Tax season is a time for financial reckoning; An opportunity to understand where you money goes and to consider how you manage it. But for a lot of people, it just seems too complicated, even scary. An accounting professor at Radford University says that has to change because understanding your personal finances can make a huge different to your pocketbook over time.
Mike Chatham is an Associate Professor at Radford University who teaches a course on personal finance. You might think “Hey, it’s easy for people in his field to understand how to manage their money.” But, it can be difficult even for them.
“Even faculty colleagues, seeing that there is $700,000 in their Traditional IRA, and not realizing, there’s not really $700,000 there, there’s $700,000 before taxes,” Chatham notes. “Once they take it out there’ll be considerably less than $700,000 to use.”
It’s confusing because there are two flavors of ‘individual retirement accounts,’ IRAs for short.
The traditional lets you skip paying taxes at first on money you contribute, but you pay when you go to retire years later. With what’s called a Roth IRA, it’s the opposite. And if you’re saving for retirement, you have to choose one or the other. “Those kinds of decisions can make hundreds of thousands of dollars of difference over the years,” Chatham says
The right choice is not the same for everyone and no one is saying its easy. According to CNBC, 97 percent of people across the country who took its financial literacy test, failed. The numbers are about the same for other, similar tests.
Chatham points out that “one of the questions people failed on a fairly frequent basis was, which loan should you pay off– the high interest loan or the high balance loan. In other words, you could pay off the $100,000 loan that’s at 3% interest or the $4,000 loan that’s at 8%. Most people were saying you pay off the big loans first. Well, that is backwards.”
Financial illiteracy is a nationwide problem, but Virginia is one of a minority of states that actually requires high schools to teach personal finance. However, on the college level, when kids are starting to get more hands-on experience with money such classes are largely absent. The one Chatham teaches, is an elective, not eligible for core credit.