Think you could outsmart a high schooler when it comes to money questions? Now's your chance to find out.
The Center for Financial Studies at Southern New Hampshire University's has created eight curriculum modules for the high school set, a project funded by a NASD Investor Education Foundation Grant. This is perhaps the first broad-reaching example of financial education for secondary school students to stretch beyond savings and household budgeting. This curriculum still doesn't cover IRA self-direction -- or investing outside of mutual funds, stocks and the other standards -- but it's a nice baseline.
Simply answer the questions below to see how well your know-how stacks up to the new high school curriculum. Correct answers will be included in a later post, so for now take a guess if you have to and jot your answers in the comment section below.
1. What is a REIT and where can you buy it?
2. What is a "cash equivalent investment"?
3. What is an ETF? (This type of investment is a hot subject these days in high-end financial publications, so if you don't know about this one yet you'll likely want to find out.)
4. What is an income fund? (Note, you'll be interested in this one if you're looking for steady cash flow.)
5. What are the advantages of investing in a mutual fund?
a. It's liquid.
b. It's more diversified than stocks.
c. It's subject to daily share pricing.
d. All of the above.
6. What are the disadvantages of investing in mutual funds?
a. You'll pay taxes on fund interest and dividends as income, even if you don't actually make income from selling your holdings.
b. It's subject to daily share price.
c. All of the above.
7. What numbers do financial planners use to calculated the expected rate of return on retirement savings and the U.S. inflation rate?
a. 12 percent for retirement returns and 3 percent for inflation
b. 8 percent and 4 percent, respectively
c. 10 percent and 5 percent, respectively
d. 8 percent and 3 percent, respectively
8. When is your net worth statement calculated?
a. When you turn 59 1/2.
b. When you turn 70 1/2.
c. Any time you ask for it or do it yourself.
9. How much of your annual take-home pay do financial planners recommend saving or investing in liquid assets in case of emergency?
a. 25 percent to 50 percent
b. 10 percent
c. 30 percent
10. What is dollar cost averaging? (It's a great way to better help you "buy low and sell high.")
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| Jennifer D. Meacham, Gather Money Correspondent | ||||
Jennifer's column, "The Bottom Line," is published every week to the Gather Essentials: Money channel. Jennifer covers money matters for RedwoodAge.com and self-directed retirement account investing for RISMedia. She's co-author of the best-selling retirement investing guide "IRA Wealth: Revolutionary IRA Strategies for Real Estate Investment" (Square One Publishers, New York). Keep up on the latest news and analysis into how you can take control of your business and personal financial future by joining Jennifer's "Self-Directed Investing 101" network. | ||||
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Comments: 32
So, not even a venture to guess at the questions above?
1, REIT = Real Estate Investment Trust - pretty much what it sounds like. Invests in real estate. Many people are bailing out of these, even though land and home prices eventually rebound. But when?
2. Cash equivalent investment = An asset, like a Treasury bond, that is supposed to be equivalent or as safe as holding cash but I think it may have the possible advantage of earning interest but maybe not enough to outpace inflation? That isn't a strict definition, it is MY definition. Anyway, usually conservative, like Treasury bonds.
3. An ETF is an Exchange Traded Fund. I honestly don't know much about these except I think they can be traded on the stock exchange and may track that index.
4. An income fund is a mutual fund that is trying to increase income. Therefore, I think there has to be option or other trading to try to ensure this.
5. Advantages of a Mutual Fund? Well, I know they are diversified than an individual stock. Is that what the diversified answer meant? I'm going to guess "all of the above tor that one" but I really only know about the diversification for sure. I know there are bond funds and different levels of Mutual funds, from conservative to risky.
6. Disadvantages of a mutual fund = Guessing all of the above.
7. I think this one is tricky. Being closer to retirement age, I've researched this and the answers from so-called "financial planners" online and off varies widely so I'd be interested in what the correct answer is. I know the S&P 500 averaged over 11% for many years, going back to about 1970, I think. I think C seems like the answer I'd be most comfortable with - relatively high rate of return, relatively high inflation.
8. I think you can calculate your net worth anytime. People do it all the time. I've done it, not necessarily accurately because they take into account things like cars and homes and I always think that is only worth what you ACTUALLY get for it, so much has to be a "guess-ti-mate" But I think I can come pretty close, given a day or two.
9. 30 percent but I think this is low. I thought the general rule was 3-6 months of living expenses, so I guess that goes along with 30 percent. The 30=50 percent answer could be correct too but I'll go along with 30% .
10. Dollar cost averaging simply means you invest a set amount per given time frame (monthly, for instance) in an investment or other account that goes up and down in value over the short term but not the long term. That way, when the stock is up, you may be buying less shares and when the stock is down in value, you buy more (which increase in value when the stock goes up).
