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Vail Valley Voices: Some basics everyone should know about finance

Peter Thompson
Vail, CO, Colorado
newsroom@vaildaily.com

One of the Vail Daily’s recent guest columnists, David Dillon, wrote about the deterioration of “basic, simple literacy” in the use of English grammar and spelling: “Whether you’re too young to understand their proper usage” or “Weather ur to young to understand there proper usage.”

A similar topic that concerns us all, especially at this time of mortgage and credit crisis, is “financial literacy.”

A recent study of high school students indicates that knowledge of the financial literacy is deteriorating. High school seniors, on average, answered correctly only 48.3 percent of questions about personal finance. That was even lower than the 52.4 percent in the previous survey in 2006 and marked the worst score out of the six surveys conducted so far.

What kind of questions are we talking about?

Well, here’s one of the questions: “Rebecca has saved $12,000 for her college expenses by working part time. Her plan is to start college next year and she needs all of the money she saved. Which of the following is the safest place for her college money?

a.) Locked in her closet at home.

b.) Stocks.

c.) Corporate bonds.

d.) A bank savings account.

Financial literacy is understanding money and how it works within our society. This is a lifetime skill that we need to know. This is a lifetime skill that we need to take with us to work, to marriage, to parenthood, to retirement, and if we ever get elected, to government. The answer to Rebecca’s question is “d,” a bank saving account. But just how safe is that?

The answer is simple, if you understand a few basic concepts. For example, if you save a thousand dollars of your hard-earned income, and via your bank, you invest it in the New York Stock Exchange, how secure are you?

Do you understand that your banker’s and your stock broker’s primary responsibility is not to you? Do you understand that compounding and leveraging of that money could give them 100 times what it is going to yield to you? Do you understand that you are at risk and they are not at risk?

The average American will earn over $1 million during his or her working lifetime, yet will retain next to nothing. Why? Because the average American never learned basic financial concepts in school and really does not understand a few secrets of the system.

Here’s another of the questions high school seniors could not answer:

“Your take-home pay from your job is less than the total amount you earn. Which of the following best describes what is taken out of your total pay?

a.) Social Security and Medicare contributions.

b.) Federal income tax, property tax, and Medicare and Social Security contributions.

c.) Federal income tax, Social Security and Medicare contributions.

d.) Federal income tax, sales tax and Social Security contribution.

The average American spends $1.22 for every dollar earned during most working years. Where did he or she learn this behavior? Maybe from watching our federal and state governments, which do very much the same thing but even more so.

And Wall Street? Well, some of them were leveraged 30 to 1, meaning that they spent or invested $30 for every $1 that they actually had.

The cornerstone of this behavior is free markets and free enterprise. The primary mechanism is the banking system and its primary tool is credit via “trust.”

“I trust you.”

When you put a dollar bill in your pocket, you are saying: “I trust the world to honor the value of this piece of paper.”

When you put a dollar bill into your saving account, you are saying: “I trust the world to honor the value of my dollar savings account.”

Well, now that the U.S. banking system is trillions of dollars in debt, the U.S. government is trillions of dollars in debt and some U.S. businesses are trillions of dollars in debt and going out of business, who are you going to trust?

This isn’t a political debate. This is understanding those basic financial concepts that make “trust” and “free enterprise” and your dollar and your saving account work.

Peter Thompson is a Vail resident and financial consultant who teaches basic finance at Colorado Mountain College. He can be reached at pthompson@the-cia.net.


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