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[TITLE]

CMV: Teaching personal finance in schools and encouraging saving would end badly

[Stats_monkey]

Hello everybody! I was in a reddit thread earlier where someone was preaching the importantce of teaching personal finance in schools, encouraging people to start pension contributions as soon as they start earning, ect. ect. I'm an economics undergrad so I have a little (it is only a little) understanding of savings, but I believe that a drastic increase in savings would be a catastrophe for a few reasons: 1) Intrest rates. The current interest is LOW, if not negative in real terms. This means that there arn't sufficient (safe) borrowers to allocate the funds to. Increasing the savings more risks entering a liquidity trap. 2) Stagnation of demand. If you encourage people to save then they arn't spending (obviously). This is probably the worst thing that could happen right now (or in the next few years). 3) Asset price bubbles. With lots of savings being depositied banks will be forced to 'do' something with that money. Some of the things they will do is buy assets, or lend to buyers of assets: such as Bonds, stocks, property. ect. Rapid increases in the purchase of these has historically lead to their prices becoming speculative. It also prices out of the market the very people who you are teaching should save: Young people. So thats why I think encouraging, on mass, a new generation of young people to start savings to that degree would end badly. I want to understand why others think it shoudl be encouraged so I'm posting here.

[iamthelol1]

No. You seem to be misunderstanding. The vast majority of people save a considerable amount of their income, and the economy's fine. Whatever, it's on the verge of collapse blablabla economic crisis blablabla. It's always been bad, there are always bubbles. It's just sometimes a little less bad. Teaching a new generation to save isn't going to change anything, because people already do it anyway.

[Stats_monkey]

Figures on that? Sone else in the tread said savings in the US are at an all time low.

[CutOffUrJohnson]

You're misinterpreting the importance of teaching finance in schools. It would not necessarily inspire people to save more, but it would more likely encourage people to live within their means. 1. You're assuming that a large amount of people will all of a sudden start saving, demand will not suddenly fall and asset prices will not all of a sudden sky rocket. This would change would be gradual as children were taught finance and to save rather than all at once. 2. Same mistake as #1. When demand falls, prices will as well, which will just increase demand again. It may be down in the short run after something like this but it must eventually reach equilibrium. 3. The same mistake as #1.

[locks_are_paranoid]

When I was in school we learned how to balance a checkbook by hand, however this is now a useless skill thanks to online banking and e-checks. We also learned how to write a physical check which is useless due to e-checks and ACH transfers. Most of the stuff thought in schools is useless. I learned long division, we had to do it without calculators. This skill is useless. On a side note, schools teach nothing but useless skills. They do not teach kids "how to learn," they only teach them useless skills for a standardized test. But even before standardized tests, these skills were still taught and were useless. Also, no one needs to be taught "how to learn," learning happens without instruction. Just so you know, I'm not some uneducated person, I'm a 22 year old college student. I would have made this my own thread, but the mods have stopped me from posting.

[Raintee97]

Are you encouraging people to throw things on credit cards or do go paycheck to paycheck. Saving into a rainy day fund is financially sound. And it further increases the chance that someone will continue to save in their life time. As an economist, would you rather people spend money on real things or on CC interest? I remember when I was younger that I had to place an expensive but needed car fix on my CC. It took months and hundreds of dollars of interest to cover the cost. That extra money I lost to interest was money I couldn't use to build up the economy in my region or was money I could have used to invest with. We want out young people to get in habit of saving money.

[Stats_monkey]

[STA-CITE]> Are you encouraging people to throw things on credit cards or do go paycheck to paycheck [END-CITE]Well if someone is living paycheck to paycheck it implies to me that the person wishes to spend all thier income at once. These are often people with low incomes, who can't begin to save without reducing thier quality of life significantly. [STA-CITE]> would you rather people spend money on real things or on CC interest? [END-CITE]Well the amount of money being spent is the same. The interest on the CC isn't a real cost in that it requires 'work' to earn, the money is simply re-allocated from the borrower (the person who wants the money NOW) to the lender (the person who would prefer to wait and consumer more in the future). I don't see how thats a waste in any way. [STA-CITE]> I remember when I was younger that I had to place an expensive but needed car fix on my CC. It took months and hundreds of dollars of interest to cover the cost. That extra money I lost to interest was money I couldn't use to build up the economy in my region or was money I could have used to invest with. [END-CITE]Having to cut out spending in the future to pay off a cost which actually happened is equivilent to curring money out in the past to pay for a cost which might occur in the future. Except without having to save so much, there would be some people who would avoid the cost entirely and be able to consume optimally the whole time. [STA-CITE]> We want out young people to get in habit of saving money. [END-CITE]Well I don't (unless someone changes my view) for the reasons in my main post. It would harm the economy and thus the individuals.