Okay, how'd I do?
:)
Sure am glad I graduated in 1970 when life (and school) was easier.
The questions and their answers are inconsequencial, look them up if you really need to know.
I would say teaching the kids "Richest Man in Babylon" will better prepare them for being fiscally responsible and gives them a better chance at having a net worth than a finacial planner will.
An income fund has not value if you haven't accumulated the money to invest in one. Same for hiring a finacial planner. You can get more from that little book than a certified finacial planner will teach you.
The only real advantage of a mutual fund is that they will actively manage your money when you don't have the inclination or the time. As far as diversity it depends on the type of mutual fund you use.
I all honesty I don;t want to out smart anyone, I want those high school kids to have a chance at finacial responsibility which can lead to a bit of stablity.
Congrats on being featured on gather's homepage!
Duane, I'll be sure to check out The Richest Man in Babylon by George S. Clason
However, I disagree with you that the answers to my questions above are inconsequential. All of the questions are ones educated investors will have to ask themselves at one point or another when figuring out what to do with their money, especially if they're not aided by a financial planner. I fully believe in taking control of your own investments, but how can someone know if the investments they choose are the best for their plans unless they know what else is out there? The answer is that they can't.
Natalie, I absolutely agree with your comment, especially "That young people are being introduced to the principles of investing while in high school is a good thing for them and for the country." Thank you so much for your sage advice on investing in real property and renewable resources for the long haul. I'm delighted to hear that this solid strategy has worked out well for you.
Karyn K., this is a new curriculum created last year and I don't know yet how many high schools are using it. You're right that the questions are tough. But, as I'm learning, the answers are essential to having a handle on the very complex nature of today's investing market. Thank you so much for your comment, and the chance to reminisce about "simpler times." ; )
And Jane C., leopard prints are indeed a classic.... I'll head on over to your blog to weigh in personally on the subject. After all, clothing for many is a big "investment." ; )
My view is to start the education with how to manage personal finances so there will be money available for investin. Part of that is about the cost of money, borrowing verse lending, the disicipline of capital accumulation, the varios types of investment [equities, realestate, variations on bonds, collectables], how they work, and what is the historic comparison of rate of return, and then a description of risk. Because without this basic education employing anyone to mange your money [financial planner, investment advisor, of fund manager] is simpling setting the person up to relying on the luck of the draw who they will get and the success they will have. As an example financial planner and even estate planners place a great deal of emphasis on tax avoidance when making investments. ANd the simple truth is that part of finacial management is the lease preditable.
Asking themselves those questions is very far down the financial edcuation path. In fact a person that watches CNBC are given those answers regularly. As far as it goes most of the questions can be answered by a simple Google search. It seems far more valuable for a person to be given some education in realestate and how it gernates cash before worrying about REITs, and which type you want.
I see edcuation more about teaching people the understanding of finance and investing before impressing them with the industry terms of individual tools. I feel that with the understanding people can easily inform themselves on how to identify the means they want to use and select the individual vehicles to use.
The standard fair is for financial/estate planner to distribute a persons resources based on age, at 60 60% in bonds or some other income fund, say 10 or 15 % in case and the rest inequities. Where a person that understand that there are equities that have been paying a dividend euivalent to current bond yields for a century may be a viable alternative. The questions offered don't suggest that a person has recieved suffiecent educationto even know that to be true or how to decide on which they would benefit most from.
To take control a perosn needs to know what is personal money mangement before they know the trade buzz words.
The questions trivialize financial management. As an example question 9, there is so much that goes into deciding what a cash reserve should be, stage of life, number of dependents, age of and employeablility of dependents, what are the monthly expenses that would have to be covered, tolerance to sacrificing potantial gain on investments for sudden emergencies, and what is the networth of the individual. No one should ever be setup to believe that investing is soemthing that can done with a simple formula and no thinking is necessary.
I do agree with you that investing and, particularly, cash reserves that one should have on hand can not be held to a general rule. It has to be SPECIFIC to the individual, how old that person is, health, other factors (having a special needs child or other factors that drain money), employability (good job, in demand..or low demand job), etc. All of that factors into cash reserves and how much to have on hand.
But, again, this quiz was based on a course ALREADY being used in the schools and to see if people know the basic terms and what they are. Disagreeing with what is being taught is a good starting point for discussion. I'm just glad they are trying to teach the kids anything about finances and, hopefully, that it will be a starting point for the kids to think for themselves about whether they agree or disagree. In a good course, there would be pros and cons mentioned, as well as lifestyle factors.
I disagree with the premise, 'do something right or wrong do momething.' The questions reflect what the instructors feel are important topics. The instructors seem to think that it is more important to know what the buzz terms are on CNBC than how an individual, especially one just starting [high schol, college (non financial), or elementary] needs to know.
