October 30, 2008, 6:00 am

The Root Of Our Financial Crisis: Education!

by: The Financial Blogger    Category: Personal Finance
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Then severe correction happens on the market, most people are more interest to know what is going on with their stocks every hour instead of wondering what really happen and how to avoid this situation in the future. It is obvious that financial institutions such as Lehman Brothers, AIG, Bear Sterns and all the others abused the financial system.


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They played a game with high risk, temporary reward and an absolute loss at the end of the night.

Other people will blame commercial banks of lending to people who can’t afford mortgages or credit card companies of advertising everywhere until they get you in their claws. However, I think the problem has a deeper root; financial education.

I was re-reading an old post I wrote about the lack of financial education in our school. I don’t know how it goes in your country, but in Canada, there is no such thing as credit 101 or basics of financial planning for teenager. However, we have Much Music offering a pre-paid Master Card for people of 16 years old!

I truly believe that we should teach the basic of personal finance to our teenager. At the age of 14, 15, they start working and paying for themselves for specific goods. They have been bombarded by advertisement since they were born and they now have the chance to buy all those goods without asking anybody. In a few years, they will have the right to have a $500 student credit card and max it out to buy new clothe, the latest IPod or a Playstation 3 (hum… I wish I was 18 again!).

I can imagine a class separated in 4 parts:

Credit 101: we would learn the basic of credit, the impact of interest charges when minimum payment is made on a credit card, how to manage credit cards properly and the result of bad credit over time.

Saving 101: we would learn how to save money efficiently. How to resist ads’ temptation and how to find good deals (who would not listen if you tell them how to save $25 on their $200 Diesel jeans?).

Investment 101: we would learn the power of compounding interest, basics of diversification and the advantage of periodic investment.

Retirement planning 101: This would be joint with Investment 101 in order to show them how saving at the age of 15 for their retirement would make them millionaires. They have to know the basics of retirement plans (such as RRSP’s or 401k) and the impact of inflation over time.

A stronger education builds a stronger society. Since economic is the base of our North American system, it seems normal to me that we teach it to our kids!

Now I just wish one day some politicians will get to this blog and steal my idea 😉

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Comments

Well, down here, we just teach people how to spend money. From what I remember of my days way back when (ok, ok, a decade ago), they taught he proper way to write a check and balance a check book….for 24 weeks.

But then again, our entire education system is screwed up. Sorry to say, politicians will have to be greased to implement it. This is one fight you will have to take on with a few friends.

Then again, I’ll do my part down here and start with some local schools teaching what I know.

Couldn’t agree more. Better financial education in school would prevent so many problems!

by: The Financial Blogger | October 30th, 2008 (10:30 pm)

Once my kids go to school, I think I will offer the school to teach them for free!

I saw a news segment a while back about kids going to something called finance camp.
So a least someone is doing something along these lines.
But I agree,this should be taught in the public schools.

Awesome post. I couldn’t agree more. My own financial education was completely lacking. Luckily I married someone who does understand finances, and I’ve learned a lot since we’ve been together. Marry someone who knows about finances doesn’t seem like the best solution for the general population though. 😉

The lack of financial education is definately a major factor in consumer debt, but national debt is another story. The government economist have plenty of financial education, yet they have spend the nation into bankruptcy.

It just proves that a financial education does not allow for good decisions. The RIGHT financial education will. They are usually taught traditional methods such as squeeze a turnip to make blood and the taxpayers always have more money they can steel.

Good perspective. In Singapore, we are facing some turbulences too, due to lack of financial education and the “investors” were taking on investment risks that they do not understand. A series of law suits ensue.

The emphasis on financial education at young age cannot be over emphasis.

Cheers!
Leroy

Here in the UK, there is a new initiative to teach children the facts about finance and economy at an early age. This can only be described as a positive move, however we are yet to see if this will be fully implemented.

In addition, I feel that parents who have a good understanding have a moral duty to teach their children the facts too. However not all parents have the know-how to do this, so there needs to be a serious emphasis on financial education at schools.

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Some say that this initially credit crisis turned into a deep and world wide economic crisis will change the very fundamentals of our economies.

Here is an idea to think about. If someone had deposited one dollar into a bank account 2000 years ago for a 2 per cent interest rate only, that deposit would be worth 1,5 raised to the 17th power (an incomprehensibly high amount of money) today. All this means that the idea of interest, the price or cost of money, is in itself nonsensical, or at least unsustainable in the long run. Why do we expect an economy based on an unsustainable principle to function???

The very best explanation of the crisis I have seen is this one: http://whyhypeblog.blogspot.com/2009/02/crisis-of-credit-visualized.html

by: The Financial Blogger | February 25th, 2009 (8:13 pm)

Paul,

Someone with $1 2000 years ago would have been so rich, it would probably be a pharaon 😉