Credit or Debit? Teaching Personal Finance

The statistics about personal finance in America are staggering. Different surveys show that anywhere from half to three quarters of Americans live paycheck to paycheck, and 69% have less than $1,000 in savings. Moreover, less than half of Americans understand how much money they’ll need to retire.

When you look at the state of teaching personal finance in schools, these statistics start to make sense. Only one in six high schoolers are required to take a financial literacy course, yet in just a few short years, nearly all of them will be responsible for handling their finances.

In this article, we’ll explore the financial literacy concepts students need to know before they enter adulthood, and techniques for teaching personal finance appropriate to each grade level.

Financial Literacy: The National Standards

The Jump$tart Coalition® for Personal Financial Literacy has created standards for the knowledge K–12 students should develop throughout their education. Students of all grade levels can engage with these concepts with increasing complexity as they get older, so these standards are a great foundation no matter what age group you teach.

• Spending and saving: Personal finance is a constant balance between spending to meet one’s current needs and wants, and saving for future goals. It’s important to teach even young students that every dollar they spend is a choice: Is this purchase worth slowing progress toward a future goal?
• Credit and debt: Students should understand how debt works, the risks associated with it, and how it can impact their future. Topics you cover might include interest rates, monthly payments, credit scores, and different types of debt (e.g., student loans, credit cards, mortgages).
• Employment and income: Students should learn that adults trade their time for income. They need to know what it means to build a career and increase their income potential, and how their employment choices affect their financial present and future.
• Investing: Investing is a concept that baffles even some adults, so it’s helpful to start introducing these concepts early. With younger students, you might talk about the difference between saving and investing and how money can create more money, and with older students, you might talk about risk, diversification, the stock market, and more.
• Risk management and insurance: Students should learn the different types of insurance, why people might want to buy some types of insurance (and avoid others), how to weigh risk, and the definitions of terms like premium and deductible.
• Financial decision making: Financial decisions are a unique intersection of personal values, taking calculated risks, and balancing the present and the future. The earlier students can develop a healthy framework for wise decision making, the better off they will be.

Teaching Personal Finance: Elementary School

Even the youngest students can start learning foundational concepts of handling money. For example, it’s useful to discuss paradigms like want and need (e.g., “I need food and shelter” but “I want a video game”) and how to prioritize spending finite resources on needs first and then wants. The following lessons from TD Bank provide ready-made instruction to introduce key concepts like saving, spending, and credit.

• Grades K–1: This lesson helps students develop a desire and plan for how to save money. It discusses topics such as why saving is important, how to use a budget, and the benefits of saving money at a bank.

• Grades 2–3: In this lesson, students will learn about the different types of payment options people use, including cash, checks, and credit cards. Students will learn about checking accounts, ATM transactions, and how to write a check.

• Grades 4–5: This lesson introduces students to the concept of credit, including how credit can benefit both financial institutions and consumers, how borrowing money compares to borrowing a physical object, and how to use credit responsibly.

Teaching Personal Finance: Middle Grades

Middle schoolers will be able to dive deeper into the concepts of spending, saving, investing, and borrowing money. Here are a couple of activities from Scholastic designed specifically for grades 6–8:

• Lesson 1: Saving Money for Your Future: Saving will come more naturally to some students than others. This activity gives students the “how” and “why” behind saving money by introducing the magic of simple and compound interest.

• Lesson 2: Saving Money by Finding the Better Buy: Like saving, spending is a good and essential part of handling money. This lesson shows students how to be smart spenders by calculating unit rates, discounts, and fixed and variable costs.

Classroom Activity

In addition to the lessons from Scholastic, consider playing the Game of Life with your students, tailored to teaching them how to navigate monthly expenses. Here’s how it works:

