A LESSON ON PERSONAL FINANCES
My entrepreneurship students and I are in the midst of a unit on personal development. When I asked them what topics they wanted to cover, a few of them volunteered, “personal finances.” I happily obliged, as it is a topic of utmost importance in my opinion.
I drew for them a chart on the whiteboard, with money as the y axis and age as the x axis. Stretching to the right were ages representing various stages of life: 0, 18, 22, 65, and 90. I grabbed a black pen and asked for their help in drawing their income at various ages. The line crept at practically zero until 22, when they anticipated they would be out of college and starting to make money. I had to redraw the line from 22 to 65 several times, as they kept wanting it to be steeper and steeper (i.e. making more and more money as they got older). At 65, I asked what happened next. They correctly remembered our discussion a few weeks back on Social Security and dropped the black line down from its peak but not all the way to zero, assuming that Social Security would exist in the year 2055 and that therefore they would derive some income from that source.
Next, I took a red pen and asked for their help in drawing their expenses at various ages. Again, the line crept at practically zero, but at age 18 things started to deviate from the black line. I sternly reminded them that they were all going to college, and consequently made the red line jump up considerably at age 18 and then go flat until age 22. From ages 22 to 65, I drew an upward sloping line that was lower than the black line. I told them retirement expenses usually end up being about 75% of what you were spending just before retirement, and drew the red line from ages 65 to 90 accordingly.
This is where things got interesting. I asked them where black was above red, i.e. you are spending less than you are bringing in. They pointed to ages 22 to 65. I asked them where black was below red, i.e. you are spending more than you are bringing in. They pointed to ages 18 to 22 and ages 65 to 90. I asked them what you could do when you are bringing in more than you are spending. They said you could save it for later. I called that pushing it into the future. I asked them what you could do when you are bringing in less than you are spending. They said you could borrow and pay it back later. I called that pulling it from the future.
We talked about how pulling money from the future makes sense when what you’re pulling it for helps you to have more money in the future (i.e. school loans for college, which by the way have low interest rates). We talked about how it doesn’t make sense when what you’re pulling it for doesn’t help you to have more money in the future (i.e. credit card debt for profligate living, which by the way has high interest rates). We talked about how it is important to push money into the future and not just spend anything extra in the present because you’ll need that money to pay for your retirement and to pay for your children’s college education. Next thing you know, class was over and that was the end of our personal finances discussion. Next class, we’ll have to move on to other topics, but I hope this one on personal finances sunk in.
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