2016-2017 has been one of the craziest years in my teaching career. My principal texted me last July to ask me to teach Personal Financial Responsibility, a course encouraged, but not required, for high school students by the state of Indiana. I accepted the challenge and immediately delved into learning as much as I could to help my students. Nearly a year later, after teaching two sections of the course, I have learned a great deal about finance and about myself. In this article, I would like to share with you what I have learned this year.
1. Teaching is a great way to learn.
This may be self-evident, yet it still surprises me every time it works. By trying to help my students have the most accurate and helpful information possible, I discovered a lot and had many of my beliefs challenged. For those of you who don’t have a few hundred students at the ready, consider keeping a blog, contributing articles to a financial news site like Seeking Alpha, or simply teaching your own children, grandchildren, siblings, nieces, or nephews. When you try to share what you know with others, you often find that you still have more to learn. You get more self-critical and question your own logic. And in the end you learn just as much as the people you teach.
2. “Investing is simple, but it’s not easy.”
This is one of many Warren Buffet quotes that I have found to be both wise and inspiring. Once you commit to taking charge of your finances and have a proven, research-based strategy applied to it, things get rolling pretty quickly. It is shocking how quickly you can pay off debt and build significant investments once you get down to business. That being said, it is still easy to get off track again, so you have to stay vigilant.
3. Your personal values are the foundation of your personal finances.
Before you can set goals, come up with strategies, and get to work, you have to evaluate what your priorities are and why. Don’t value something because it is important to other people or because society pressures you to value it. Basing financial decisions on your deepest personal priorities is the only way to have the discipline it takes to be financially responsible.
4. Everyone is different, so get to know yourself.
We all have different values, risk tolerances, strengths and weaknesses, and psychological factors. What works for you may not work for me. If you know you tend to be undisciplined, look to popular advisors like Dave Ramsey for strategies that motivate you to stay on track. If your personality is the opposite of that, you might be able to get better returns with a more mundane but mathematically superior strategy. Neither approach is wrong, as long as it is the right approach for you.
5. SMART goals are the most effective personal finance strategy.
Saying you will “save more money” or “spend less money” isn’t enough. Quit kidding yourself. If you really want to accomplish anything, get specific, and draw up a plan. Start with long-term SMART goals based on your personal values, then design intermediate-term and short-term goals that will get you there. SMART goals are Specific, Measurable, Attainable, Realistic, and Timely. If you are setting a goal that doesn’t meet all 5 of those criteria, you aren’t really setting a goal at all; you are making a wish.
6. Evaluate your personal finances like you are a business.
Give yourself a quarterly earnings report and an annual report. As you work from one report to the next, think about how you want that report to look at the end of the quarter. Have an annual shareholder’s meeting: get your immediate family together, go over your annual report, evaluate your progress toward your SMART goals, and discuss what you can do to increase the next year’s profit margins.
A fundamental investor is going to look closely at a company’s book value, its assets minus liabilities. You should know your personal net worth, your own assets minus liabilities, and evaluate whether it is on track to meet your goals. I check in on my net worth every quarter and calculate my personal changes in working capital, just like I do when evaluating a business I might invest in. If I am not making enough progress on improving my net worth, it’s time to track spending better.
7. Be cautious with debt, but don’t be terrified of it.
Whether it’s revolving debt like credit cards or installment debt like a mortgage or car loan, debt creates both risk and opportunity. Think of debt as a stray dog that wanders into your yard. You are not going to pick it up, carry it into your house, and instantly make it your best friend. However, you probably aren’t going to run back into the house terrified, lock all your doors, and peek through the blinds to see if it is still there. The sensible approach is somewhere in the middle.
You might put out some food or water, sit cautiously on the step and wait for it, check to see if it has a collar, and only pet it once both you and the dog have developed some sense of trust in each other. If you do eventually adopt it, you might get it spayed or neutered, vaccinated, microchipped, etc. Adopting a stray animal can be both risky and rewarding, so it is worth doing, but only if you do it carefully.
Debt deserves the same respect. People terrified of debt miss out on the opportunity to build a strong credit history, take advantage of credit card benefits, and purchase a house with a low-cost mortgage. People who use debt too liberally become virtually enslaved by their lenders. Either extreme is not a good place to be.
8. There is no such thing as over-emphasizing the power of compounding interest.
Many people only look at interest in the simple interest paradigm. It is crucial to examine how simple and compound interest compare when it comes to both debt and investment. One might hurry to pay off a loan that has 5% simple interest because of their anxiety about debt and ignorance about compounding interest. This person instead could invest in a retirement account that might earn 7% compounding interest and lower their income tax commitment for the year. That brings me to my next point…
9. If everyone understood opportunity cost, we would all be a lot richer and a lot happier.
That guy who thinks he’s helping the economy when he litters in the Wal-Mart parking lot because Wal-Mart has to pay an employee to clean it up… Yeah, that guy really sucks. Literally, he sucks resources out of the economy. We are all stuck cleaning up after him instead of doing things that are actually productive. And if his logic is that faulty, his own personal finances probably look as shambolic as the trail of literal trash he leaves behind him wherever he goes.
Everyone needs to understand how opportunity cost affects their personal finances and how it affects the economy as a whole. Life started to make a whole lot more sense once I started learning about economics, which leads me to my final point…
10. Every student should take at least one business, economics, or finance class in high school.
Some states, including where I teach in Indiana, at least require an economics credit to graduate from high school. Growing up in Ohio, I was not required to take any classes that covered these topics in high school, and I elected to fulfill my graduation requirements with other courses. Most of what I know about business, economics, and finance I learned from my parents, my personal research, and my mistakes. I would have behaved a lot differently from ages 16 to 30 if I had taken a personal finance class in high school.
The class that probably did the most to impact my personal finances was my 8th grade computer class. I was lucky enough to have a good teacher who showed us how to use formulas in Microsoft Excel. I added to this knowledge on my own in the following years, and I am still learning new tricks today for everything from analyzing student assessment data at work to comparing stocks, bonds, and ETFs in my personal investments. My wife and I use Google Sheets to organize our financial planning, and it makes budgeting as a team so easy!
I noticed while teaching this course that most high school students coming into it knew almost nothing about using spreadsheets. They thought of spreadsheets as a means to organize tables, not as a means to quickly make calculations, analyze financial data, etc. During my class, they learned how to create simple and compound interest calculators, organize budgets that automatically recalculate their balances when an expense changes, and use Google Finance formulas to automatically update information about securities so that they know how their allocations change as stock and ETF prices change.
If you are reading this blog, you have probably already made a commitment to educate yourself and improve your personal financial welfare. I hope you keep learning and stay vigilant with your finances! I also hope you will seek out opportunities to share your knowledge and experience with others. Investing doesn’t always have to be about beating the other guy. We can all lift ourselves and each other at the same time. When we try to explain ourselves to others, we learn a lot about ourselves.
I am grateful that my principal challenged me to teach a new class this year, and that the challenge lead me on a journey of financial exploration that included starting this blog. I look forward to continuing to learn from the online finance community and share my own knowledge with you here. Thank you for reading!