Addition by Subtraction ... Personal Financial Knowledge and the Choices We Make ... It's Never Too Soon or Too Late to Learn the Basics

It's not what we don't know that causes us the most harm and greatest expense over a lifetime when making personal financial choices. It's what we don't know that we don't know. It's the unknown unknowns, in other words. {For just one small but telling example of the costly 'what we don't know that we don't know' factor at work, see Meal Plan Costs Tick Upward as Students Pay for More Than Food.} The power of addition by subtraction is perhaps the most consequential of the unknown unknowns and therefore unmade calculations.


For instance, world class athletes make what they do look easy and effortless by subtracting wasted effort and motions in an effort to minimize imperfections and therefore improve results by expending less energy. They can then use that 'saved' and subtracted energy more productively. When this happens, we often refer to them as natural athletes, but they're not. They're merely imperfectly performing but diligent hard workers consistently honing their skills by practicing the method of addition by subtraction, aka learning by doing the right things right.


And it's exactly the same addition by subtraction factor at work when considering the consequences and results of the personal financial choices we make over a lifetime. Ongoing ignorance is no legitimate substitute for practicing addition by subtraction and thereby acquiring the needed personal financial knowledge to experience the benefits and joy associated with a lifetime of self help.


Too many of our fellow Americans know too little about the probable lifetime financial consequences of the decisions they make when making them, even though they are decisions whose consequences all too often will prove to have been both foreseeable and needlessly negative over the long haul.

So let's take some time to look into what we should know but don't know at the various stages of growing up. And speaking for myself, that 'growing up' process lasts a lifetime.


What kids need to know about money --- at every age is well worth taking a few minutes to review and consider, both as individuals and in consideration of our families and friends:


"American parents today are well aware of the importance of teaching their kids about money — especially since many won’t learn at school even such basics as how to pay bills, or why interest rates matter.


Just five states scored an A on a recent report measuring efforts to improve financial literacy in high schools and 12 states scored an F, meaning there are minimal or no requirements for personal finance education.


Even in the states that are encouraging financial education in schools, most teachers don't feel well-equipped to teach the subject — and only a small percentage have actually taken courses on personal finance themselves . . . . Here are 10 highlights per educational level . . . .

IN GRADE SCHOOL:

In elementary school, kids should be learning about the financial world beyond their own piggy bank. Yes, the basics of saving, spending, investing and borrowing, but also more advanced concepts like compound interest, budgets and insurance against financial risk.
Saving and investing:
1. The difference between saving and investing.
2. The concept of compound interest.
Income:
3. Possible sources of income (not including mom and dad), like salaries, benefits and interest rates.
4. Why more education can lead to more income.
Spending:
5. You can’t buy everything you want. What goes into deciding to buy something?
6. How to count and use money.
7. What is a budget? And what goes into making one?
Borrowing and financial risk:
8. Borrowing allows you to buy things now and pay for them in the future.
9. Credit is when you use someone else’s money for a fee, and interest is the fee you pay to borrow money through credit.
10. Financial risk is an unavoidable part of life, and you can choose to protect yourself by avoiding risks or taking out insurance.

IN MIDDLE SCHOOL:

Now for the stock market. In middle school, kids should be learning that there’s a thing called Wall Street, and why it matters to them. Also, false advertising, and taxes.
Saving and investing:
1. How time, interest rates and inflation all affect the value of savings.
2. How to calculate interest, i.e. multiply the principal amount, the interest rate and the time of the loan or investment.
3. Financial assets you might want to invest in include stocks, bonds, mutual funds, real estate and commodities.
Spending:
4. When buying things, look for information beyond advertising claims to make a decision.
5. A good budget should account for expenses, income, savings and taxes.
Borrowing and financial risk:
6. The benefits to using credit to finance long-term purchases last a long time, but the benefits to using credit to make daily purchases are short-lived and don’t add up over time.
7. What is an interest rate on a loan, an annual percentage rate, and why do rates fluctuate based on changes in the market?
8. How to avoid getting charged interest on credit card purchases.
9. What is a credit score, and why does it matter?
10. What is an insurance premium, and why do they vary?

IN HIGH SCHOOL:

Preparing for the huge financial decision of college is paramount in high school, but kids should also be learning the basics needed to navigate life as an adult after college. High schoolers should also be learning about the economy, financial regulatory agencies and policies, and should be taught the value of developing a personal financial plan.
Saving and investing:
1. The possible benefits — and risks — of starting a business of your own.
2. Going to college is an important financial decision. Consider tuition and fees, and the future economic opportunities of a degree.
3. How taxes affect income.
4. Some adult things you’ll soon need to worry about saving for: a car, higher education and retirement.
5. The factors that go into calculating an investment’s end value: investment amount, time, rate of return, and frequency of compounding.
6. What do the government agencies (like the SEC, FDIC and CFPB) do, and why does it matter for your finances?
Borrowing and financial risk:
7. The important factors in financial aid for college: grants vs. loans, amount of loans necessary, loan forgiveness and repayment schedules, and expected future income.
8. How to compare the cost of credit from different financial institutions, how to use credit wisely, and the risks of excessive debt — including declaring bankruptcy.
9. How to protect yourself from identity theft.
10. The different types of insurance, from health to auto to disability, and how things like deductibles and copayments work.


You can see the full list of CFPB curriculum recommendations here.

Summing Up


Knowledge is power and ignorance is dangerous to our financial health and well being.


Practicing addition by subtraction is a powerful personal tool when making decisions, and especially financially related choices. What we don't spend we don't borrow and therefore are able to save, and what we don't borrow and do save, we can put to work for us early in life and invest for the long haul.

The more we know in advance about how things really work, the better off we will be. And practicing and applying the powerful rule of 72 to what we do and learn to do, aka compounding over time, is a great reality enhancer.

Accordingly, the sooner we know what we don't yet know but need to know, the sooner we will take the time and make the effort to learn that which we need to know. Choosing to remain ignorant about finances is harmful and an unnecessarily expensive way to go through life.

The power of addition by subtraction is a key success factor when striving for perfection, even though we'll never achieve the perfection we seek. We're only human.

That's my take.

Thanks. Bob.