“Personal Finance is More Personal Than It is Finance”

3/13/2023

I have often lamented that personal finance is not a required course in U.S. high schools.  What I envision is basic instruction in managing accounts, credit cards, and loans, as well as advice on budgeting, saving, and investing for the long-term.  The objective would be to provide a foundation of financial knowledge upon which to build over time.

Recently, my high school son announced that his economics class was going to learn about personal investing. The culmination of those discussions would be an “investment competition.”

I was initially excited at the prospect of collaborating with my son on such a project.  That excitement quickly faded as I soon found myself explaining to my son the many wrong things the competition was teaching him.  Here are a few:

• Ten-week time horizon? Buy stocks!
• Forget setting your own goals; instead, compare your returns with your friends (daily!).
• Diversification? Don’t bother- you’ll never get ahead!
• Poor two week stretch?  Sell everything and start over!
• Fees? Trading costs? Taxes?  Who cares?! 
• Don’t hesitate to take the advice of a peer, so long as they sound confident.  (This refers to my son’s classmate who advised the purchase of gold “because it never goes down.”)

This is not the foundation I was hoping for. To be fair, the class was limited by the school calendar and the narrow scope of the investment lesson plans. Ultimately, it has proved valuable in providing my son and me with the opportunity to discuss investment issues.

All this reminded me, that as important as knowledge is when it comes to personal finance, even more important is behavior.  One can understand how to budget but fail to adhere to it.  Even if we understand we need a long-term horizon for investing, panic can set in when the markets are down leading to selling at a time when there might be good buying opportunities. 

There is a great book on investing called The Psychology of Money by Morgan Housel. In the introduction, Housel recounts the stories of two contrasting figures.  One is a Harvard educated finance professional who does so well in his career that he retires at age 40 with a net worth in the tens of millions.  The other is a gas-station attendant and janitor who lives within his means and invests for the long-term in blue-chip stocks.  The story ends with the finance executive bankrupt and the janitor a multi-millionaire (to the shock of those who knew him).

What Housel points out from this story is not that we should live within our means – surely good advice – but that there is no other field where a novice can outperform an expert in such a dramatic way.

Certainly, we should seek to understand the nuts and bolts of personal finance, but the most valuable lessons we can apply to our lives, and model for our children, are those of everyday, disciplined behaviors that move us closer to our financial goals.

Jeff Buck