5 Financial Math Skills Every Teen Should Learn

By Tim Parker | October 26, 2011 AAA
5 Financial Math Skills Every Teen Should Learn

If we were to measure education in the United States purely by how students performed on standardized tests, the results might be labeled: embarrassing. In math, the United States ranks 25th out of the 30 among developed nations and 24th in science. According to McKinsey & Company, authors of "The Economic Impact of the Achievement Gap in America's Schools," minority students perform two to three years behind their white peers.

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Performance on standardized tests full of abstract math may be a good indicator of the higher-level thinking skills of our children, but these tests do little to prepare a child for the math he or she will need as an adult. One study by the Federal Reserve found that people who filed for bankruptcy had an average of one and a half times more debt than their income. If they were making $24,000 per year, they had an average of $36,000 in debt.

Whether the measurement is abstract math or practical life skills relating to math, America appears to be falling short. In response, many are calling for reform in the way we teach math and among those reforms, a course that teaches skills that adults use every day as they manage their finances. Some of the practical concepts may include some of the following.

Percentage of Gain or Loss
Think of all the times you've seen signs with percentages. Everything dealing with money comes back to percentages in some way. Twenty five percent off at a retailer, credit card interest rates and investment yields are just a few examples. Every cell phone has a calculator, but how many people can calculate percentage of gain or loss even with a calculator? This may be one of the most important skills, beyond simple computation, that we teach children.

Mental Math
How do numbers relate to each other? If you have something that costs $100 and there is a 20% off tag on it, 10% of any number is easy to find. For 20%, find 10% and double it. Mental math such as this allows consumers to do rapid comparisons of value while shopping.

Simple Interest
If a person receives 3% interest per year on their $10,000 deposited in the bank, they can figure out what they receive each month by calculating the percentage and dividing by 12. How many people would know that they will receive $25 per month?

Compounding
There isn't a practical need to be able to compute compound interest, but teaching children how compounding works may encourage more people to start a savings or investment account. Most important, we should teach kids how compounding is like a snowball rolling downhill. Starting a savings or investment account won't produce big gains at first, but as the compounding snowball takes over, the gains are what make people rich. The same principal works when paying off debt. As you pay off more debt, interest doesn't compound which puts more money in your pocket allowing you to perpetually make higher payments. (To learn more about compounding, check out: Accelerating Returns With Continuous Compounding. )

Annual Percentage Rate (APR) Vs. Annual Percentage Yield (APY)
This is an example of a concept that is slightly complicated, but sometimes used as a way to mask the real interest a person will pay. In general, APR is used for loans and APY for investments, but not always. APR is simple interest and APY takes in to account the effects of compounding. Consumers should look past the APR and focus only on the APY.

In reality APR and APY are not significantly different until large sums of money or a longer-term loan period is involved. The important thing to remember is to focus on the APY when both are listed. (To learn more about APR and APY, read: APR and APY: Why Your Bank Hopes You Can't Tell The Difference.)

The Bottom Line
Although understanding how to calculate concepts like percentage may serve a practical purpose, there are calculators online that can help with all of these concepts. Most important, all practical math concepts taught should focus on making common sense financial decisions and showing young people how those decisions come with handsome and substantial rewards.

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