• Salaries: First, write a variety of salaries on pieces of paper and have each student draw one out of a hat. Make sure to provide a wide range of figures, but nothing too extravagant.
• Rent or mortgage: If you have access to a computer lab, send students to Zillow.com to choose a house to buy or apartment to rent (the house listings will show an estimated monthly mortgage payment). Don’t let students get too hung up on finding their dream house; the purpose is to get an idea of different price ranges. If you don’t have access to a computer, you could have them draw pictures of houses out of a hat, along with its monthly rent or mortgage payment.
• Groceries and other necessities: Give students newspaper ads that list the price of things like groceries, toiletries, and clothing. Have them put together a rough list of what they think they’d need to buy for a month. Again, don’t let them get lost in the weeds; you might give them parameters of the types of things they must buy (e.g., one item of clothing, one cleaning supply, 10 breakfast items, and so on).
• Utilities and other bills: Give students an estimate for the utilities they might pay for their chosen house or apartment. Also let them choose the type of car they’d like to drive, along with its monthly payment and gas costs.
• Leftover cash: Once students have gathered all their essential expenses, have them calculate how much money they have left over. This amount is how much students have left for saving and for “fun” spending. As a class, talk about how salary and monthly expenses impact this number and how students feel about their choices given how much (or little) leftover cash they have.

Teaching Personal Finance: High School

It’s easy to help teenagers see the relevance of personal finance to their lives. High schoolers are likely working part-time jobs, paying for some of their own clothes or entertainment, saving for prom or a car, and considering how they’ll pay for college. The following are some of the more complex financial terms you can introduce to your high school students:

• Taxes: Especially when teenagers see their first paychecks, they’ll be ready to learn about tax rates, Social Security, Medicare, and other issues that impact how much money they bring home.
• Compound interest: Compound interest can be students’ best friend or worst enemy depending on whether they invest or owe money. Make sure they know the basic calculations behind compound interest, and the fact that they need to look for this term anytime they consider investment or loan opportunities.
• Opportunity cost: Teenagers think they have all the time in the world; however, opportunity cost will show them differently. Students should know that every use of money is a choice; if you choose to buy a new outfit now, you lose an opportunity to save for the future.
• Value of education: Because the cost of college can be so high, students need to seriously consider the cost vs. the higher potential earnings education can bring them. This calculation shouldn’t discourage students from pursuing higher education; rather, it should help them be wise about their choice of school, major, lifestyle during school, etc.
• Risk: Because most students haven’t handled large amounts of money, it’s likely hard for them to imagine the devastation of financial loss. That’s why it’s important to help them understand risk, why they should diversify investments, and why different types of insurance are necessary.
• Time value of money: Because money can earn interest and increase in value over time, students need to understand the time value of money (i.e., the fact that money available right now is more valuable than the same amount in the future).
• Cost–benefit analysis: Depending on our level of desire, we can hone in on either the cost or the benefit of putting our money toward something. However, cost–benefit analyses will help students consider both so they can make the best decision possible.
• Debt: Particularly given that students may be soon taking out student loans, getting their first credit card, or perhaps cosigning for a car, they need to understand how debt works: interest rates, how interest compounds, monthly payments, penalties for not paying, and more.
• Delayed gratification: The ability to delay gratification is a marker for future success in many areas of life. Students can apply this mentality to important issues like saving and investing to set themselves up for a secure financial future.
• Scarcity: Time and money are both finite, so students need to understand how to make decisions given their limitations at different times in life.
• Inflation: Students should understand what inflation is, how it fluctuates, and how it should impact their consideration of debt, purchases, and the amount of money they need to invest for retirement or other expenses.

Classroom Activity

Ask students about a goal they have—one that costs money. It could be to buy a car, start a business, live in New York, travel to Europe, or any other long-term dream they wish to fulfill. Have them do independent research about how much it would cost to fund that initiative. Then ask them to figure out how long it would take, how large of a salary they’d need, and what sacrifices they might have to make to accomplish this mission. At the end, they should have a timeline, a budget, and an analysis of the factors that will impact their efforts toward their goal.

The purpose of this activity is not to discourage students’ ambitions. Rather, it’s to show them how to create realistic paths to their dreams. Too many people make big financial decisions or pursue big goals without first sitting down to calculate how to make it happen, and because of that, they often fail to accomplish what they set out to do. With this activity, you’re showing students how to do the work upfront to create the lives they dream of.

More on Preparing Students for Adulthood

Academics are important, but they’re not the only thing students need to succeed in adulthood. Teachers have a unique opportunity to prepare students for life beyond the classroom by teaching personal finance to students of all ages. Introducing these concepts early and often will help students not feel so overwhelmed the first time they start paying real bills and making real financial decisions.