June 3 2010|08.01 AM UTC

Stan Reybern

12 Important Financial Concepts You Didn’t Learn in School

Category: Personal FinanceTags: ,

Critics of the public school system have long lamented the lack of personal finance education in our classrooms. As many have pointed out, today’s high schools rarely teach even the basics. Consequently, students often graduate high school unable to so much as balance a checkbook or compare two different loans. Yet as embarrassing as this is, our schools also neglect a whole slew of more advanced financial concepts. While some are covered in various college courses, the only group of students likely to have encountered all of them are MBAs. In reality, they apply to everyone, not just business owners. If you are not an MBA or are simply curious to learn about some of the important financial concepts overlooked in school, consider the following.

Probability


Image Source

Probability seeks to measure how likely it is that various things will happen and express those odds as a percentage. A coin toss, for instance, has a probability of 50% because it is equally likely that it will flip heads or tails. Banks use probability (albeit in more complicated ways) to determine the odds that borrowers of various creditworthiness will repay their loans and, thus, what interest rate to charge. While many believe that banks charge high or low interest out of “greed” or “favoritism”, it is ultimately a total numbers game. If probability shows that borrowers with your characteristics pay on time, you pay less. If it shows the opposite, you pay more. Understanding probability can put such decisions into perspective and empower you to make better ones yourself.

Statistics

Image Source

While probability is about predictions, statistics is about measurement. Generally speaking, there are two kinds of statistics: descriptive and inferential. Descriptive statistics simply reflect the inarguable facts of the data. The heights, weights, genders and eye color of a thousand randomly assembled people would be examples of descriptive statistics. Inferential statistics go a step further by attempting to draw conclusions from the descriptive ones. An example of an inferential statistic might be a theory about how “80% of all people living in this area have brown eyes.” Statistics, like probability, is used across the economy and shapes billions of financial decisions large and small every single day.

Sunk Costs

Image Source

A sunk cost is an amount of money that has already been spent and cannot be recovered. Cars purchased, years spent in careers and portions of meals already consumed are all sunk costs. Unfortunately, because human beings are naturally risk-averse, we are often slow to acknowledge sunk costs and change course. We frequently hear friends or relatives justify staying at jobs they despise because of all the time they’ve worked there. Others will actually force themselves to choke down disgusting restaurant food to “get their money’s worth.” But all they are doing is throwing good money after bad by prolonging the original mistake. Instead, true financial rationality demands that you emotionlessly cut your losses as soon as a sunk cost is recognized. Time and money already spent (and which you cannot get back) should not affect what you decide to do next.

Expected Value

Image Source

Expected Value is a specific and immensely useful application of probability. In simplest terms, it is an expression of the long-term average odds that something will happen. You get it by taking an outcome and multiplying it by the probability that it will happen. The number you wind up with is the Expected Value of that action. While this might sound like abstruse financial jargon, it is anything but. Everyone who buys lottery tickets, for instance, is either unaware of or ignoring the concept of Expected Value. Based on the calculations just described, forking over $10 for buys you a piece of paper with an Expected Value of $5. Seen from this perspective, buying lottery tickets actually reduces your net worth. An index fund, on the other hand, is an example of something with a positive Expected Value that could rationally be expected to grow your net worth.

Mental Accounting

Image Source

Another financial mistake we often make is classifying money into arbitrary but seemingly meaningful categories. We hear investors tell us, for example, what they do with “money they can afford to lose.” As kids, many of us probably spoke eagerly about our plans for birthday money that we “weren’t expecting anyway.” A Washington Post article described a study where 86% of people bought a $10 movie ticket after losing $10 on a train, but only 46% bought a second $10 ticket after losing the original. This is a fallacy known as mental accounting. In all the above examples, people are making apples-to-oranges comparisons out of identical things. There is no dividing line between money that matters and money you can afford to lose, or between money you worked hard for and money you weren’t expecting. It is all the same resource: money. Economically speaking, you should make these decisions based solely on Expected Value rather than imaginary categories.

