NerdWallet's Smart Money Podcast - The Intricacies of Interest: The Backbone of Mastering Your Finances

Episode Date: May 30, 2024

Author Jake Cousineau explains why it’s important to teach interest and budgeting to students — and how to learn as an adult. How can you understand complex personal finance topics as an adult?  What strategies can young people use to achieve financial independence?  Personal Finance Nerd Kim Palmer talks to Jake Cousineau, author of How to Adult: Personal Finance in the Real World, about the significance of personal finance education and the intricacies of interest rates to help you understand the impact of financial decisions on your future. They begin with a discussion of the importance of teaching personal finance to high school students, with tips and tricks on budgeting, investing, and managing credit. Then, they discuss the impact of APR on loans, the long-term financial effects of interest rates on major purchases, the financial impact of having a good or bad credit score, and the transformative power of automated savings and index fund investments. In their conversation, the Nerds discuss: personal finance, investing, budgeting, financial literacy, credit score, compound interest, index funds, retirement savings, student loans, APR, financial education, wealth building, financial independence, automated savings, money management, financial health, financial planning, loan repayment, interest rates, saving for the future, debt management, financial freedom, budgeting pitfalls, financial knowledge, credit management, financial wisdom, financial illiteracy, personal finance books, managing money, smart budgeting, housing costs, transportation costs, food budgeting, and financial confidence. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Kim Palmer. On Smart Money, we are all about answering your money questions, big and small, ambitious and easy. And this episode, we're taking on a fun one. How can you successfully adult in the world of personal finance, given how complicated it can get?

Kim is here in her role as the host of our regular book club series to guide you through this conversation. So Kim, who are you talking with? I am speaking with Jake Cousineau. He's the author of the book, How to Adult, Personal Finance in the Real World. What I really love about Jake and his work is that he's also a high school teacher. So he is talking about this stuff with his students all the time. And his advice is really informed by those conversations and the questions that his students ask him. Great. Well, I will let you take things from here. Thank you. Jake, welcome to Smart Money. Hello, Kim. Happy to be here. Thanks for having me. Of course. I wanted to start by asking you to read from the preface of your book,

because I think it explains really well why you think high schoolers should learn more about personal finance and also what the rest of us can learn from it too. Yeah, I can do that. All right. So when I graduated from college, I didn't know what a W-4 was, nor did I know what I was doing when I filled one out. And my ignorance was not limited to tax forms. I had no idea what a 401k was, nor did I know what I was doing when I filled one out. And my ignorance was not limited to tax forms. I had no idea what a 401k was, didn't have a clue how health insurance worked, and I couldn't understand the terms of my student loans, which I'd agreed to when I was 17 years old. Because I assumed everyone else knew these things, I hid my ignorance and adopted a fake it till you make it approach. And while I succeeded in faking it, I never made it. Tired of being constantly broken

in debt, I decided to read everything I could on personal finance, and I came to a couple conclusions. First, it is absurd that this is not taught to every high schooler in America. While AP European History or Transcendental Poetry may come in handy for some students, basic finance is going to shape the future of every student. Second, this stuff is not particularly difficult to understand. I went into this thinking you had to be a genius or some sort of math whiz to understand these concepts, but this is not the case. Third, I realized I was not alone. As I studied personal finance, I began speaking with my friends and colleagues and discovered

nearly all of them were as poorly informed as I was. Like me, they were embarrassed about their lack of financial knowledge. There's a strange phenomenon where everyone feels they should know basic finance, despite the fact that almost no one is taught basic finance. So to combat what you see as that huge gap in education, you started a program at your own high school where you teach. Tell us how you started or what you teach your students first. The genesis was I was broke. I was probably 27-ish. And I just, I realized I didn't know anything about money. I'm like, I would like to save it. That sounds fantastic. I don't know anything about investing. Truly know nothing about what a 401k is or an index fund. Nothing.

So I read everything I could. And I was a teacher at the time. I've always been a teacher. That's always been my career. So when I finished, I was like, okay, this is unbelievable that this is not taught to us. So I was like, I'm going to do something about it. I'm going to start a class at my school. And it got approved very quickly. And then I was like, okay, now what? To answer the second question, what do I teach them? I made a list of all the things that I truly wish that I had learned. But I wanted to keep the lists sort of in mind for people that are completely new.

