Tuesday, July 26, 2016

Financial Literacy 101

Young Americans typically lack numeracy and come up short on financial literacy. Parental advice gets no respect. Could the answer be third-party guidance?

A math major we know recently took a new personal finance class offered by her college. She rated it Excellent and passed along slides outlining the course.

It covers about what you would expect, with added emphasis on on topics – education loans, subsidized health insurance – of special concern to new grads. Students are introduced to basic accounting (income statement, balance sheet, net worth), banking, retirement plans, credit cards (use as charge cards only), taxes, insurance and goal setting.

Because most new grads will start out poor and in debt, the course encourages inconspicuous consumption, as advocated by Mr. Money Moustache and – new to me – the Frugalwoods.

Investing receives substantial coverage. Students are encouraged to keep it cheap and simple:  Avoid brokers. Buy mutual funds, not stocks. Buy no-load funds, preferably index funds, from the fund company. Choose funds with an expense ratio of no more than .35%.

As investors, most new grads will have little to work with. The course encourages them to look on the bright side:

"If you were to take only one thing away from this class it would be to understand the time value of money.
"Compound interest is a very powerful concept. It is the single greatest advantage that young people have over old people."


Jim Gust said...

Although I agree with the advice on mutual funds, I take exception to the "no stocks" rule. Investing in a few stocks can be more engaging than the faceless and bland mutual funds. Investing in the right stocks can be akin to winning the lottery.

JLM said...

Dull, basic index funds are the best first investment, and the best core investment. At some point I'd hope the investor would assemble a modest portfolio of stocks. But as you suggest, that's a gamble. Apple at a split-adjusted 1.50 a share was the only stock I ever encountered that looked worth buying while also offering the "margin of safety" advocated by Benjamin Graham.

JLM said...

The course included a unit on major purchases: a car, a house The math major tells me her boyfriend wants to buy a car he can't afford, so she gave him the slides to study. That's how financial literacy spreads.

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