In the January/February issue of Capital at Play I used this space to discuss how consumer debt is a vehicle through which wealth is transferred, resulting in the rich getting richer and the poor getting poorer. The feedback I have received from this article has been overwhelming. Almost without exception the comments have been the same, “I never thought about it that way.”
The more I heard this, the more I realized that the culprit may be a problem I have written about extensively in the past. If large segments of the population don’t understand that interest paid on consumer debt transfers wealth from borrowers to lenders, why is this? How can so many people that naive? So I have to ask, “Could the problem be the failure of our educational system to teach basic financial literacy?”
When I attended public school, more years ago than I like to admit, we learned how to balance a checking account, pay bills, prepare a budget, amortize a loan and many other basic fundamentals of financial literacy that everyone needs to know whether you plan to be a ditch digger or a doctor. I started learning these basic fundamentals in elementary and middle school. Things got a bit more sophisticated by high school, but not a lot. The reason is basic financial literacy is not rocket science. Maybe that’s why teaching it has gradually disappeared from the public school curriculum since we started sending rockets into space. Now we turn out students who can plot the course of a rocket to the moon, but they can’t balance their checking account.
I remember a teacher telling the students to never spend more than they make; that if they did, they would have to borrow money and that is not good. Of course, that was before the arrival of the credit card. In one math class, we had an assignment to do the calculations required to create a loan amortization schedule. It was not a long complicated schedule like one for a mortgage loan that may run for thirty years; it was a simple schedule of payments required to repay a loan with monthly payments over a period of three years. Each of us could select the amount of loan we wanted to use and for the assignment we used an interest rate of ten percent as it was easier to calculate.
When the assignment was completed, the teacher asked each of us add up the amount that would be paid in interest. I had used $10,000 as my loan amount and according to my calculations; my total interest came to over $1,600. I’ll never forget the teacher’s comment, “Now I’m going to explain why borrowing money is not good. The amount you calculated you would pay in interest is the price you pay when you don’t have the patience to save for the things you want. It is money that has to come from your earnings that you will not be able to spend on something you may really need later.” Keep in mind that was before the advent of the credit card, and it has stuck in my mind ever since. Somewhere along the way the stigma of consumer debt has been replaced with widespread acceptance and the “I want it NOW” mentality that is prevalent in today’s society.
Another exercise I had to do in school was to keep a mock checking account register for one semester. Each Friday the teacher would give us an amount that represented our paycheck for that week’s work. If you attended class all week you got to enter the full amount in your account register and add it to the balance, but if you missed a day or two, you had to subtract a proportional amount for the time you missed. We didn’t have sick days or paid leave days.
Each Monday, the teacher would put a list of things on the blackboard that we could purchase during that week. There were always more items than we had money to buy, so we had to be selective. Once we made our selection, we had to list the items we purchased, enter the amounts in the account register and deduct it from the running balance. We quickly learned that by not spending all our money each week, we could occasionally buy one of the nicer more expensive items. Oh, if the urge to get one of these items caused us to spend more than we had in the account, we had to automatically deduct $20 from our next week’s pay. I guess that was an overdraft fee!
At the end of each month, we had to turn in our account register for review. The teacher would look it over and give us a summary of the account that she prepared, which usually didn’t agree with the balance we turned in. Our task was to reconcile our account with her summary and find the error that kept them from balancing. This exercise took very little class time throughout the month, except for the day we had to reconcile, but it taught us how to keep track of our money. Schools don’t do this anymore.
When I was growing up, we performed numerous little exercises like these that were spaced throughout our school years. They helped us learn about the way things work in the real world; the world where we would live and function regardless of our chosen career paths. When lessons like these are removed from public education, it results in a gradual dumbing down the population with regard to personal financial literacy.
The huge debt crisis our nation is currently facing can be traced directly back to the introduction of the credit card and the gradual acceptance of consumer debt as a way of life. When the population no longer views debt as a stigma, it’s difficult for them to restrain politicians who want to use it to give us things we can’t afford. Eventually, debt can be more addictive than drugs or alcohol and far more destructive because the bills have to be paid at some point. Isn’t it time we demand that personal financial literacy be an important part of the school curriculum again?
Mike Summey is a well known entrepreneur, the author of several books on real estate, and has written a number of real estate columns. He is also an avid pilot and philanthropist.