So I didn't want to get too deep into the weeds with anything too technical and turn anybody away from it. But so my book, I cover interest, basic budgeting, basic banking, taxes, investing, retirement, credit, credit cards. So that's sort of the gist of it. What I consider to be really the foundation, like the core tenets that you need to understand in order to build wealth. I love that you did that because

we hear so much from adults that it's really terrible that young people don't get this education. And then you actually did something about it. Yeah. I mean, part of that is I'm also proud of myself. Thank you. But, you know, part of being a teacher, it was a little bit sort of a low hanging fruit. What topics were they most interested in learning about? Day one, every year I get a new crop of students and it usually starts with, you know, like wild things that you would hear on TikTok or social media. They're like, all right, let's talk about infinite money loop. I'm like, not a thing. You know, they'll be like, all right, what's money laundering? Like not important, you know, or, you know, they start with the things that are really farfetched. But eventually, I think I always say teaching personal finance is sort of a precarious balance

between, you know, almost fear mongering. If you don't do what you're supposed to do, like, here's the bleak situation you could be in. But on the other hand, if you do manage your money well, especially starting so young, you could build your wealth very effectively, very efficiently. So to that end, I think they get most excited sort of about investing, learning about basic compound interests, maybe 401ks, stuff like that, because they see that like, hold on, if I put in only $300 per month, I could be a millionaire fairly easily. If I start at 21, like per month, you know, I could be a millionaire like fairly easily. You know, if I start at 21, like, yeah, you absolutely can. So they get sort of excited when they see that they see the power of compound interest where they're like, all right, I only put in, you know,

300,000, but I get back 1.8 million. You know, you show them some statistics like that and they're, they're in, you have a pretty captive audience at that point. Some people listening might be thinking that financial education geared towards high schoolers might be a little juvenile or not relevant to their lives. What lessons do you think your book has for people who are a little bit further along in their journey? I wrote it for the target audience, let's say you're 17, 23. That was my thought. But based on all the many Amazon reviews and just sort of word of mouth, it's really people who are probably more even in their thirties or forties who are reading my book, to be honest. The majority of Americans,

I'd say, if you ask them to explain what's the difference between a Roth account and a traditional account, they'd probably stammer through something, but it'd become clear that they're not completely fluent in what those things are. So I don't think it's limited to younger people. What you could do is you could skip around. There's a chapter in my book of paying for college. So obviously if you are past college age, if you're done with that point of your life, you could just sort of skip that chapter. But I do think there's something in there for the majority of people. And I think that goes back to your original point too, that a lot of adults never get the chance to learn this. And so we might be at that point at any age. I might talk about this pretty often. I think there's a certain,

maybe that age is 30, but there's this point where people get to and they don't know about finance and then they develop this shame because they feel like everybody else around them knows it. And they're like, oh gosh, I never learned this. And now they really want to hide that their ignorance. But the truth is almost everybody feels that way, right? We're all hiding. We're all pretending that we have this financial knowledge that we're really competent in the subject, but really everybody's just another bozo on the bus. We don't know what we're doing. And we should really be more open about these things. Well, let's talk some about your specific tips for young people. You write about interest like

pineapple on pizza. You're going to love it or hate it. What do you tell young people about interest? How do you start? Both adults and kids will be like, why do you start with interest? But if you think about it, interest is truly the backbone of almost all personal finance. You need to understand when you're borrowing money, exactly what is interest exactly. So an APR, that number they give you, you should understand exactly what that is going to relate to when it comes, you know, time to actually pay back your loans. So especially with students, I'll have them, all right, you want to go to USC? All right, this looks like you're going to have $100,000 student loan debt at, let's say, a 4% APR. What are these monthly payments going to look like if

you actually want to pay it off in 10 years? So without understanding interest, if somebody hears that they owe $100,000 of student loans, honestly, that's not a very useful piece of information. $100,000 sounds a lot, Honestly, that's not a very useful piece of information. $100,000 sounds a lot, but unless you break it down into monthly payments, you know, especially over, let's say, a 10-year time period, if you don't do that, it's just sort of abstract for students, right?

They don't understand. But if you tell them, oh yeah, you need to pay $1,200 a month or something, they're like, oh my God, okay, that's a lot of money. Yeah, $1,200 every month, that will really sort of make it hit home to them. And especially it's just the basic lesson of, all right, if your interest the first month is $120, if you give me $150, your debt only goes down by 30. And that's where that sort of blows their minds. And they're very indignant. Like, what do you mean? I just gave you $150. How did my debt only go down $30? Well, 120 was eaten up by interest.

So at that point, they get very interested. They're like, what? Like, this is a scam. And then on the other end, sort of what I said, that's the doomsday scenario, how interest works against you. Then I show them compound interest, you know, compound interest calculators and see how quickly I can help them accumulate wealth. So on both ends, they're like, all right, I definitely want to avoid that situation. And then you show them

sort of the carrot and they're like, okay, I definitely want that situation. So interest is nice because it sort of piques their interest in multiple ways. And also everything you're saying about interest now, it would be such a useful exercise for older adults too. Anytime you buy a house, for example, or buy a car or take out any loan, just thinking through how that interest adds up is really useful at any age. Oh, a hundred percent. Yes. Talking to my friends, colleagues, co-workers, you know, some people don't realize, all right, you know, I live in Los Angeles. So a million dollar house is very common in a lot of places. It's a steal, you know, like, so a million dollar home when interest rates were under three, let's say 2.8, you know,