[Raintee97]

Um.....Do you live in the same world I as I do? The one where you have an unplanned Root Canal you need to pay for or the world where your refrigerator breaks or your scooter gets stolen and you need to replace it. These things do happen. All the time. Smart people save a bit each month so when they do happen, they can rely on their savings rather than have CC debt or such. You seem to forget that is it better to pay for something with saving and this pay no interest than have to place things on a CC and have to pay for what you purchased plus the extra interest charges. When people don't save they are forced to used less optimal methods to get by. When people do save they have an amount of capital that they can use to invest or to help with unexpected budget hits.

[Stats_monkey]

[STA-CITE]> the world where your refrigerator [END-CITE]Okay if your fridge breaks, and you have to buy a new one, the economic cost in TOTAL is: The cost of 1 fridge. Can you explain why borrowing to pay once it does happen is any worse economically than saving to pay when it happens? The fridge still uses the same number of economic resources: The same amount of metal, labor, argon, whatever it is they make fridges out of. The total economic cost is the same, so persuading everyone to save for it is a 0 sum game.

[anonoman925]

The cost of fridge + interest, right?

[Stats_monkey]

Yeah but interest isn't an economic cost. Its not a use of resources. Its just an agreed upon amount between two parties of an IOU. Zero sum game if the person pays for it by savings, because economic cost is the same.

[anonoman925]

It's capital, for me, that becomes unavailable for something else, yeah.

[Stats_monkey]

I don't really understand what your saying here.

[anonoman925]

If I pay cash for something, there is a straight trade. If I use credit, there is a third party acting on my behalf and will bill me product + interest. It's cheaper for me to pay cash and more economically beneficial because I can take the interest in the other scenario and buy a toaster.

[RustyRook]

[STA-CITE]> interest isn't an economic cost [END-CITE]I'm still writing a detailed response, but I want to jump in here. "Interest cost" is an economic resource. It's the monetary equivalent of opportunity cost. If u/raintee97 makes interest payments in the future, it comes at the cost of future consumption.

[Stats_monkey]

It comes off his future consumption, but adds onto the future consumption of the lender, making it a 0 sum game. If you produce a fridge in period t, it doesn't matter if it was paid for by savings from period t-1 or through borrowing for t+1, its the same fridge with the same oppertunity cost.

[Raintee97]

Does the benefit of not having to pay interest mean anything to you? Do you understand why paying 650 for an item is better than paying 650 plus interest?

[Raintee97]

Yes the cost is of one fridge. but my methods of generating the money for the cost of one fridge are varied. I can pay for the cost of he fridge from my savings. Total cost one fridge. I can also pay for the fridge with a CC and have to pay for the fridge and all the interest. And if I'm just making min. payments I'm going to have a lot of interest. Your view is more or less telling people that given options, they should pick the most expensive option to pay for unexpected things.

[monkyyy]

Can you name *any* other example where this logic would also apply.

[Stats_monkey]

Can you specify which logic in particular you don't think applies?

[monkyyy]

That collective actions should differ from individual actions. For example not taking an expected positive "gamble" if you only play once(and the money is low enough that diminishing returns of money can't be the real reason) but if played an absurd high number of times taking it.

[Stats_monkey]

You seem to be implying that it would be universally benificial for all individuals to increase savings. I don't think that is the case. EDIT: Clarified by adding univversal and all.

[NorbitGorbit]

this seems a bit like "they shouldn't teach history in school because then everyone would become a historian." my hunch is that a negative change in spending habits by the next generation would be more a function of not having much money rather than schools teaching fiscal responsibility. wouldn't you agree?

