What the Depression Can Teach Us About Financial Literacy
April is Financial Literacy month.  Among the primary goals for the Council for Economic Education are high school course requirements in economics and personal finance in all 50 states and the District of Columbia.  Amen! Personally, I was pressured by my parents to take Home Economics in high school.  Unbeknownst to my parents at the time, we were to be taught to sew and bake.  Don’t get me wrong. These skills come in handy when I need to sew my own Jam shorts or whip up a bundt cake but, unfortunately, they are of little help in managing the family cash flow.

Fortunately, for me financial literacy started at home.  My grandparents came of age during the Great Depression.  My father, the primary earner, worked in a very cyclical business.  It was ingrained in us by my parents and grandparents to 1) repurpose items, 2) pay with cash, 3) not pay retail prices, 4) buy used when possible, 5) do home projects ourselves, and 6) scrape to the last drop.  As Chris Rock joked, “When I was a kid, that’s all we had was Robitussin.  If you run out of it, pour some water in the jar, shake it up, more ‘tussin!”  I’m not going to lie.  It hurt to see my sister crying in the mall when she didn’t get the Benetton rugby shirt that everyone was wearing.  I was disappointed when the Mark Messier jersey I begged for turned out to be a knock off.  We’d all complain when my grandparents made us eat at the “early bird special.”  It was even worse when they would have the complimentary bread, pickles, and soup crackers wrapped up for the next day.

In hindsight, there was a real method to their madness.  To paraphrase the famed economist and philosopher Adam Smith, money makes money (translation: money has time value).  When you have a little, it is often easy to get more.  The great difficulty is to get that little.   Seen through that lens, any financial literacy lesson should begin with getting that little.  What are the simple things that families can do to get started on the path to financial health?

1. Beware of little expenses

The average American family spends 16% of yearly income on everything from lottery tickets, unused gym memberships, wasted food, gambling losses, credit card interest, and wasted energy.  Your odds of winning the lottery are 1 in 291 million.  The odds of winning various casino games are below 50%.  Save the money.  Invest it in the market.  The market, as represented by the S&P 500 Index, hit new highs every 16 days since inception in 1957.

2. Every purchase has an opportunity cost

Consider coffee.  $2.95 per day doesn’t sound like a lot.  But in 5 years, you will have ingested over $5,000 worth of coffee. In 20 years, over $20,000, and in 40 years, over $40,000. That’s a lot of money for something that is (A) not a necessity (many of you will disagree) or (B) can be made at home for a fraction of the cost.

What if you invested the $40,000 of coffee money instead of drinking it? Over 40 years, assuming a hypothetical 6% annual return on investment, $2.95 invested in the market each day would amount to $177,128! With that kind of money, you are halfway to being able to franchise a Starbucks yourself.

3. Recognize that the bigger the purchase, the bigger the opportunity cost

The great Will Rogers joked, “Too many people buy things they don’t need, with money they don’t have, to impress people they don’t like.”  Everyone knows these people.  I read once that the average American buys a nice car within 14 days of inheriting money.  Think of the opportunity cost!  Consider inheriting $100,000.  If you buy an $84,000 sports car and invest the remaining $16,000, it will take you 30 years at a 6% market return to recoup the $100,000.  By then you’ll have a very old car.  If you instead buy a $23,000 car and invest the remaining $77,000, it will take you only six years at a 6% market return to get back to $100,000, and in 30 years your balance would be almost $500,000.  Or better yet, keep the car you have and invest all $100,000.

In short, save money, invest your savings, add money to your accounts as often as possible, and remain invested for the long term.  You don’t necessarily have to be as strict as my Depression-era grandparents, but they were on to something.  Now if you’ll excuse me, I’m going home to serve my family leftovers.