Time Value of Money

Image Source

The time value of money states that money today is worth more than money tomorrow. Money already in your possession can be put into investments or savings and earn interest. Investopedia offers an apt example:
Assuming a 5% interest rate, $100 invested today will be worth $105 in one year ($100 multiplied by 1.05). Conversely, $100 received one year from now is only worth $95.24 today ($100 divided by 1.05), assuming a 5% interest rate.
Keep this in mind when someone makes an offer for your house or other property. A seller who offers you “more money later than he can give you today” and tries to make it sound attractive could, in truth, be offering less than today’s “smaller” amount. The old saying “get the fast buck, not the last buck” nicely captures the time value of money.

Risk Management

Image Source

Astonishing numbers of people have little or no appreciation of true risk management. Mention the risks of any activity and you are likely to hear dismissive responses like “there’s risk in everything” or “you could get killed crossing the street.” Frankly, this is a lazy and ignorant view of what risk truly is. It is not enough to simply assume that risk is present equally in everything so why bother thinking about it. Each activity entails different types of risks and different probabilities that they will materialize. You need to quantify any serious risks that are encountered. The decision of where to buy a home, for instance, should be made partially based on historical property values and the likelihood and they will rise or fall. For extremely important choices, it might help to construct a formal decision tree that visually displays possible outcomes and their Expected Values.

Leverage

Image Source

Borrowing money (also known as leverage) is another common source of confusion among the public. Besides attributing high or low interest rates to greed and favoritism, many people fail to comprehend the basic, underlying mechanics of borrowing. The idea of interest can prove especially confusing. Yet, it is crucial to understand what is actually happening when you borrow money. Take the easy example of a car loan. While your new car might cost, say, $28,000, borrowing the full purchase price costs far more than that. Using a cost of loan calculator, we find that borrowing $28,000 at 6% interest and repaying it over 5 years costs $32,479 when all is said and done.

Compound Interest

Image Source

If you’ve ever wondered why financial experts are always telling people to take advantage of tax-deferred 401(k) and IRA accounts, the mystery is solved. Compound interest is the reason. If you put $10,000 into an index fund earning 6% interest and do nothing, it will be worth $57,434.91 in thirty years. That’s because the interest on your original $10,000 is itself earning interest with each passing year. Of course, the returns are even sweeter if you continue putting money in, but the power of compound interest should now be clear. Furthermore, with a Roth IRA, all of this accumulated growth is untouched by income taxes.

Inflation

Image Source

You might have heard various analysts and experts claim that some low rate of return (say, 1% or 2%) “doesn’t even beat inflation.” Inflation refers to a gradual, yearly rise in the prices of everything in the economy. Because the government prints more money each year, it loses its buying power at a rate of between 2%-4% annually. In other words, $500 today can buy more goods and services than it will buy a year or two from now. According to the Heritage Foundation, Social Security provides low or even negative returns to various segments of society because of inflation. When making financial decisions (such as evaluating investment performance or yearly income) you must always determine the inflation-adjusted, or “real” rate of return. Neglecting inflation creates a rosier picture, but is nothing more than an exercise in self-delusion.

Opportunity Cost

Image Source

Opportunity cost refers to the value of your foregone options. The opportunity cost of attending college, for instance, might be the income you could earn at a job if you weren’t in school. The opportunity cost of going to a party might be a lower grade on the test because you didn’t study. Every choice in life, big and small, entails opportunity costs. Nor are they always this obvious. Many “do it yourself” projects are actually a waste of time and/or money when opportunity cost is considered. Let’s say it takes you six hours to do your own taxes, during which you cannot work on your business. If six hours working on the business would have produced more than the cost of an accountant, doing it yourself was a waste. To view it any other way is sheer mental accounting. While you did not physically hand money over, the greater sum of business income you sacrificed means you should have.

Risk vs. Reward

Image Source

One of the most basic ideas underlying many of these concepts is that risk and reward are positively correlated. There is relatively little payoff involved when an activity is extremely safe. As the old saying goes, “if it were easy, everyone would do it.” This is why savings accounts (backed by federal deposit insurance) pay only 1%-2% interest while stocks (which can crash in a heartbeat) routinely pay 5%-10% or more. It is also why working a low-intensity desk job for fifty years is a lot less lucrative than owning an actively managed business. One is relatively sure thing, while the other contains much uncertainty and risk.