you get that million dollar house now with interest rates, let's say at seven. I'm like, do you understand it's the same priced house in their mind? Most people say, well, it's still a million dollar house. I know your monthly payment is so much higher now, like thousands of dollars higher because that interest rate and most people sort of disregard the interest rate because they get stuck on the purchase price. You cannot disregard that interest rate, especially if you're going to be borrowing, you know, $800,000 to pay for a house or something like that. But it's huge. Yeah. And showing that to my students as well, they're always sort of blown away like, wait, what? It's the same priced house, but now you're paying double. And so that's, again,

that's really going to demonstrate the importance of interest rate. You have a chapter on budgeting where you make what I thought was such an interesting observation that most people bankrupt themselves in three main categories, housing, transportation, and food. Why do you think those three categories are so important to zero in on? So I think the popular anecdote I'd say for the past 10 years is always when people are talking about budgeting, it's always about like Starbucks, right? Like, ah, people buying $5 coffees every day. So if somebody does do that, if they spend $5 in coffee every day, roughly, you know, that's $150 per month.

That's how much that mistake is. So with housing, transportation, food, the biggest one is these are long-term commitments, not so much the food, but housing. If you buy a 30-year mortgage and your monthly payment is 50, 60% of your take-home pay, you've kind of ruined yourself for not just one year, not just six months, but possibly for 30 years. Similarly, cars, you're going to have a five-year loan to pay off. So these things are going to wreck your budget for a while. And the other thing that I talk about in my book is once the numbers start to grow larger, once you get into, if you're looking at, you know, your rent, if somebody is looking at an apartment for $2,500 and $2,000, for them, they're like, oh, this is an easy comparison. Like it's not that big of a

deal. I could go the $2,000 route or the $2,500 route. Not realizing that's a $500 difference. That is $6,000 in one year. You know, that is $30,000 over five years. So once the price point becomes larger, people care less about the price difference, which they absolutely should not. If somebody offered you a gym membership for $20

or a gym membership for $520, you would laugh at the $520. Like, what are you talking about? That's insane. But in reality, it's still $500 out of your budget. The hit to your wallet is going to be the same. Now, I'm not saying a gym membership provides the same sort of utility and joy that a house does, but the point remains, it's going to take the same amount of money out of your budget. At the end of the day, it's basic math. If you're spending too much, then you're not going to be able to save or invest or do whatever you want to do with your money in the long run. Is it hard for your students to relate to those budgeting issues

they'll face in their 20s or can they easily grasp that that's just around the corner? I think a lot of them can. And a lot of my assignments are activity based. One of the final assessment for my budgeting unit. So all of them will get a household income. So it could be their income on their own or perhaps they have a spouse. And that income could be $50,000. It could go up to $300,000 and sort of luck of the draw.

And then I will give each of them two cities, one high cost of living city and then a low cost of living city. So the first thing they have to do, they have to calculate their after-tax take-home pay. So that takes quite a bit of work. And so let's say if their after-tax take-home pay is $4,000 and their high cost of living city, if they're looking in LA, they're like, what? I can't afford anything. Maybe a 500 square foot studio apartment, best case scenario. And then they look somewhere with a low cost of living area, like, oh my gosh, this actually opens up some real opportunity for me.

So I think that really does make it real because once they're imagining in the high cost of living city, they're like, this is not possible. So I think it does sort of put it into perspective for them as much as it can. I think for somebody who's let's say 25 already living on their own, it's definitely going to hit home more easily. They're going to be like, OK, yes, this is good because I realize a mistake I'm making. I'm spending too much on transportation or whatever it is because they're actually going to be in the moment already. It almost sounds like an elaborate game of that board game life, but with actual financial ramifications and details. It's funny because it's obviously not a perfect analog, but they'll feel real

stressed when they're like house shopping. They'll be on Zillow just like this is impossible. Like this is, you know, rubbing their hands through their hair, just like, oh, God, this is I'm not gonna make this mortgage. They're stressing about it. You write about credit, too, and you share what your students say about credit. Quote, a credit score seems unfair. I think the lenders would trust me if they got to know me. I love the innocence of that observation. But of course, the hard fact is creditors do think they know us through our credit score. So what do you want your students to know about it? The main thing I want them to take away is they're at a real disadvantage because basically your credit score is most affected,

right? It's so vulnerable when you are the least prepared. At the beginning of your credit history, a single mistake could drop your credit score by 250 points. So I tell them, one, you're already at a huge disadvantage because the time at which your moves and your behavior is most influential is when you are least prepared. So one, you really can't miss payments. You can't because they could set you up for a bad credit score for many years. And I also just show them, if you value your credit score and if you really take care of it, it's essentially getting discounts on your largest purchases. And I give them an example in my book. I've got like three people. I think the people that I chose for that chapter was like, I've got Zaria, Vivian, and Paige. And I go through

and one of them has a credit score of like 580, maybe one is 640 and the other one's 800, something like that. But I show them all purchasing a car. And basically in the end, the one with the highest credit score gets the lowest APR. And they ended up paying, I think, $8,000 less for a car. So tell them you're getting a discount on your largest purchases. So you really need to value this. You really need to take care of this credit score because single mistakes could literally cost you. And if you're buying a house, they could cost you hundreds of thousands of dollars. Let's talk about investing, which your students say sounds like trading Pokemon cards, which really is not wrong.

