with how to balance your check book and goes from there. It’s so…so innovative!
If its dry its not much better than nothing. Hopefully they can get the kids engaged.
I couldn’t agree more with this post. Kids are being raised with what seems like an endless supply of money and I think their perception on money management is either skewed or non-existent.
Personally, I think personal finance should be added as a requirement for graduating high school, but I doubt that will ever happen. (At least not until it is a part of standardized testing, that is what seems to matter these days.)
If the schools can’t hack it then the parents can try, and us bloggers can fill in the gap!
I know a couple that got a free condo and car from the parents… and have been bankrolled for years. They can be fun to hang out with but they don’t really have sane expectations and no idea of the value of money. Will they be able to regenerate for their own children or teach then the right lessons? I don’t know.
I remember when I was in college in my early 20s, and a fellow classmate was talking to me about “buying a RRSP”. I had no idea what that meant. I chuckled at this one, remembering a similar instance for me at college. A classmate told us he had to leave early to catch his broker, as he had to sell some shares of Coke. I was literally amazed at the worldliness and sophistication of this guy. Really…
I’m glad I learned at least a bit since those days. 😉
I thought about this a few years after I finished college. Jeez, I can solve complex theoretical computations and write a 5-page-paper with the best of them, but balancing a checkbook? Doing my own taxes? Investing? Nope, not required, so not learned.
I think people should be educated about finance from the initial point of time.But nobody is understanding this important fact and so student of today are becoming a person in debt of tommorow.I think basic finance should be taught in schools and colleges.