Share this article:
  • Digg
  • Reddit
  • del.icio.us
  • StumbleUpon
  • Facebook
  • Tipd
http://www.billshrink.com/blog/wp-content/plugins/sociofluid/images/digg_48.png http://www.billshrink.com/blog/wp-content/plugins/sociofluid/images/reddit_48.png http://www.billshrink.com/blog/wp-content/plugins/sociofluid/images/stumbleupon_48.png http://www.billshrink.com/blog/wp-content/plugins/sociofluid/images/delicious_48.png http://www.billshrink.com/blog/wp-content/plugins/sociofluid/images/google_48.png http://www.billshrink.com/blog/wp-content/plugins/sociofluid/images/yahoobuzz_48.png http://www.billshrink.com/blog/wp-content/plugins/sociofluid/images/twitter_48.png

{ 49 comments… read them below or add one }

unbound June 3, 2010 at 10:48 am

What school did you go to? These concepts were definitely described…whether the student is awake or not is another story. Overall, it is a decent summary.

One problem I do see is with the Probability description. Strictly speaking it is accurate, but a bit more context should be provided. Whereas companies dealing with large volumes (insurance, banks, etc) use probabilities for risk analysis and expected payments, the final price is not set by that analysis…the analysis just provides the floor (absolute minimum) that needs to be charged. Actual final prices are nearly always substantially higher depending on what the consumer (i.e. market) is willing to pay.

Reply

Smithian June 3, 2010 at 4:03 pm

In the long-run the interest rate paid is that which generates normal risk-adjusted profits (the minimum risk-adjusted profits necessary to attract businesses). Anything higher will invite entry by new lenders, driving the interest rate down to the lowest necessary to generate profits. (The long-run supply curve is relatively flat.) Demand (willingness to pay) determines the quantity of loans undertaken. Different interest rates will prevail for different risk classes of borrowers.

Reply

Anonymous June 4, 2010 at 8:43 am

Agreed. I learned the majority of that in school

Reply

Anthony June 4, 2010 at 8:52 am

Perhaps we should be asking which school you went to, because I went to one of the top five public high schools in America, and none of these concepts were ever discussed.

Reply

Jonas August 20, 2010 at 3:30 pm

Yes it struck me that some info was missing – banks routinely try to charge people 1.5% over their ‘floor’ percentage mortgage rate on a renewal, for example, They may offer me, say 6.2% in the Renewal Letter, but if I resist this and end up getting the minimum rate 4.7%, this over five years would save me about $10,000 of my hard-earned after-tax dollars. So, banks play this game because ignorant people are willing to pay more. Calling around to compare rates will break the ‘renewal letter stonewall.’

Overall the article resonated with me – both because these days I grow very uneasy about being not financially cognizant as I should be, and I can see people in general practice are not either (blissfully ignorant is more like it.) It seems we’re wasting a good number of our precious years in the earnings we throw away.

Reply

Anonymous June 3, 2010 at 3:20 pm

I feel sorry for the person who wrote the article if they did not learn this stuff in school. In my day this was taught in 9th grade math. These days I’d imagine it is 7-8th grade level.

Reply

Anonymous June 3, 2010 at 9:54 pm

lol at the person that said they learned this stuff in grade 9 math. Sorry but half, if not more of these terms relate to economics, and you certainly do not learn econ in grade 9 math.

Reply

Travis Turner June 4, 2010 at 12:40 am

I wasn’t taught this until college. However, I may have understood these concepts alright before then but definitely wasn’t taught them in high school. I am willing to bet that the author is right and that most public schools do not teach these things. Often the structure is determined by the standardized test the child has to pass or a set curriculum which focuses on the basics and neglects practical use topics like these. These topics should have been taught and you should feel lucky to have been introduced to these at a young age. In short the American school system is broken, otherwise we would be learning these things and much more.

-Travis

Reply

keepemflyn June 4, 2010 at 6:32 am

I feel sorry for Anonymous if that person thinks it’s about math. As a financial planner going back 30 years, most of my clients lack a good understanding of most of the concepts.

Reply

Anthony June 4, 2010 at 8:55 am

Again, I would love to know where you attended school Because I can assure you that modern students learn nearly nothing about personal finance or even finance in general. I would imagine they learn these things in places that have good public school systems, but it simply is not generally taught in the United States.

