Money in the real world: Associate finance professor offers personal finance resources

4/4/2016

Hoping to up your financial literacy? Alice Xie, associate professor of finance, looks into the world of personal finance and the resources available to you in celebration of National Financial Literacy Month.

What is financial literacy?
When we talk about financial literacy, we’re generally talking about personal finance. It’s a fairly broad area that is focused on knowledge of how money works in the real world. Making investments, borrowing money, estimating financial burdens and taxes—these are all related to personal finance. And understanding these topics increases your financial literacy.

When should financial education begin?
Financial education should start as soon as possible, even as early as elementary school. Little kids can understand some concepts—like basic budgets and the difference between a want and a need.

My daughter is in third grade. Last year they learned about trade in their social studies class. And this year they’re learning what a budget is. Now I can give my daughter a budget before we go to a toy store and she then decides when to make a purchase, making choices and knowing that she won’t be able to get everything she wants.

Behavioral habits start at a young age. That’s why it is so important for kids to begin to understand these concepts at an early age.

Let’s talk about student loans, a personal finance hurdle for many students and their families.
From my point of view, learning about the consequences of student loans and having a basic knowledge of financial literacy is a must for high school students.

A lot of students need to borrow money to attend college but they may not estimate the financial burden they will face after they graduate. Or they borrow large amounts of money to attend college and suddenly they find they can’t find a job and don’t know how to pay their loans.

Students have to plan ahead and understand the terms of their loans, including how interest is compounded. They need to know how to figure out how much they will have to pay after they graduate and estimate how much they will earn.

If people take just one step this month to better their personal finances, what would you suggest?
You can start by learning the Rule of 72, which is an important calculation tool for both borrowing and investing.

If you already have loans, the Rule of 72 can be used to calculate your potential financial burden. Use the number 72 and divide it by the APR. For example, if the credit card company tells you your interest rate is 29.99 percent, divide 72 by 29.99, which is about 2.4. This means that the amount you owe will double in 2.4 years because of interest. If you borrow $1000 today, you will have to pay back $2000 after 2.4 years.

Conversely, if you’re making investments, the Rule of 72 will show how long it will take you to double your money depending on the interest rate.

There are more complicated formulas, but the Rule of 72 gives you a rough estimate.

How else can people increase their financial literacy?
A lack of available resources was a barrier to financial literacy a few decades ago. But that is no longer true—even for those who will never take a finance course.

Resources now are really rich, especially online. There are a lot of great videos on YouTube. I often find videos that correspond to my lessons on YouTube to help students gain a better understanding of what we are discussing. Online calculators are another great resource. These can help you calculate everything from potential financial burdens to how much to contribute each month for retirement.

If possible, also read financial news every day. We used to have to rely solely on the Wall Street Journal. But we also have really good, free resources online now. Bloomberg.com, Yahoo Finance—if you want to explore, you have the resources you need.

Is it ever too late to start on the trail to financial literacy?
You can start to learn at any age; but, again, start as early as possible. I can understand that some people are really scared by the numbers—I hear this all the time in my classes. But I tell my students they have no choice. In the U.S., we have the most developed financial market and each household will have to deal with those markets—either to borrow money or to make investments.

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