5 Things Schools Should Teach About Money (but don't)

Graduating high school should prepare you to transition to adult life. But when you’re faced with the realities of rent, insurance, and debt, you might realize your education left out some critical lessons about money—leaving you to learn about personal finance on the fly.

Fortunately, it’s never too late to learn the essentials that will help you avoid costly mistakes and take charge of your financial future.

Here are five important things about money that might have been left out of your primary education.

1. How to understand good debt vs. bad debt

Debt is an everyday reality for many of us. According to the Federal Reserve Bank of New York, Americans’ household debt totaled $17.69 trillion as of May 2024.

Not all debt is the same, though. Creating “good debt” and managing it responsibly helps you invest in your financial future. For example, good debt can help you earn a degree or buy a home. “Bad debt,” on the other hand, generally involves borrowing for items that reduce in value or don’t contribute to your long-term financial wellbeing.

Understanding the difference between good debt and bad debt can help you know when it makes sense to borrow money and how to manage loans.

2. How to harness the power of compound interest

Did you know that the interest you earn from investing or saving money in certain accounts can also earn interest? It’s called compound interest, and it’s a game-changer when it comes to building wealth over time.

Here’s how it works: Imagine you put $1,000 in a savings account that earns 5 percent interest annually. After the first year, you earn $50 in interest, bringing your total to $1,050. In the second year, you earn 5 percent interest not just on your initial $1,000, but also on the $50 you earned in interest the previous year. This means you earn $52.50 in interest that year, bringing your total to $1,102.50. Now imagine if you had $10,000 or even $100,000 in the bank. Compound interest adds up.

Saving and investing as early as possible gives your money more time to grow exponentially through compound interest.

3. How to build an emergency fund (and why you should)

From car repairs and medical bills to loss of an income, unexpected financial emergencies happen to everyone. An emergency fund can help you cover unplanned expenses without relying on debt.

Exactly how much you need in an emergency fund depends on your personal circumstances. A good rule of thumb is to set aside three to six months of living expenses. If you’re just starting out, focus on saving your first $1,000—and avoid the temptation to dip into it unless you’re facing a true emergency.

Here are some ways to build your emergency fund:

• Start by saving a small amount from each paycheck.
• Take on a side gig and stash away your earnings.
• Set up automatic transfers from your checking account to your savings account every time you get paid.
• Put your emergency fund in a high-yield savings account to earn interest.
• Avoid impulse purchases.
• Cut unnecessary expenses and put the savings into your emergency fund.
• If you receive a windfall, like a tax refund or bonus, save all or a portion of the money.

Once you hit your emergency fund goal, you can focus on building a general savings account that can provide financial stability or be used for a major purchase, such as a down payment on a home.

4. How income taxes work

Taxes are money you pay to the government to cover public goods, services, and infrastructure. The amount you pay is based on a percentage of your income at different levels, called tax brackets. As you earn more money, you pay a higher rate on the portion of your income that falls in the new tax bracket.

If you’re employed, your employer will typically take your taxes out of your paycheck and send the money directly to the government on your behalf. Each year, you file a tax return to report your income, along with any deductions (such as student loan interest or charitable donations) or credits you may be entitled to. If you overpaid on taxes, you will get a refund from the government, but if you didn’t contribute enough money, you will need to pay the balance.

Understanding how taxes work can help you manage your money and take advantage of deductions. A tax professional can offer personalized guidance on your individual situation.

5. How to create a budget

When you transition from school to work, you usually have more income—and more expenses—than ever before. Creating a budget can help you track your spending, pay your bills, manage debt, live within your means, and work toward long-term goals.

There are many ways to make a monthly budget, but at the most basic level, it should include:

• Your total monthly income, including money you earn from a full-time job and side gigs
• Your everyday expenses, including your housing costs, debt payments, utility bills, recurring payments, and insurance premiums
• Your variable expenses, like groceries, clothes, travel, gifts, and entertainment

Once you add all your expenses up, subtract that number from your total monthly income to see how much is left over (and if you go into the negative, you may need to find ways to cut back on unnecessary expenses). Ideally your budget should also include a line item for savings, too.

Making a budget (and sticking to it!) can help you make informed decisions about your money and use it for the things that matter most to you.
Even if school didn’t teach you everything you need to know about money, it’s never too late to hit the books. A little extra studying now can help you ace your financial future.