[Stokkolm]

1) and 3) make some sense. Deflation being bad is a myth which used to be perpetuated by propaganda.

[Waking]

You seem to be conflating "saving" with "putting wads of cash under the mattress." A saving account accrues interest (albeit very slowly), because it's not just a storage place for your money but rather a very very low-risk investment. Investments are by definition driving economic growth. Every piece of value that anyone has ever made is the result of an investment of time, money, or both. We should *absolutely* be teaching young people about investing, both for their own personal return and for the sake of communal economic growth.

[Stats_monkey]

Did you read my original post? I am very well aware of what savings are, but it is a misunderstanding to conflate savings to investment in factor production. I mean maybe if you look at the very long run, then the disruptions of high savings may smooth (like in the solow growth model, where savings rate dictates the steady state). In the short run though savings increases can severly harm growth (and given that savings are a % of output, that might mean total savings fall, resulting in even less investment).

[Waking]

Of course I read your post. You said if people are saving they aren't spending. That's not necessarily true. Putting your income into an array of investments is the best possible way to grow the economy and your own personal wealth. If you don't consider this "saving" then what are you defining as a savings? Is putting money into a retirement acct such as a ROTH IRA "saving" even though that money is distributed to ETF's or mutual funds and can't be withdrawn for years? That's a huge amount of growth to the members of said fund. In essence you're providing a massive loan - what better way to grow the economy?

[Stats_monkey]

We are possibly using different definitions of investment. I am talking from an economic perspective, where investment is the allocation of resources towards increaseing the quantity of quality of production factors. So buying an house as part of a speculative bubble (IE what happened in 2007) would not fall under my definition of investment, but would be a use for savings.

[Waking]

Your definition seems to preclude investments that don't pan out, which is ridiculous. Buying a house is always an investment. You are contributing to the economy by paying people in the housing industry - builders, upkeep, real estate sales, etc. The hope is that by owning the property and contributing to the development of the surrounding community, your home will literally create value. This may or may not be the case for you, but surely having society as a whole operate with the idea that investments can create value is what drives the economy in the big picture (which is what you seem to be after).

[RustyRook]

I'll try to structure my argument as well as I can, but finance is definitely not my expertise. I'm trying to get better at it just like a lot of other people. Also, **this is largely theoretical**. If someone can refer to some research regarding this matter, I'd be overjoyed. Let's move through the scenario. People start saving $, putting it into their *retirement* funds. This would mean that they'd have less $ available for consumption than if they didn't save. (Even if they consume through the use of credit cards, their consumption would decrease from their pre-saving days because they'd have less $ available to pay even the minimum payments on the cards. I hope this is clear enough. By putting $ in retirement funds, they can't afford to rack up large credit card debt and still pay even the minimum payments. Yes, I'm not considering people whose behaviour would lead them straight to bankruptcy because those would be exceptions.) So as people spend less, there is less consumption of goods and services in the economy. Since Y = C + I + G + NX, and C drops, Y would also drop. So the AD curve shifts left, and Real GDP drops. But that's the "ceteris paribus" situation, there are lots of other effects. As C drops, I would also increase as more money becomes available to be borrowed. So the getting the whole picture is very difficult. That's going to be a theme throughout this whole mess, because subscribing to the standard Keynesian model is also slightly controversial, but what to do? And in the end, it's still a model. :( Moving on, let's consider the effects of saving in the long run. It's money in the bank, which becomes available to people upon retirement. If more people save now, more people will spend later, and they'll do so at a rate that's higher than current rates because they'll have more money available at the end. So even the consumption expectations of the economy. Currently, it's expected that most of the consumption comes from younger people, in their primes - mortgage payments, children, etc. Older people are expected to consume less. Why? Because that's just how it has been so far. Now here comes my two cents in this whole debate. People should be encouraged to save more while they're young because they're expected to live longer, so by the time the current cohort of young people get older they'll be a part of a group of consumers (older people) who will be a larger proportion of the population than they are at the present moment. Instead of older people becoming a burden it would make them consumers, which would be a net benefit for the economy in the long run. Remember, in the long run there will be more and more businesses that cater to older people just as there are so many businesses that fight for the younger market right now. Yes, there would be a net shock right now, but even that's speculative. It's totally possible that the increase in investment spending could nullify the effect of the decrease in consumption. Then there's the net benefit of having older consumers in the long run. Smart policies that encourage business creation would be awesome. If handled well, this could be a winning policy in the long run, at some (speculative) cost in the short term. I'm sorry for the very long wall of text. I hope it all makes sense and that I haven't bungled up the whole thing somewhere.

