FOOL ON THE HILL
What You Didn't Learn in School

There's a movement afoot to get more financial education in schools. It can't happen soon enough. Selena Maranjian offers eight things that she wishes she had learned way back when she was in high school -- things like having realistic expectations and how to make and save money.

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By Selena Maranjian (TMF Selena)
January 27, 2003

In 2002, the Jump$tart Coalition surveyed American teenagers to test their financial literacy. The average participant scored just 50%, a failing grade.

To make matters worse, this wasn't the first time Jump$tart surveyed our youth. The average score was 52% in 2000 and 57% in 1997. Things aren't improving. Here's one sample set of results: "Students felt that returns on savings accounts (37.5%) and U.S. government savings bonds (40.2%) would grow more in value over 18 years than stocks (18.7%)."

The financial illiteracy of today's young people isn't so surprising when I look back on my own, otherwise pretty good, secondary education. At my public high school, I studied geometry, chemistry, creative writing, civics, French, Latin, and even how to play football. But I can't remember a single lesson on how to manage money prudently and make the most of financial opportunities. I think my experience is typical. Most fellow adults don't know much about managing money, either, because they never learned about it in school. They're muddling along, hoping for the best, assuming (incorrectly) that everyone else knows more than they do.

That's the bad news. The good news is that for a variety of reasons (such as increased overall interest in and awareness of the stock market and effective advocacy groups such as Jump$tart), there's a movement afoot to teach kids about money. If it succeeds, we'll soon have a society full of money-savvy adults. I just noticed that my high school now offers a half-year elective called "Personal Finance," designed "to develop personal strategies in banking, credit, investing, buying or leasing an automobile, buying insurance, purchasing a house, and planning for a major event." It's a shame that it's not a required part of the curriculum, but it's a step in the right direction.

So, now that schools are interested in cranking out financially adept students, what, exactly, should they teach? I'll offer a few things I wish I learned in school. Many link to our Teens and Their Money center, with information adapted from our new book, The Motley Fool Investment Guide for Teens: 8 Steps to Having More Money Than Your Parents Ever Dreamed Of (recently named one of Barron's best investment books of the year).

I wish I had learned that...

I could become a millionaire, given patience, diligence, and compounded growth.
It's corny, and it's the kind of come-on line you see all over ("Become a millionaire -- in three easy steps!"), but for teenagers and pre-teens, in particular, it's very true. It's also a great motivator. Young people aren't eager to learn about money when they feel limited to a meager allowance or part-time job, but teaching them about the magic of compounding may inspire them to learn more and take action.

Stocks aren't boring -- they're often companies we know fairly well and like. Even many adults associate success in the market with finding obscure companies with stock that shoots up to the moon. In reality, most companies we know and like are publicly traded, and over the long haul, these same firms can increase our wealth. I'm speaking, of course, of firms such as PepsiCo (NYSE: PEP), Microsoft (Nasdaq: MSFT), Johnson & Johnson (NYSE: JNJ), Berkshire Hathaway (NYSE: BRK.A/BRK.B), Pfizer (NYSE: PFE), Starbucks (Nasdaq: SBUX), Wendy's (NYSE: WEN), and Tootsie Roll (NYSE: TR).

It's not impossible to save money -- there are many ways to do so. Check out these helpful tips from actual teens on how they've managed to save money.

There are many ways to make money -- other than babysitting and flipping burgers. Many teens assume incorrectly that they have few options. Instead, a little creative thinking can uncover lots of moneymaking possibilities.

It's important to have realistic expectations about investing. Without being realistic, many people jump into the market, get burned once, and then never return. They take on too much or too little risk, or are just impatient, skittish, or confused. We should all expect a risk-and-return tradeoff. Expect to own pieces of companies, not pieces of paper, via shares of stock. Expect stock prices to go up and down, for lots of reasons (and non-reasons). Expect volatility in the market. Over the long haul, it goes up, but over shorter periods, it can go up or down -- sharply. Expect growth in your holdings, at least in the long run. (Assuming you've invested in healthy, growing companies.) Expect to wait -- investing is a marathon, not a sprint. Expect to lose some money, and aim to learn from and not repeat mistakes. Expect to run across conflicting information and advice. Expect investing to be work -- but fun work. And finally, expect to keep learning. There are many resources available to help you.

Investing can be very simple and easy -- with index funds. This is a biggie. Too often, we learn a little about investing, only to discover how much we don't know. We realize there are return-on-equity ratios, cash conversion cycles, and same-store sales figures out there, and we despair at the thought of mastering all that. Fortunately, there's a lucrative alternative behind Door No. 2 -- the index fund. With it, teens and adults alike can painlessly participate in the stock market's likely growth over long periods.

There are many indexes, such as the Dow Jones Industrial Average, the S&P 500, and the Wilshire 5000 ("the total market"). And there are various index funds based on these and other indexes. An index fund is a mutual fund that essentially mimics a given index, holding the same companies in the same proportion. Therefore, it gives investors essentially the same return as the index.

For many, if not most of us, opting for index funds isn't a matter of settling for second best. If you don't have the time, temperament, or interest in it, you probably won't do well picking stocks on your own. You can end up outperforming most mutual funds and many stock pickers via an index fund.

It's vital to avoid bad money moves. Perhaps the most insidious bad money move is getting mired in credit card debt. It's derailed many adults and snared many college students, too. Scandalously, many colleges have accepted millions of dollars from credit card companies in exchange for permission to market to students. (Learn more about managing credit cards and keeping your credit report clean in our Credit Center.)

Some people actively invest while burdened with credit card debt. In such situations, they're often paying out 18% or so to the credit card lender while trying to earn 10% or more in the stock market. Not good.

Other bad money moves to think twice or thrice about include smoking, drugs, lotteries, and other forms of gambling. Even addictions to shopping can be dangerous. (I, myself, have recently gotten addicted to innovative board games, I confess. Most of them cost less than a pair of shoes, but it adds up.)

We should never stop learning about personal finance issues such as money management and investing. At any age, there are things we can and should learn about how to save money, make money, invest money, and spend money. It needn't be a chore, and it will probably pay off in spades.

Here's a big list of resources that might come in handy for you.

[Note: I invite you to share this article with any teen or clever pre-teen you know. You can also email it to friends via the link at the bottom of the page.]

Fool on!

Selena Maranjian's goal in life is to make the incomprehensible comprehensible. (Or is it to make the comprehensible incomprehensible? Hmm...) For more about her, view her profile. You might also be interested in books she has written or co-written, such as: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools