High School Budget Project
This month marks ten years since my high school graduation.
I usually avoid reminiscing too much about my high school experience but today I'm opening the memory vault to share a gem.
Many lament that basic personal financial tenets should be taught in schools before we send our youth into the world to make their own money decisions. Well, guess what? My high school did teach personal finance.
The spring semester of my senior year, I found myself in an Economics class as the final course of the social studies curriculum.
We learned about supply and demand, cost benefit analysis, and vertical integration. By the end of the semester, senioritis was in full swing and our teacher sprang a project on us for our personal finance unit.
We were given the profile of a fictitious man, Greg Dukes, and we had to set up a life for him.
Greg, our "client," had a certain amount of income coming in each month and we had to create a budget for his wants and needs. We would find him housing, buy him a car, and choose an appropriate health insurance policy. Lastly, he just happened to have $10,000 that he was ready to invest in the stock market and we were, for all intents and purposes, his financial advisers.
I got to work like a mission-driven budgeter. We were free to do with Greg's paycheck as we wished.
In line with my parents' money philosophy, I kept his lifestyle modest. He would live in a 1-bedroom apartment and purchase a used Honda Civic with a hefty down payment. I remember really resenting this Greg guy for his bad driving record because it drove up his auto insurance premium. As for his health insurance (in retrospect, I'm not sure why he wouldn't just be getting it through his employer?), I scouted out a low deductible plan since I tend to be risk-averse and superstitious about health.
As for Greg's $10,000 nest egg to invest, I went for a semi-diversified portfolio. I put $2500 in a global high income mutual fund, $2500 in a small cap growth fund, $2500 in a Brazilian ETF, $1250 in the stock of a large auto company, and $1250 in the stock of a large tech company.
At the end of the project, we presented our made up lives to the class.
Here's what I learned:
We all have different priorities.
One student wanted Greg to ride his bike everywhere because she was on a hippy streak and thought cars were evil (saving a ton on payments, insurance, gas, maintenance, etc.). One student built tithing into Greg's monthly budget, something that wasn't on my radar. One particularly obnoxious kid had Greg buy a Lamborghini with crippling monthly payments.
Housing prices can be exorbitant.
We all quickly realized that shelter would cost us dearly, particularly in the San Francisco Bay Area. We joked that his best option was to live Harry Potter style -- in a closet. After scoffing at the costs of small apartments, we marveled at the high mortgage payments on homes in our own neighborhoods. We came to the conclusion that the American Dream of home ownership might be totally (and indefinitely) out of reach, at least in our region.
Actions have consequences.
That stupid, stupid Greg had a moving violation and an accident on his driving record in the last 12 months. After the first event, couldn't he wise up and drive better? Geez. Alas, through this less than ideal auto insurance prospect, we figured out how speeding through a school zone or running a red light would cost us.
Investing is not for the faint of heart.
We picked our $10,000 investments at the beginning of the project and our homework was to check on the portfolio every day after the markets closed. One student got schooled when he reported that he had bought .1 share of Berkshire Hathaway (all of his eggs in one basket) and our teacher informed him that you can only invest a portion of a share in a mutual fund. Some of us ended up big winners, some big losers. Some of us walked away with a newfound confidence in stock picking, others were just weary of the constant fluctuations. Of course, little did any of us know that our investments would be pillaged with a recession only a couple years away. (Ten years post-project, my portfolio is actually down from $10,000 to $8,600).
For freshly crowned adults ready to take the real world by storm, we knew nothing. We had no internal index for appropriate prices on items like rent, food, and insurance. We had been taken care of for 18 years by wealthy parents and we had no idea how to fend for ourselves.
A decade later and some adulthood under my belt, I would suggest a few modifications to the project.
We all treated Greg's paycheck like a game where we had to squeeze out every extra cent for living expenses. In doing so, we all but ignored saving anything for a rainy day, let alone a large purchase.
Did Greg go to college? How did he pay for it? Was he like 43 million other Americans who took out student loans? Although my personal experience with student loan debt tackling hasn't been too rough, I imagine some preemptive familiarity with loan amounts, minimum payments, and interest accrual would have served me well.
In our naivete, we treated Greg's paycheck as his only possible source of income. It didn't occur to a single one of us in that Econ class that Greg could find another way to supplement his take-home pay. We put an artificial limit on his earning capacity (a paycheck) when, in fact, the sky is the limit if you're clever and hard-working.