Financial Literacy

Are We a Nation of Financial Illiterates? – Freakonomics

I am all in favor of a well-rounded education, but seriously: what good is it if high-school students learn about Flaubert, biology, and trigonometry if they don’t learn how to take care of their money?

There’s a quiz at the beginning, so that’s exciting. Experts promoting education in their field tend to come up with a long list of what makes basic proficiency. In that vein, this list of topics might be a little broad:

  1. Basics of how markets work. Things like: it is the law of demand and supply that determines prices in competitive markets, and the interest rate is the price of money.
  2. Time value of money and the working of interest compounding: Because so many payments in finance happen at different points in time, one needs to know how to compare payments. Discounting is at the basis of asset pricing. What is the price of bonds? It is the present value of its payments. Interest compounding is a fundamental concept and it requires a little bit of math. It is critically important to understand interest compounding to be able to fully appreciate the importance of starting to save young and how to borrow and handle debt.
  3. The concept of risk and the working of risk diversification and insurance: A lot of the decisions about saving and investing have to do with how to handle risk.
  4. Basic accounting: To know the net values one needs to subtract assets and liabilities, and that it makes a big difference between whether we choose market prices versus book prices.
  5. Rights and responsibilities of consumers and institutions. People need to know there is a Federal Deposit Insurance Corporation, bank deposits are safe (up to $100,000), and there is no need to line up to withdraw deposits; they should know who does and does not have fiduciary duties and what it means to use a financial advisor (you cannot sue them if the stock market plummets).

Finally a cruel shot at gym teachers:

Having the gym teacher do financial literacy education defies the purpose of having financial education in schools.

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