Many adults never learn financial basics at home or school

Treasury Department seeking input on what every adult needs to know about finances, and money experts weigh in

September 05, 2010|By Eileen Ambrose, The Baltimore Sun

Most of us are familiar with the food pyramid, the government's guideline for healthful eating. Now imagine a "money pyramid" for healthy finances.

The Treasury Department is working on such a teaching tool right now, and it's seeking public input this week on what money maxims should be included. The agency wants your opinion on its proposed list of what adults need to know about five key areas of finance — earning, spending, saving, borrowing and protecting against risk.

The goal is to put those concepts in an easy-to-remember format that can be used by financial education programs across the country — and to help us all make more informed decisions. You can e-mail your thoughts to

Some of what the Treasury hopes to impart to the masses is fairly elementary: Gross versus net pay. Saved money grows. If you borrow now, you pay back more later.

But financial experts say many adults need the basics. Most didn't grow up learning them at home or in school. (In Maryland, public schools from elementary through high school will be required to teach basic personal finance concepts by next September. Schools can incorporate the concepts in existing classes or design new courses.)

So, what should every adult know about finances? I surveyed some financial experts about what concepts deserve a plank in the pyramid, and here's a sampling:

Skepticism We teach children to beware of strangers, but adults must learn skepticism in financial matters, says Lewis Mandell, a finance professor at the University of Washington who has studied financial literacy for four decades.

"Understand the motivation of the counterparty, which is an academic way of saying, 'Hey, the folks on the other side aren't out to help you. They are out to maximize their own profits,' " Mandell says. "I would look at everyone I do business with as my adversary. What is it they are trying to accomplish, and what am I trying to accomplish?"

After all, mortgage brokers and loan officers weren't just being nice years ago when they didn't verify a homebuyer's income, he says. They wanted to get consumers to borrow — the more the better — so they made more money. It didn't matter if the customer couldn't afford the mortgage.

A healthy dose of skepticism will lead you to ask more questions and comparison-shop.

It also might prompt you to take steps that financial regulators say are essential: Get verbal promises in writing and check out investments — and those pitching them — before you buy.

Need vs. want "It's a simple concept, but it's a difficult one to get control of," says Jim Godfrey, president of Consumer Credit Counseling Service of Maryland and Delaware. You might want a $300 pair of tennis shoes, though a $30 pair can do the job, he says.

Know what you spend Budgeting or tracking where your money goes can help you figure out what expenses can be cut to free up dollars to meet your goals. Many consumers don't do this.

"They have no idea how much money comes in, how much goes out. All they know is that there is no money left at the end of the year," says Peg Downey, a financial planner with Money Plans in Silver Spring.

Part of the problem is the growing use of credit cards or other electronic payments, which can make us feel like we're not spending money, and we lose track of purchases, says Jennifer Openshaw, founder of Family Financial Network. She recommends using cash for day-to-day expenses to become more aware of spending.

Pay yourself first Before you pay bills and other commitments, make sure you set aside savings for your future. Put savings last, and it's easy to spend a paycheck and have nothing left to salt away.

Live below your means Easy credit a few years ago allowed many consumers to borrow and live a lifestyle beyond what their paycheck could support. But Allen Cox, managing director for the Maryland Coalition for Financial Literacy, says consumers should aim to live on less than they make so they are able to save and invest.

Debt limits choices Borrow to buy a house, a TV or car, and you are committing future income to paying that off, says Keith Gumbinger, vice president of HSH Associates, a provider of mortgage information. The decision to take on debt today could leave you unable to take advantage of opportunities later, he says.

Time value of money This phrase, often used by financial professionals, basically means that getting a dollar today is worth more than receiving it in the future.

That's because you can invest the dollar today and, in time, it can grow to be worth more than a buck, says Michael Kitces, director of research for Pinnacle Advisory Group.

And the earlier you start saving or investing, the fewer dollars you will need to put aside to reach goals, he says.

Compounding interest This occurs when the interest you earn is added to the principal, and then you earn interest on that total. And so on. The effect of earning interest on interest makes your money grow faster.

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