Reply

Phil July 3, 2011 at 4:01 pm

I agree. I graduated high school in ’06 and undergrad in ’10. I only began to learn some of these concepts in high school because I took an accounting course. The rest I learned in my undergrad because I went to the business school and had to take courses in Statistics, Economics, and Finance. But if I didn’t choose to take any of these courses, they wouldn’t have been introduced to me as a requirement, which I think they should.

Reply

Adam@RabbitFunds June 3, 2010 at 3:45 pm

Fantastic article! I am a firm believer that our schools do a poor job of preparing the rising generation for real life. While you may graduate understanding physics, the English language, or even calculus, you may not have a clue how to manage your own day-to-day financial decisions. I also love that you hit more on underlying principles which govern many decisions and business practices versus just hitting on the practices themselves.

Reply

Chris March 5, 2011 at 11:16 pm

Adam, speaking as an Economics major, these concepts are not taught in schools because they require you to know the math that you learn in High School, but to apply it in many non-intuitive ways. In fact Economics is no more about “real life” than physics or calculus. At any level above this article, you start needing to use calculus to learn Economics. I am so sick of people trying to belittle Economics to the science of every day life. Everything you learn in school is every day life.

Adam, If your child wants to be an English major or a mathematics major, you shouldn’t be telling him that is less “real life” than Economics is. They are different lenses of interpretation in this world, and anyone who’s spent a year or more in college studying with an open mind can tell you that.

Reply

Ole March 20, 2012 at 9:42 am

You don’t need a degree to understand Economics. Just do THE OPPOSITE of what Bernie and the Fed do :)

Reply

Anonymous June 3, 2010 at 3:48 pm

Too bad it’s all an illusion anyways.

Reply

Ron June 3, 2010 at 4:53 pm

Anon,

If you went a school where all 12 of these concepts were adequately taught in grades 7-8 (or at all), I think that school should be held up as a model of financial literacy. Having just graduated in 2004, I can tell you none of them were covered. Other than perhaps a passing mention of inflation or borrowing (and probability, if you took high-level math courses), these topics were completely and utterly absent from the curriculum.

Personally, I absorbed them myself from various books and discussions with people over the years. The author is correct that MBA’s probably learn them all in school.

Long story short: if these concepts were as obvious and widely understood as you seem to think they are, the country would be in a lot better shape.

Reply

Anonymous June 3, 2010 at 6:34 pm

Yeah…I did my undergrad at CMU. This is all pretty elementary stuff.

Reply

S.T. June 3, 2010 at 9:05 pm

I’m sure “Anonymous” said this was 7-8th grade level could be more constructive. Cant you see this for what it is…its a good reminder for those who have been out of school for a while or simply for those that can be glad they already know them. Why hate?

Reply

Charles June 3, 2010 at 9:21 pm

If you weren’t learning most of this, what were you learning? I admit, school could have spent more time discussing the real world implications of these items, but still…

Reply

jessica June 3, 2010 at 10:03 pm

I agree that this stuff is inadequately covered in most junior high and high schools. I attended seven or 8 schools before college and never heard of any financial concepts being taught. However, you also don’t have to be an MBA to learn this stuff in school. After two years in community college, I’m already familiar with all these concepts. Whoooo Portland Community College! lol I can’t imagine what I’m going to learn in the next two years at university studying business with a focus on finance. I suddenly feel like maybe I am learning something! Thanks.

Reply

College Guy June 3, 2010 at 10:09 pm

I learned all of these things in Highschool with the exception of sunk costs, and Mental Accounting.

Reply

Anonymous Coward June 4, 2010 at 12:54 am

I’m not sure what you two guys before me are on about but this was definitly not explained to me at school. I learned this in first and second year Enconomics and Finance at university. Good article, especially for the people that didn’t go to Uni.

Reply

Anonymous June 4, 2010 at 1:43 am

I’m in college now and it wasn’t taught in my high school school; I learned these concepts through avid reading. As budgets tighten we will continue to see these topics ooze out of high school curriculum. Not everybody went to a school such as yours, so it is important to be open-minded and cover all of your bases than to come to such false, egocentric presumptions.