There are many people that have aquired wealth without ever having a course on dollar cost averaging. They simply learned that if they put a set amount of money away (savings) from every check before they started spending, they would accumulate moneys that they could then invest. Whether yuo put that money into a mutual fund every month or into a savings account and then invest it in indivudla stocks really is of less importance than simply putting it aside. The term dollar cost averaggin is a god catch phrase for mutual funds and stocbrockers to get a steady income. Tell me a a great investor or mutual fund that dollar cost averages. They accumulate dollars and when they find an actractive stock they buy.
We all agree that it is ever increasing in importance that kids today are educated in personal finacial mangemetn. You may think this is a good starting point, I don;t. I feel that the course this test was taken from is giving false hope to parents that their kids are learning something important and with the knowledge on theis test they will be able to gain finalcial security. Who cares when networth is calculated, do the kids know what networth is and how avoiding debt is a faster way to have a positive networth.
I'm so glad you are sharing your opinion as I think you make some good points. Here is where I am coming from - as a parent of three, my kids never got a single course that helped them increase what I'd call "financial literacy" in school. Not once in over 21 years of having them go through high schools (they were 7 years apart in age, first one born 7 years before the second...etc)..
We taught them everything, what a credit report is, about debt and credit cards, the importance of saving early and saving regularly and basic financial terms. We taught them how to read stock market pages, let them practice "investing" by picking stocks and tracking their performance on paper. We taught them to avoid debt with the possible exception of mortgage payments - and how to maximize net worth and assets. ANY course that teaches kids a smidgen about money is better than nothing because I was amazed at how many kids knew nothing about finances when they graduated college. I don't know why but many parents won't discuss finances with their kids. It is like it is a taboo subject. That concerns me.
My hope is that a course like this would at least teach them the basic terms. If a kid does not know what "net worth" means or what a mutual fund is or how credit cards work (and those high rates of interest!) or why they might want to build up an emergency fund, then they don't even have a touch of financial basics. They still have to think for themselves and I'd hope the course would stress that factor as well.
I think you and I are closer together in how we feel about this than you might think.
We are working on the grand kids now. I start next year with the first one (at age 8) by giving her the Richest Man in Babylon, and we will talk about it (the parents say it is ok).
We started our kids on learning to manage their money (2nd and 4th grades respectively). We gave them an allowance plus the cost of incidentals for the week (school lunches) with the option of makng their own and keeping the money they avoided spending, along with incentives such as grades and house hold tasks. We had them set goals to save for and discussed what the expected from the purchases.
As they got older and friends started questioning their financial values we began explaining what we did and why. When they first realized they had a networth and began asking about what they should do with it we began discussing the options and where they could go to find out more, we never told them what to do. One daughter is active in stock picking (she likes it, and her husband is active in ETF trading) and the other (and her husband have recognized that they are not inclined to active management and are using 401ks and mutual funds). The fisrt is now actively developing a small business (with flexible hours) and the other as the kids get into school seems to have a similar bent.
Their understanding of personal financial management help them go to college, graduate without debt, to have successful careers, and decide to be stay at home moms. And it all started with the principles of Richest Man in Babylon in elementary school. The investment terms and asset management, they learned once out of school with money in hand. The only debt for both families is their homes.
As for myself and my wife's backgrounds, it was learned the same way. We learned about the investing from public resources, the library, newspapers, and TV (good old Louis Rukyser). In fact I have tried a few financial planners over the years (one nationally recognized) with little learned except how tax llaws and rulings can have a significant impact on investments (negatively after the fact).
Whether you call it antidotal evidence and not statiistically meaningful, it is the reason that I am so strong a believer in the personal finance training and so down on the wall street lingo training. To be fair (I have no reason to be) I should see the the course syllabus before being so hard on it. I will rely other antidotal data, most people that claim to teach kids about finance and start with the part that is so geard to inside phrases can seem a bit mor impresse with their financial prowess then justified.
There are several people agree with you that the financial training of our kids is important. There seems both the current academic activities yuo are familiar with, those of us that have done with our kids, those that are both doing with their kids, and those that are either being educated or have recently gone thorugh the basic education.
With you knowledge and Gather experieince, I wonder if you would consider (or even if it can be done) posting an article that ask for suggestions on what should be part of the financial education, the sequence, and tools to use for educating kids?
After a few days you might post a summary of what has been offered as a simple set of ideas for parents or other family members wanting to help kids learn about person finance. You may suggest I do it, but I don;t know the system and I can be to reactionary, and I just done have the skill necessary for framing somehting others could use. What do you think? Or is there someone else tha might do this?
Sincerely,