[politics_acct]

You raise two points, but really only address one. * Teaching personal finance * Encouraging saving Teaching personal finance you mention, then pretty much ignore. I think teaching personal finance is essential. It is a life skill that will impact everybody. There aren't many high school subjects that can make that claim. How many people will have a credit card during their lifetime? Shouldn't we explain to them things like what an APR is and how much paying only the minimum due actually costs? Perhaps help kids understand how much a car really costs beyond just the money they need to put up for a down payment? How does a bank account work and how do I open one? How does paying taxes work? How many deductions should I claim on a W4 when I start a new job? What is a credit rating and how does it affect me? These are important life skills that we don't even attempt to address in high school. A separate question is whether such a personal finance course should encourage saving. I maintain it should. At an honors level I'd consider going further and teaching basics of investments. US savings rates are low. Very low. Here's a chart from the St Louis Fed showing the US personal savings rate over the last 60 years: https://research.stlouisfed.org/fred2/series/PSAVERT Here's a list from the World Bank showing Gross Savings as a % of GDP: http://data.worldbank.org/indicator/NY.GNS.ICTR.ZS?order=wbapi_data_value_2013+wbapi_data_value+wbapi_data_value-last&sort=desc For us to increase savings from this baseline to a level where the drop in consumption was enough to cause a problem just isn't a realistic concern. On the other hand, we continually expect people to be more capable of taking care of themselves with less help. Defined Benefit Plans are a thing of the past, replaced by Defined Contribution Plans. Retirement savings in vehicles such as a 401k or IRA require the individual to do at least some management of their own assets. As an econ student you know the power of compounding, but not everybody does. Beginning your retirement savings in your 20s has a massive effect on when you can retire and how well you can live in retirement. http://www.businessinsider.com/compound-interest-and-young-people-2015-4 Not everybody can afford to start saving at a young age, but why not explain to them in high school what the effects are and why it helps to try?

[Stats_monkey]

[STA-CITE]> I think teaching personal finance is essential. It is a life skill that will impact everybody. There aren't many high school subjects that can make that claim. How many people will have a credit card during their lifetime? Shouldn't we explain to them things like what an APR is and how much paying only the minimum due actually costs? Perhaps help kids understand how much a car really costs beyond just the money they need to put up for a down payment? How does a bank account work and how do I open one? How does paying taxes work? How many deductions should I claim on a W4 when I start a new job? What is a credit rating and how does it affect me? These are important life skills that we don't even attempt to address in high school. [END-CITE] I'm going to give you a ∆ for this. When I made my post I did group teaching of PF with teaching to save. You are right that people making informed lending and borrowing decisions is better. I still havn't changed my view on the savings aspect though. Savings effects the multltiplier so it absolutely could have a large effect on output. So thats a yes to the education about PF, no the the agenda that more saving is always/usually better.

[politics_acct]

I'll tackle this two ways. From a pure economics side you need to have some savings. Savings allow for the replacement of capital and new investment capital for future growth. The [Golden Rule savings rate](http://en.wikipedia.org/wiki/Golden_Rule_savings_rate) maximizes consumption. We can debate what the current Golden Rule rate is for the US, but I doubt that we'd peg it below 5%, which is what the St Louis Fed link I posted earlier says the current savings rate is as of March. On a more pragmatic level, I go back to my earlier argument about the need in the US to deal with retirement. As health care improves we're living longer. Pensions are no longer the safety net they once were. If individuals don't save on their own we will have massive societal costs in dealing with masses of destitute seniors. I maintain that encouraging saving and investing will pay off in the long run not only in providing investment capital to business for growth, but also in reduced future outlays by the government for a needed safety net.

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