Friday, May 14, 2010
I'm consistently struck at the disconnect between "what's supposed to be true" and "the real world."
For example, if you use the 'retirement planners' online, you'll routinely see statements like "assuming an 8 percent return..." Over the past ten years, the average return on the IRA I opened in 1998 has been...wait for it...negative. Not just after inflation, either; literally (or 'nominally') negative. One could argue that twelve years is a small sample, but it's a significant fraction of the average adult's working life, and I would have been better off putting the money in a coffee can. So telling young people that stocks always pay off over the long term just seems very...twentieth century. Assuming an 8 percent annual return, I'd have at least twice as much as I actually have. That must be a lovely world.
I grew up hearing that renting was throwing your money away. That position was sustainable until about 2003.
I've heard and read that you should "pay yourself first" and set aside, say, ten percent of income in savings. But what does that actually mean? Is that ten percent after the retirement deduction? (If so, we're really talking twenty percent.) And when you're just starting out and making next to nothing, just how realistic is that? Do you know what young men are charged for car insurance?
It's certainly true that I've seen students make some bizarre economic decisions. A few years ago, my office had a particularly great work-study student who helped my administrative assistant with various routine tasks. When she graduated, we gave her fifty bucks and a card. She responded "you guys are great! Now I can go tanning!"
At the risk of being the crotchety old guy, isn't sunlight free?
I've heard students refer to financial aid money as if it were all grants, even though it's frequently borrowed. That worries me, since they'll be hit with surprisingly large loan payments while making entry-level money. And failure to grasp the idea of compound interest will make you a patsy for Visa.
Although I like to think I'm a relatively educated person, many of my financial lessons have been accidental. A passing comment to my brother-in-law led to the lesson that putting two married people's cars on a combined insurance policy is dramatically cheaper than carrying two separate policies. I could have gone years without knowing that. And that's without even mentioning the depression caused by pairing the concepts of 'opportunity cost' and 'graduate school.'
Real world economics should acknowledge that many of the Sound Financial Principles we've been taught are either outmoded or irrelevant, but the new rules are hard to pin down.
If you had a chance to teach a financial literacy course to youngish college students, what would you focus on?