Reply

Roger June 4, 2010 at 2:02 am

Wrong. We covered most of those in some detail by the time i graduated from high school

Reply

Nemo June 4, 2010 at 4:51 am

“If probability shows that borrowers with your characteristics pay on time, you pay less.” If only it were true. The fact is, people more likely to repay their loans usually pay higher interest. They end up paying more to defray the losses by people who don’t pay.

Inflation is also caused by everybody wanting their annual raise to cover the cost of inflation… Companies have to raise prices to cover the cost of raising salaries. Most durable items have the same relative value, it’s just the value of the dollar that has fallen. In the 1870s, you could buy a really good rifle for $20. Today, that same $20 gold coin is worth $1200, with which you could buy a really good rifle.

Reply

Geoffrey June 4, 2010 at 10:24 am

Well, you’re sort of correct. Yes, as production costs rise those costs are passed on to the end consumer. So, wage increase absent from production increase will cause an inflationary factor. Ultimately, though inflation is caused by the increase in monetary supply which is propagated through the Federal Reserve (created to ensure a stable currency, but history shows the Fed has caused more instability than stability).

Basically, inflation is created to keep people consuming. And, probably also to lower the burden on debtors most especially the Federal Government, and to also cause an increase in tax revenue–increased dollars cause increased wages which forces citizens to pay more in taxes. You see, there IS a solution to our governmental debt and it’s basically failing to properly adjust items for inflation. When in doubt, we can always adjust what basket of goods we’re measuring afterall. Who wants to measure ‘volatile’ food and energy, anyway? So what if gas costs increase 400% in a year–don’t count it and magically inflation stays low. Airline travel gets cheaper when we subtract the cost of loading bags in the plane. Hey, statistics–they say what we want, when we want. Statistics–the art of lying. I digress.

Reply

Bob June 4, 2010 at 5:59 am

I learned this as a Computer Science undergraduate in college. I was exposed half of these concepts in high school although I didn’t really pay attention to them. Many people other than MBAs learn these concepts. Private college prep schools teach them more so than public schools.

Reply

Anon June 4, 2010 at 6:05 am

This was awesome, great article. Even those who think they understand what’s going on would benefit from a careful read.

Reply

Rhawk187 June 4, 2010 at 8:13 am

Probability and Statistics were covered in grade school to a small extent at least for me, although advanced topics like prior probabilities and pdf/cdfs etc, I didn’t get until college.

Compound interest was in grade school too.

Inflation I definitely picked up at school age, although I’m not sure if it was explicitly explained until college economics. That’s also where I first learned about opportunity cost which might not be as common sense as some of the other entires on this least, but is probably one of the most important.

Reply

Geoffrey June 4, 2010 at 8:30 am

Most everything here is true. Except…well, compound interest. The description of the Roth is poor. When you take the % out by paying tax on the front-end–ultimately the number is the same as the number on the back-end with the traditional IRA (all else equal–I’ll spare the Latin).

Also, these concepts are not separable. Ultimately, inflation reduces the return on the invested monies, anyway. So, the REAL RETURN might be closer to a couple of percentage points. Granted, I’d still advocate investing for retirement over the long haul, but it’s not as grandiose as you might imagine.

So why a Roth? If you expect taxes to increase over time (possible to probable; thanks Mr. Obama)–or you expect to be in a higher tax bracket at retirement (unlikely). However, this goes back to probability so perhaps it’s a good tax hedge to invest as much as possible in a 401(k) should somebody be wealthy enough as a mere wage earner/wage slave and then invest in a Roth at the now potentially reduced tax rate?

Anyway, nice article on the overall. The first financial concept discussed should be one of thought, though. Planning and a logical construct makes all the rest simple. Failure to think will cost anyone no matter how intelligent. Why? Because money goes to those who treat it the best. If you hoard, you lose. If you waste, you lose. If you’re smart and treat capital well–it multiplies and pools in your agile little hands.

Reply

wally June 4, 2010 at 11:51 am

Its obvious that some of these concepts are taught in school especially probability, statistics, compound interest and inflation. However, whats also obvious is that most schools don’t teach these concepts in any comprehensive manner with the intention of providing students with a good basic understanding of personal finance.

