Absence of early education around personal finance and financial planning should be taken as a serious exclusion, given that banks and financial education are aggressive in targeting even children (albeit through parents). It is rare to find a country which educates its young population about managing their finances before they turn eighteen, although financial literacy is getting momentum in a number of countries.
A common question that young adults usually ask is “what is the need for, value of, or the relevance of learning “difficult” subjects such as mathematics?” Many develop a resentment of math if not a phobia partly due to the incompetence of some teachers in communicating the subject, failure to make it interesting and failure to relate it to everyday examples. One reason is that many teachers do not know how to use personal finance examples to demonstrate less obvious mathematical concepts and rules.
In Lebanon the high school curriculum results in cramming a great deal of mostly useless facts into the short-term memory, and expecting students to regurgitate the facts during very stressful exams. There is seldom much effort or emphasis on training of students in the area of critical thinking, such as teaching them how to use the past to predict the future or how to choose between two different car leases or the difference between buying an apartment versus renting it. Even worse, despite being a country where at least half the population is Muslim, in Lebanon there is no introduction prior to college of the basic principles of conducting financial transactions within the shari’ah framework, or at least teaching students the meaning of riba!
Having lived, studied and worked mostly in higher education in the West, I found that the weak preparation of young people in the area of making wise financial choices is more severe there. Attending a school is a legal requirement for children until the age of sixteen, which means that kids are ‘forced’ to stay in school till they turn sixteen, whether or not they learn anything. In addition many of the important subjects including math and science are offered as electives which means that kids are allowed to choose topics they want to study even though they are too young to make a wise choice, and despite the fact that their choices are affected by phobias as well as by peer pressure.
Consequently in some Western countries teachers usually experience difficulties when teaching freshmen classes since some students cannot even convert fractions into percentages. The tragedy is that not being skilled in math and lacking basic information about finance leads young adults to spend their whole life in debt through “maxing out” (borrowing the maximum allowed amount) their easily obtained credit cards, thinking that they are getting a free lunch when they spend $500 and have to pay only $20 per month!
One of the causes of the ongoing global financial crisis is that many home owners took out huge loans to purchase homes which they could not afford based on their incomes. They were ‘seduced’ by the very low interest rates and they were not savvy enough to understand that these rates were variable. Had they been taught how to calculate the actual cost of borrowing or how to evaluate the impact of rising interest rates on their monthly payment, they would have made very different and wiser choices.
A whole industry in the West survives and flourishes thanks to people’s lack of knowledge in the area of personal finance; I am referring to the mortgage refinancing business which benefits from many people’s rush to refinance their home loan whenever interest rates drop by 0.25%, without paying attention to the cost of refinancing which is usually thousands of dollars added to the principal, as well as lengthening the life of the loan. Unfortunately the average person cares only about a lower monthly payment!
Another example of the common lack of knowledge in the area of personal finance is frequent instances where an individual deposits money in the bank making 2% annual interest, he /she has enough money to close a credit card balance, but continues to make the minimum monthly payment on a credit card balance at an effective annual rate of 18%!
Introducing personal finance classes into the high school curriculum as early as the age of fifteen is a good strategy that would help people to lead a financially sound life without being burdened by debt, it would help them avoid having to pay $400 per hour to a financial planner later on in life in order to get advice on managing personal finances.