# Teaching Personal Finance in School

A dyed red-haired rapper criticizes the public education system in a viral YouTube video, “Don’t Stay in School“.  Looking back at my education, I remember learning the capitals of the states for no apparent reason.  Other than watching Jeopardy, I’ve never used this information.  Now my children are also learning the capitols, again for no reason.  With search engines this information is even more useless than when I was in school.

If we replace the teaching of useless and pointless things like this, or maybe the learning of the three types of rocks (igneous, sedimentary, and metamorphic), we would have time to teach children a lot of really important things for their lives like personal finance.  Much of the information about personal finance that keeps people from making bad decisions was not taught to their parents, which is one reason we see so many people buying new cars every three years or running up debt on 19% interest credit cards.  Here are some lessons that should be taught in schools instead of, say, the types of clouds.

The rule of 72.  If you take 72 and divide by an interest rate, that will tell you how long it will take an investment to double at that rate.  For example, if you put your money into a CD paying 4% interest, you will double your money about every 72/4 = 15.5 years.  Double that rate to 8% by investing in bonds and you’ll double your money about every 72/8 = nine years.  You get a better return because you’re taking on a little more risk since the bond issuer could default.  Go into stocks, which have a variable return, but one that averages around 12% annualized if you hold them for at least 20 years and you will double your money every six years or so.  If you invest your money for 30 years, \$1000 will turn into \$4,000 in bank CDs, \$8,000 in bonds, and \$32,000 in stocks.  That’s something worth learning.

The rule of 72 works the other way as well.  If you are taking out a home mortgage at 8%, you will pay in interest about every nine years about the amount of principle that is not paid off during that time. Because you pay back very little of the principle during the first two-thirds of a mortgage, if you have a \$200,000 30-year mortgage, you’ll pay about \$160,000 in interest during the first nine years and still owe about \$180,000 on the loan, as if your payments just vanished.  Over the life of the loan, you’ll pay about \$530,000 for that \$200,000 mortgage.  If you use the rule of 72 and assume you’ll owe about the full loan value for the first 18 years and then a little over half of the mortgage value for the last twelve years or so, you would estimate paying \$200,000 for the first and second nine-year period, then a little of \$100,000 for the last 12 year period, which is pretty close to the \$530,000 paid.  If you get a 15-year loan instead, you could estimate about \$200,000 for the first nine years and then a bit more than \$100,000 for the next six years.  The true amount you’d pay would be about \$344,000 – fairly close to your estimate of a bit more than \$300,000.

Note if you keep a credit card balance and are paying 15% interest, the rule of 72 tells you that you’ll be paying the full value of the balance in interest every five years.  If you keep a \$10,000 balance on your cards, you’ll be paying \$10,000 every five years or about \$2,000 per year in interest.  That is a paycheck or two for many people, meaning you’re working a month of your life per year just to pay interest on your credit cards.  Maybe if people learned this in school, they would be more leery of whipping out the plastic for a vacation.

The power of extra payments.  And speaking of home mortgages, here’s a little trick that is not taught in school that would be very valuable.  If you look at your mortgage pay-off plan, you can determine how many payments you could remove from the loan by making an extra payment.  For example, in year one of a 30-year loan on \$200,000 at 4% interest, you’ll be paying about \$3,500 in principle and \$8,000 in interest.  Monthly this is about \$300 in principle and \$670 in interest each month, for a payment of about \$970 per month.  If you paid an extra \$300 in a month (the amount of the principle paid each month), you would be eliminating one mortgage payment, saving yourself \$970.  Pay an extra payment, and you’re eliminating about three payments, or \$3,000.  If you make an extra payment during the last year of the loan, you’d only be saving about \$60 since at that point your payments are going mainly to principle.  By looking at the amount of principle you are paying off each month, you can see how powerful making extra payments is.  Early in the loan (and the higher the interest rate you’re paying), extra payments are very powerful and well worth the money.  Later on, not so much.  Maybe if people knew this, they would try to hit the loans hard during the first several years and save hundreds of thousands of dollars.  People often get serious about paying off their loan at the end, but by that point, most of the damage has been done any you might be better off to invest the money.

Small amounts add up.  Let’s say you run by Starbucks every working morning and drop \$6 on a sugary coffee drink.  If instead you made a cup of coffee at home for essentially free (compared to \$6 per cup) and invested the money, you would be investing about \$150 per month or \$1,800 per year.  Invested in mutual funds, making 10% annualized over 30 years, you’ll have about \$330,000.  That is enough to send a child or two (or three) to college.  So, just by changing your morning routine and making expensive coffee drinks an occasional luxury rather than a daily routine, you can pay for college.  Imagine how different things would be if almost everyone did this.

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