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Financial Education: Money Talk Hits a Sore Spot

posted by Nathalie Martin

Money is a touchy subject. No matter how much you try to make discussions about how to preserve it, how much importance to place on it, etc, value neutral and nonjudgmental, people have issues.

I spend most of my free time these days trying to keep people off economic death row. While some of this work involves reviving a workable bankruptcy system, much more relates to prevention through financial education. I also believe that any financial education class must be very carefully crafted to fit the specific audience. Age and income are huge variables, so you can’t just teach a cookie cutter curriculum.

I teach a two-day financial literacy class to UNM undergrads and law students, and would love to share the details with anyone out there who is interested. Here is a start: http://lawschool.unm.edu/faculty/martin/fl-1.php.  Karen Gross gave me the idea and I have built on it. But, this year I was asked to do one hour on the topic for first year students, in part because they are in such terrible financial condition. Because the class in which this is taught is comprised of 9 sub-sections, I had the pleasure of having eight of my colleagues attend this class. We started with basic compounding interest hypos, including one exercise in which one person gave up one $4.50 latte a day for 10 years, saved, $18,000, invested it at 8% and held it for 30 years, ending up with over $150,000! We then saw the math moving in the other direction with credit card debts, learned a bit about credit reporting and scoring, a bit about bad car deals, and then broke up into groups to think of ways to economize. The students enjoyed this last part, even if some of the suggestions (selling plasma, getting paid to be in drug tests, finding a sugar mama/daddy,  or giving up long-distance relationships), were a bit extreme.

Students enjoyed the class but many of my colleagues had issues. "Wasn't it unfair to tell students they could reasonably expect to earn 8% on investments?" Um, no. "Don’t they need to use credit cards to build credit?" Uh….not really, no. "What is wrong with a car lease if you’ll be getting a new car every two years anyway?" "And expensive car payments? So what? Why does the total cost of interest matter if on a cash flow basis, you are fine. Isn’t it all about the cash flow?" These last two are stumpers all right. I guess I am both greedier and simpler than most people. I like to drive it till it dies, earn interest, not pay interest, etc.

This does tell you though that it is hard to listen to advice about money that is geared to a different crowd. Cash flow is the issue if retirement is fully funded and the kids are out of college. Otherwise, I can't imagine how a little extra dough lying around could be a bad thing…

Comments, anyone? What information would be useful in a class like this?

Comments

I had to chuckle reading your post. This is something you might want to expand on for a future class that includes behavioral economics. It certainly appears that your educated peers were doing more "justification" of their beliefs than assessing the facts. And that is normal.

The information you gave was good and on-target. You were only being rebuffed because your peers were trying to justify their own choices. The car lease situation is a good one. I don't particularly have an issue with someone taking out a car lease as long as they are fully aware of the end of term open liability to charges and that they understand that it is nothing more than long term rent. Personally, I always buy used cars, but that's my choice.

There is a fine line between compulsive abstinence and enjoying life. I figure the best we can do is present facts, enlighten and allow people to make their own choices that fit within their budgets.

For example, I've watched credit counselors chastise people for cable TV packages but if that is where someone finds their little port of entertainment and happiness and has made adjustments in other parts of their financial life, why not let people have a little fun.

Financial prudence should not be about depravation, just choices. If you buy your lunch out everyday and things are getting financially tight, consider buying lunch out twice a week instead.

Keep up the good work you are on the right path.

Steve

P.S. Don't be surprised if your colleagues individually pull you aside for a little advice. You've planted some seeds that will either germinate and grow or die in an intellectual drought.

Nathalie, your posting brought to mind the conversations I have had with several colleagues about affinity cards and to which I alluded in a recent post of my own. "Sure," they'll tell me, "affinity cards are a bad deal for most people, but I'm not like most people. I always pay all my credit cards on time and don't purchase any more than I would without the affinity card." They apparently don't fall for the same cognitive biases that everyone else falls for. I've thought about writing an article entitled, "The Exceptional Professoriate" but fear the irony would be lost.

If you're doing your latte example with a 40-year horizon and showing only nominal dollars, you're not really teaching financial literacy. Financial conservatism, sure - and no doubt that's valuable - but literacy? Are you telling your students that their latte will cost $4.50 in 40 years?

Bob, I can see you know where I am coming from. Your story is hilarious! Hope none of these people are reading...... :)

And Steve, you have raised the critical issue for those who have spending under control. The point is not to become financially anorexic, but to find that sweet spot between frugality and excess. Enjoying life, without being stressed out by debt and filling up our landfills. What is it that really brings people happiness? For people at the low end, TV is critical as there may not be much other affordable entertainment. For a lot of the rest of us, buying more means speding more time taking care of all of it, and time is the one thing we can't really manufacture.

And as for those $4.50 lattes, the mistake you point out is one of many small innacuracies in the example but the example is still instructive. Just to clarify, the hypo involves ONLY giivng up the lattes for 10 years and drinking them again from then on, so we are not pricing anything 40 years from now. My example underpriced future lattes to be sure, but if a student were to save the price of a latte a day, say 9 years from now, she'd be investing FAR more than what I reported and thus making much much more on the 30 year investment. The point is that this is not a huge sacrifice, and no matter how you do the math, the savings really add up.

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