Mandatory High-School Personal Finance Classes

Yesterday, the Missouri House Committee on Emerging Issues in Education began considering an initiative that would make high school personal finance classes a requirement for receiving a high school diploma in the state of Missouri. Currently, Missouri high school students are only required to take a half-credit of personal finance classes, and personal finance classes are defined so broadly that a class dedicated to social studies or anything that falls under the heading of “practical arts” meets the qualification. It is also possible to take a proficiency test that can provide an opt-out. Missouri does not disclose the results of its proficiency tests, but the national adult passage rate is 57%.

The current bill will modify Missouri’s existing law by removing the opt-out possibility and force students to take a class that focuses solely on personal finance related material (i.e. no more social studies and practical arts classes counting towards the requirement).

Like everyone else that writes finance articles on a regular basis, I have the objective of improving financial literacy among my readers so that folks can have an increased understanding of the full range of natural and possible consequences that can flow from their decisions. Instead of spending your life working for the bank to afford the interest payments for something that you bought five years ago, I’d much rather hear your story of how you put $3,000 into Colgate-Palmolive stock and witnessed it grow into $142,000 over the next thirty years.

Where I disagree with some other finance writers is that I do not view mandatory personal finance classes as the panacea for solving the problems that result from financial ignorance and apathy. I instructed a class on personal finance one summer, and the type of material I was assigned to teach was like this: “True or False. A stock is safer than a bond.” The answer you’re supposed to give is false because stock prices tend to fluctuate more on a daily basis than bonds, though you can probably understand why this type of instruction can be misleading, incomplete, and boring.

I think the real issue is that personal finance is presented as a boring topic that must (mandatorily) be pounded into your head with isolated trivia rather than a topic that should keep excited.

The process of converting earned income from labor into passive income from investments should be exciting if presented correctly. When take $74 and use it to purchase a share of ExxonMobil, you have Chairman and CEO Rex Tillerson acting in concert with 83,600 bound by contractual duty to spend a significant chunk of their waking hours maximizing the long-term value of that ExxonMobil share.

Once you have purchased it, there is nothing else you have to do to reap the rewards. You don’t have to show up somewhere at 8 AM on Monday to reap the benefits of that Exxon stock. You don’t have to have a good attitude or play nice in order to reap the benefits. There is no one there to say “Tim doesn’t play well with others, therefore, we are going to withhold the benefits of the stock.” You don’t have to water it for six months to watch it grow. None of that–the experience is entirely passive with the only requirement being the payment of taxes on income that you receive as a dividend from the stock.
And despite the tendency of the popular financial media to portray stocks as something that should be regularly purchased and sold, the life of the corporation is perpetual. You get to own Exxon until the day you die if you so desire, and then, you can direct who gets it after that. The only ways you can ever have a stock taken away from you is through: divorce (marital dissolution), a legal judgment resulting from something like a drunk driving accident or paying back a loan (intentional tort or contract claim), or back taxes/something that causes you to become in arrears to the government (bankruptcy proceedings or some type of garnishment). Unless you do something like that and don’t have the cash available to pay it, there is absolutely nothing that can take that ownership position away from you unless you decide to sell it.

Too much time is spent discussing the volatility of low-quality assets–the best businesses are little worker extensions of yourself that are creating income without you ever actually having to do anything additional. That one share of Exxon? It gave you $1.14 in 2005, and then gave you an additional amount each year thereafter. That same share is now paying you $2.92 without you having to put in any additional work.

And if you want to turbo-charge the process, you get to take the cash that is created passively and then use it to buy another business interest that also generates cash. Particularly in the early stages, it makes sense to just click the reinvest button and have the cash generated get thrown back into the company.

In the case of Exxon, a single share got to cycle $20.81 back into the company over the past ten years. And back then, you didn’t have to pay $75 to get your hands on a share–you only had to $50. By clicking the reinvest button, instead of having each share pay you $2.92 today, you get to have 1.33 shares paying you $3.88. Your present annual income got a 33% bump if you chose to wait before spending it by reinvesting; and even if you do spend it along the way, you still get to collect $2.92.

For someone who does not have a natural appetite for financial matters, the struggle point is going to be convincing someone of the merits of delayed gratification. The $2.92 check by itself isn’t a motivator. It’s in desperate need of a reframing. A $50 contemplated purchase in 2005 needs to be phrased as: “Would you rather buy that for $50, or would you rather collect $20.81 over the next ten years and then own something that will produce income for the rest of your life thereafter?” Exxon hasn’t cut its dividend since incorporating in New Jersey in 1882; there are no sure things in life, but the viability of ExxonMobil is about as close to a guarantee as you’re ever going to find in the business context.

High-yielding dividend stocks can serve as the best real-life didactic exercised. You give a kid $4,000 in Royal Dutch Shell, and he will have $94 show up in his bank account every 90 days. That’s actual money you can start to do something with, and the recurrence of the cash arriving in the bank account can stir the passion for investing. Of course, higher yielding stocks can sometimes also be associated with higher risks of dividends cuts, and while that is also an important lesson to pick up along the way, it can have the unintended effect of scaring someone away from business. How many people could have done great things in life if you they didn’t get overwhelmed by an initial setback?

I’m mostly agnostic on whether personal finance plans should be taught in high school because I have seen firsthand what some of these plans look like. If I were a member of the Missouri legislature and had to decide, I’d ultimately vote against it under the theory that (1) local school boards and parents ought to be able to sort out what type of personal offerings are prudent for the students, and (2) the addition of a mandatory class removes the discretionary ability of a student to act in concert with their parents to choose classes they determine to be in their best interests. If a student is proficient in personal finance at the level being taught by the teacher, and would rather take an elective, why should the state of Missouri take that decision out of the hands of the student, his family, and the local school board? Or what if he is not proficient in personal finance, but he and his family would prefer that he take a different elective that they find more important than personal finance?

The secret to getting someone truly interested in investing–not just pounding random formulas into their head but stirring the soul with incentives in such a way that a student will self-propel themselves into deep study of business on their own time, likely hinges upon the proper introduction of passive income.

If you can get someone thinking about converting earned income into passive income–delaying gratification today by creating surplus resources from your labor and then acquiring other assets that will give you money for “free” in the sense that it is automatic and recurring without any ongoing affirmative conduct, you ought to be able to get the fire started. The initial passion gets triggered when you realize that the popular understanding of making interest payments to the bank every month can be replaced by owning shares in the bank itself so that you get to collect dividends. Instead of paying the bank every month, the bank pays you every ninety days.

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