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Financial technology, education, & changing the meaning of saving

A nuanced understanding of personal finance and a general understanding of economics are two pillars of a successful life that are sorely missing from the K-12 education system

Our consumption-driven economy indulges in immediate investment returns rather than a roundabout perspective that emphasizes the future — a notion that needs to change. The culprit for such consumer behavior is the lack of thorough K-12 financial education, which is the perfect opportunity to lay the financial groundwork for rising generations when their minds are most malleable to knowledge. 

Like all adults, upcoming investors, consumers, and savers will face financial challenges. Rather than preserving financial education for college entrants focused on a finance or economics major, incorporating financial material — even if basic — into the educational curriculum today is paramount. 

The economic fallout from COVID-19 should be all the motivation needed to stoke a resurgent exploration of financial education for students. Especially considering that 40 percent of Americans struggle to produce $400 in the case of an emergency, a tenuous grasp of personal finance is no longer acceptable.  

But the investing world is complicated and daunting. Unless you’re professionally involved in markets, the complex terminology and Wall Street institutions may appear too esoteric to digest and deliver to students in straightforward language fit for education. The good part is that you don’t have to go that route. 

Instead, some basic precepts of personal finance can go a long way in preserving hard-earned savings and generating passive income. And financial technology (fintech) is rapidly making such material and resources more widely available — for both teachers and students alike. 

P2P Lending & Savings

Conventional wisdom, which is perhaps the most distinctive mark of subpar K-12 financial literacy, is that banks are the ideal place to store your money. While banks are generally safe with FDIC insurance and offer the security of your funds, any interest you’re earning is negligible.

Most banks only offer depositors less than 1 percent interest. For example, Chase bank offers only 0.1 percent interest on deposits under $100,000, which is around the national average for banks.

Many people are comfortable depositing their money with a bank and not worrying about managing investments, which is fine. However, there is a blossoming field of options at the fingertips of the mainstream investor today, as teachers, that can be taught to students. 

For example, banks base their business model on the high margin revenue stream of short-term borrowing and long-term lending. They take in customer deposits (short-term borrow) and lend portions of those funds out to businesses and other individuals (long-term lenders) at higher interest rates than they offer their customer deposits.

They pocket the difference in interest rates. It’s highly lucrative for the bank, but limits savings rates for depositors, like teachers, and borrowers are stuck with going to banks for credit at unfavorable rates. 

Historically, banks were among a small set of options to deposit money with and access credit. That changed over the last decade. The rise of P2P lending platforms, where borrowers and lenders come together in an open market, has made for a much more appealing avenue to save and invest money.

And it’s sparked an entire generation of passive investing tools. 

For example, at Constant, a lender can customize an interest rate that they prefer and publish it to the platform. If a borrower is interested in the terms, the two counterparties can agree on a P2P lending contract — no middleman like a bank involved. The primary advantages of P2P lending are twofold. 

First, interest rates are much more appealing, meaning that lenders can generate more return on their money than simply depositing it in a bank account. For example, if Alice is a teacher than makes $50,000 per year, let’s pretend she has no expenses and wants to invest her money in a bank and P2P lending platform equally.

If Alice allocates $25,000 of her income to a P2P lending platform as a lender with an annual interest rate of 7 percent, she will earn roughly $1,750 over the course of a year. 

She does not have to accept any terms beyond her desired interest rate either. 

Conversely, if Alice were to take the remaining $25,000 of her income and deposit it with Capital One Bank using their current annualized 1.5 percent interest, she would only generate $375 over the course of the same time as her P2P lending investment. The 1.5 percent rate is also very generous for banks right now. 

Second, P2P lending is just as accessible as a bank account, and are even more accessible in most instances. Accounts are trivial to set up, and lender deposits are fully collateralized and insured by the platform.

In addition, some P2P lending products invest on the depositors’ behalf for an APY of 4 percent (still significantly better than banks), and users can withdraw their funds at any point. 

A better understanding of the higher returns on investment (ROI) form using P2P lending instead of banking can, over time, create a larger nest-egg for when hard times hit — like with COVID-19. The difference between 7 percent interest and 1 percent interest can mean making ends meet and having to take on more debt. 

But what other options are there besides P2P lending? An entire ecosystem has emerged out of inefficiencies and the inability of banks to meet the passive investing demands of a new generation of investors.

People no longer want money just sitting in an account not working for them, they want passive returns. 

Refining Financial Literacy With Resources

The rise of passive income and investing is the average American’s best friend when it comes to approaching financial markets.

Whether it’s commission-free trading on platforms like Robinhood, savings, and dollar-cost averaging applications like Acorns, or payment and investing apps like Square Cash, there’s never been a better time to translate the growing field of personal finance resources into the classroom than now. 

A K-12 education system profuse with resources on personal finance and passive investing can transform our consumption-first mentality to one of a savings-first mindset. It needs to start at a young age. 

Students emerging from the K-12 system should be wary of the risks of shouldering too much college debt — a simmering crisis in the college system right now. They should be aware of the extraordinary power of compounding interest and the time-value of money.

Grasping these basic precepts of finance does not require an overhaul of the current education system, just a little more emphasis on practical and real-world scenarios to better prepare the youth for the challenging world of financial decision-making. 

The US Department of Treasury, way back in 2002, even concluded that students with financial education available in their K-12 experience go on to save significantly more money in adulthood and live more comfortable lives.

Since then, the initiative to mold the minds of our nation’s youth into more savvy personal financial managers and investors has shown little progress. Hence the abysmal savings rates of most Americans today, which is perpetually lower than 10 percent of income

A cursory glance of the venerated and comprehendible finance book “The Richest Man in Babylon” would reveal to students and teachers how remarkable of an impact the effect of saving 10 percent or more of one’s income can have over their lifetime. Maybe it’s time that such books become required reading. 

Maybe it’s also time that we incorporate fintech platforms and their personal financial resources into the curriculum of high school students so they can begin saving early. For example, a savings app like Acorns that injects any excess change from consumer purchases into a savings portfolio or P2P lending app. 

The kids are already technologically savvy, so why not explore apps that are both beneficial and interesting to them? 

Side-by-side with a ballooning industry of investment apps and resources, offering both information and investment products, teachers should feel more comfortable promoting the expansion of financial education.

Savings rates can rise, Americans can be better prepared for crises with prosperous nest-eggs, and the American youth can be set loose into the real world with a firm grasp of how to manage their finances. 

That’s a marked departure from the bank-heavy and limited financial education available in the K-12 system today. But it will change the meaning of saving, and hopefully encourage people to save a little more for their future selves.