Our society spend an awful amount of time preparing our kids to make money but doesn’t give alot of effort in teaching our kids how to manage money. Maybe we would have avoided the current housing crisis if the general public had a pretty strong understanding of personal finance. Given that buying homes are the biggest and most important purchases that most people will undertake in their lives, its a little disconcerting how little most people understand about home mortgages.

Reply

Jeff June 4, 2010 at 4:32 pm

I haven’t even graduated yet and I already know all these concepts.

Reply

Tony F. June 4, 2010 at 8:07 pm

I love reading the comments from people that are saying “What school did you go to?” and “I learned the majority of that in school”. Here is my question to those people: How did that work for ya? Where are you now? Are you the CEO of a multi-million dollar company? Thats funny…because I am and I may have heard these expressions and terms in school…however the ability to conceptualize in the level of detail needed to put the teachings into practice is lacked by 99% of kids in school. Only after becoming an adult are most of us able to comprehend these “simple terms”…and mostly because we made mistakes along the way. And now they are simple (in retrospect).
Summary: Great article. Polishing ones financial practices should always be welcome…regardless of age and education.

Reply

Anonymous March 20, 2012 at 10:20 am

“The CEO of a multi-million dollar company” (*cough, bullshit, *cough*cough) is reading articles on “12 important financial concepts” LMFAO!!!! YOU ARE A CLOWN….lemme guess, you went to school with the bearded lady and the 8 ft tall midget?!

Reply

misanthropope June 5, 2010 at 2:33 pm

the “behavioral finance” stuff isn’t taught in school, largely because it is fairly new.

much of this stuff (probability, “risk management”, and opportunity cost) certainly shouldn’t be emphasized. all of that stuff is what got the genius CFOs of the financial industry into so much trouble. that stuff is all about “garbage in, garbage out”. you can learn a bunch of slick looking methods to process data, and then you have this false sense of security, because what REALLY matters is coming up with reliable numbers to plug IN to the formulas.

nothing in what is in the modern era called “finance” is of much value at all. that crap is all used as a _substitute_ for ACTUAL money management skills.

kids: don’t be self-indulgent morons with money, like your parents were. THEY inherited fortunes from their parents, but you aren’t going to- it’s all spent now. think carefully about how many hours of work it takes to earn the money you are considering blowing on discretionary items. save as much as you can stand, don’t invest too much in any one place unless you first the time to become genuinely EXPERT. when your net wealth is 30 times your most recent year’s expenses, congratulations you have finally paid off the mortgage on your life, and you are FREE.

Reply

Anonymous June 14, 2010 at 12:00 am

These are college level economic concepts and I wouldn’t be surprised if 90% of America didn’t understand this

Reply

Anonymous July 11, 2010 at 6:48 pm

I’m going to have to disagree with those saying that they covered all of these in high school. Even though my high school required Economics courses, no one really knew what they were doing. The only reason why I’m familiar with a couple of these concepts is a finance obsessed teacher I had.

Reply

Anonymous July 14, 2010 at 12:41 pm

Where is the comment clown that says GOD will take care of everything………no need to understand this gibberish.

Reply

Anonymous July 30, 2010 at 8:57 am

Unless this was taught in Calculus (which I didn’t take, but probably should have), I agree this (and most importantly basic personal finance) was not taught in my American high school in the late 80s/early 90s. Though I was able to take AP Computer Science which was basically a programming class. Thanks for the article! Funny I’m trying to catch up now and learn as much as I can about these concepts for my (hopefully) next IT career path.

Reply

Laura November 23, 2010 at 3:41 pm

Well that was enlightening.
I never imagined it could be possible to go through comprehensive school without learning most of these concepts. I remember some of these being discussed in grades¬®7 and 8. I admit that I’m not quite familiar with all of them, and not all have been thoroughly discussed in the context of economics (a subject I so far haven’t had the opportunity to take), but we went through these in civics and maths. I guess PISA got it right after all, Finnish education IS good.
I wish all the best for American high school.

Well anyway, I found this interesting. Thank you very much, I learned something new.

