My first money lesson of the year...

In my Grade 11 University math class, we are in the sequences unit. A sequence is an ordered list of numbers. Specificially we deal with sequences where each term in the sequence is multiplied by a common number to get the next number in the sequence. An example is 2, 4, 8, 16, 32, ... (the sequence is doubling each time).

A great application of this is compound interest. If you multiply the interest each time, you can find out the future value of your money. So in our class yesterday, we started talking about savings and borrowing and compound interest.

First of all, the class quickly discovered that this is the way to get me off topic, as I got a lot of great questions from the class and happily answered them all to the best of my ability. We talked about more frequent compounding periods than annually, although the interest rate is listed as annually and how the more frequent that compound period, the more money that is charged/earned. When I explained that credit cards charge daily interest, it prompted the response, "those guys are jerks...I'm never getting a credit card!". We'll see if this person in the future lives by these words, but not getting a credit card immediately should be good advice for any teenager.

Then we talked (briefly) about purchasing a car. I told the class that I don't have a car, getting a cheer from the vegan in the class. We talked about a person that I know that purchased a fancy automobile immediately after getting their first job, and then was saddled with lease payments, insurance and all the rest, when they really couldn't afford it. I didn't have time to get into much more than that, but hopefully they will think about that (I'll return to planning and deciding if you can afford something when I get to the finance unit in the course).

Then I wrote on the board that the interest rate on mortgages is charged every six months. A student asked "what's a second mortgage". After first explaining what a first mortgage was, I explained that a second mortgage is borrowing against the equity in your home. Then I (quickly) explained this was one of the problems in the United States, where people would leverage their homes and end up borrowing more money than their home was worth. Then when they tried to sell their home, they wouldn't have enough money to cover their loans. Someone asked, "If you lose your job, and you still owe half the money on your house, or on your farm, what happens?" I answered as honestly as I could, and I'm not sure if this is exactly right, but I would think that you would be forced to sell your house if it got foreclosed. The portion that you owe the bank would be taken out of how much money that you got for the sale of your house.

My last math lesson of the day was in the staff room when a fellow teacher asked me what a reverse mortgage was. I tried to explain that it was when the bank gives you money in exchange for equity in your house. It is intended for retirees who have a lot of assets in their house, but have little or no cash. The problem is that when they die, a large amount of the value of the house can go to the bank.

All in all, it was a fun lesson for me, and although I have an excellent class, there may be some financial strain at home for me to be getting questions about foreclosures and second mortgages. I explained to them that one of my goals was to be a millionaire and that I would explain how I would do that when we talked about savings and borrowing later in the course. Every year I hope that some of this financial stuff sinks in, and I hope that because I am passionate about it that some will take an interest.