Is investing something they really can get excited about? And I mean, how do you make sure they understand the risks about it too? The things that they've heard about, the more attention grabbing articles, let's say GameStop, Bitcoin, you know, things that are sort of this flash in the pan. They do get very excited about the potential of making a lot of money. But so my class, you know, I'm basically telling them if you're ever investing and it's a real rush, you know, you're checking it every second to see if the stock is going up or down, like you're probably taking too many risks. I tell them every two weeks I put money into my accounts. Just, I don't even see it happen. It's automated. And you know, all the money basically that I have

is just going into index funds for the most part. I teach them index funds. I teach them about diversification and not putting all your eggs in one basket. So once they learn about compound interest, a lot of the effort is just to sort of temper their excitement and be like, you know what, 10% growth just from an index fund,

that is enough to become very wealthy. Like you don't need to get greedier very wealthy. You don't need to get greedier than that. You don't need to seek doubling your money every six months. If you do that, it could end in heartache for you. And for your students, because retirement is so far away, showing them this and that long timeline with compounding, does that convince them that they should start saving for retirement early? Yeah, I've had quite a few students and it always just warms my heart who will either email me just after graduation or even during the school year and be like, Mr. Coos, I just opened up an IRA,

like just opened up a Roth IRA. And I just basically I told my parents, sometimes I'll make deals with their parents, like all the money from my paycheck, you know, I'll put in because, you know, they're making too much. Like I put all $4,000 in my money and then my parents sort of reimbursed me half of that. Basically they've sort of created a matching contribution from their parents. That's, you know, 50%. I always try to make everything realistic and sort of tangible. And it's not hard to look online either on like Reddit. So there's different subreddits and you know, one of them is like personal finance. And there's so often people talking about, Hey, I'm 68 years old. I don't have any savings. And so I'll just sort of share these anecdotes of people who are, you know,

unfortunately they're sincerely struggling and they're worried about their, how they're going to make it in retirement. And that really hits home for students. Cause like, okay, this is not just some abstract thing. This is a real problem in the United States where a lot of people don't have enough money to sort of live comfortably for their remaining years. Is it ever hard to explain to them that, you know, we can't all afford the kind of lifestyle that we see every day on social media? I think most of them do understand it. But the point I do try to make to them, because I will have some students who are like, man, if you're just never spending any money, do you ever have any fun? Like, what's the point? Like, I want to have fun when I'm young. I try to tell them like,

you absolutely can do both. You have to prioritize and you have to decide what are the things that I really like that really give me the most joy. So if you are a car person, that's okay. You could spend $50,000 on a car, but just know that means you can't also have a super nice apartment. You can't go out to eat five times a week. Just know that you're gonna have to make sacrifices in other areas to accomplish those things. Well, thank you so much, Jake. Do you have any closing thoughts

to share with our listeners? A lot of people reach out looking for some sort of secret tip or the one thing that's going to change their life. And this is cliche, but really just finance is going to shape so much about your life. It honestly shapes relationships. It shapes your happiness. So if you are somebody who's maybe struggling with this, do your best to, if it's my book, somebody else's book, I really like Psychology of Money by Morgan Housel. I Will Teach You to Be Rich by Ramit Sethi.

So these books were hugely influential for me. And one, they made me feel, all right, this stuff is not as difficult. And they truly gave me some ideas to start managing my money that I instantly saw tangible results. And once I started seeing a little bit of progress, I got much more motivated to actually pursue these things because I saw there's a clear correlation between the effort I'm putting in and my net worth or my financial health. So wherever you're at, take an interest in this subject and just, you know, read a couple of books to learn about these things and you will feel much more confident. That's great advice. Jake Cousineau, thank you so much for joining

us on Smart Money. Of course. Thank you for having me. And that's all we have for this episode. To share your thoughts on money, shoot us an email at podcast at nerdwallet.com. Visit nerdwallet.com slash podcast for more info on this episode. And remember to subscribe, rate, and review us wherever you're getting this podcast. This episode was produced by Sean Piles and myself. Tess Vigeland helped with editing. Sarah Brink mixed our audio. And a big thank you to NerdWallet's editors

for all of their help. And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.