Reply

Im at the top of the pyramid. May 10, 2011 at 11:25 pm

Leverage means something different to me. Any successful business owner/entrepreneur has leveraged themselves. “Now get back to work! You college educated, work force drone. So I can enjoy my round of golf.” Says the self motivated, self educated, business owner. As I clean my golf balls with my worthless public education highschool diploma and blow my nose in a hundred.

Reply

S L Narasimhan July 3, 2011 at 10:55 pm

Hi
Good post! You have touched upon some really fundamental issues which require teaching at school level so that they are more or less instinctively applied to real life situations.
On leveraging, there is the greater issue of leveraging borrowed funds vs using own funds. With the tax planning element coming in, own funds are always the most expensive and hence borrowed funds should be leveraged to obtain tax benefits.
I run a consultancy practice where I specialize in simplifying and teaching financial concepts to non financial managers and individuals particularly in the hotel industry.
I sense that there is a great need for some grass roots level basics to be taught to non financial managers in a user friendly manner since accountants (incidentally I am one of them as well but of a different mind-set) and finance people tend to make it complicated and there is a fear factor involved with numbers and analysis.

Reply

Gordon July 5, 2011 at 10:35 am

I have heard a word or two about compound interest in my Economics class a few months ago but my teacher was no good so I couldnt really give a presentation on it even though we discussed it for several hours quite passionately.

Reply

David July 9, 2011 at 8:41 am

This is great, I’m still 16 so I hadn’t heard about much of this yet, thanks for the information. Especillay the Oppotunity Cost part. I’m not old enough to relate to real life experiences of my own for the most part, but when playing a MMORPG, I was quite efficient economically, and I would never do things myself, I would simply calculate what was most efficient depending on my hours doing certain task and money earned/spent. It was extremely frustrating when you tried to explain this to people and they were totally stubborn about it, preferring to do it themselves while wasting more time.

Reply

kzzxy July 11, 2011 at 7:52 am

You can learn all these in high school… if you take AP Economics.

Reply

Jimmy July 16, 2011 at 9:23 am

I didn’t learn these concepts by name until I was in college myself. If you think through things you will find that these concepts are all simple and even practiced by us all on a daily basis. There is nothing new under the sun. Financial responsibility is not far from time management skills and other things that we think about often. You run into trouble when you don’t think through your decisions. Many people end up in debt that they cannot handle because they saw the opportunity and jumped for the instant satisfaction, not thinking about the cost they will incur in a few years. One financial rule that if you follow, you will be better off in the long run: Don’t spend more than you have. Unfortunately, in our society, it is nearly impossible for someone to earn enough money for college by the time they are expected to go. Conversely, how long would it take to buy a home? This time could have been used to be paying on the home. Some things are too great to handle, and financing is necessary, but even so, one should not borrow more than they know they could easily repay. You don’t need the nicest house or car or other luxuries. Furthermore, save some freakin’ money. You will never be able to buy anything of considerable value if you do not practice this activity. Lastly, be generous and give to those in need. This one does not help your finances, but makes a better world to live in. Money should not be seen only for the selfish gain it may promise. Money is temporary and so are the things you can buy with it. Why not be a blessing to someone else?

Reply

David Locke August 17, 2011 at 1:22 am

Where has financialization led? To ruin. So are you proposing that we should ruin our lives more? Are you suggesting that everyone must think as you do? Are you suggesting a narrowing of the mind? Sorry, but a wideband education of the population is much more critical than educating everyone in the way you look at the world. If everyone had this knowledge of financialization, then maybe it would be commoditized, nobody would pay anyone for financial advice and services, and understanding it deeper would let the world turn a deaf ear to the practitioners of ruin.

Reply

Steven Rogers November 21, 2011 at 5:03 pm

Great article. I managed to use the interest from my IRA to do all of the equipment financing and leasing for my small business. It’s amazing what planning ahead can do.

Reply

Kacy B. Kelly July 25, 2012 at 5:48 am

A lot of useful information here regarding education on personal finance. I am sending it to a few friends and also sharing in delicious. Well with your permission let me to grab your RSS feed to keep up to date with forthcoming post. And of course, thanks for posting.

Reply

Leave a Comment

Previous post:

Next post: