With today’s education system training students out to become financially illiterate employees, many academically smart people lose out when they step into the outside world. This necessitates the need for integrating financial education in the many lessons taught in school. The following 3 below are the ones I believe every student must know.
To prepare well for the future, I’ve always believed that we must know history at our fingertips first. Similarly, for people who want lots of money, they have to study its history well first. Regarding this, signing of the Bretton Woods Agreement in 1944 would be one of the most important events in modern financial history. This is because it caused all national currencies worldwide to be backed by the US dollar which after 1971 became backed by US debt. The importance of this lied in the fact that most economies worldwide are dependent on and modeled after the US and if the US economy shows cracks, it will be soon that these economies will suffer.
In addition, with the US dollar becoming a “currency” after 1971, money must keep moving to assets that appreciate in value as history has shown that all currencies eventually hit zero. One clear example is the Continental, a currency printed to fund the American Revolution. Today, given this flaw, debt must increase in order for economies to grow. This is one of the reasons why bailouts are used whenever there are crises because bailouts increase debt.
However, debt can be a double-edged sword because too much of it is poison to the economy. As a result, with money today being printed for debt, savers become losers as the purchasing power of their money will get devoured by inflation that is accelerated by more debt. Unfortunately, despite this, many still save and this is why they are financially exploited.
The second lesson every student must know would be understanding their financial statement. In financial statements, there are 3 parts and these are income statement, balance sheet and statement of cash flow.
An income statement measures the net income you earn over a period of time and with the inclusion of expenses, you can budget and control your money outflow better. A balance sheet allows you to compare the worth of your assets against liabilities, giving you your net worth. A cash flow statement allows you to determine the amount of passive income you earn over a period of time. Passive income is income you do not work for and it usually resides in lower tax brackets. Knowing these 3 aspects of a financial statement can easily allow a student to be more prudent with their finances, reducing the possibility of financial problems in life.
The third lesson necessary for every student would be the difference between an asset and a liability. In simplified terms, assets put money in your pocket without you working while liabilities draw money out of you even if you work. Knowing this will allow you to make your assets worth more than your liabilities, using cash flow from assets to buy the liabilities you need (e.g. yacht, club memberships, etc). This will certainly help people filter out bad financial advice and concentrate better on achieving their financial goals.
In conclusion, while simple in nature, these 3 lessons can have profound impact on the lives of many if they knew them well early. Nevertheless, it is never too late to learn and I hope readers have gained some understanding about finance with this.