E26: Money Behavior and Personal Finance | Alexander Smith—Social Science and Policy Studies | Aedan Bingham—Robotics Engineering, Economics

Alex Smith Aedan Bingham

Jon Cain: It's a common goal every new year or every so often. You say it's time to really shore up your finances, you know, save more, spend less, plan for retirement. But it's not easy. Why is that? We're going deep in this episode of The WPI Podcast. We'll talk with a professor here at Worcester Polytechnic Institute who's an expert on personal finance and behavioral economics. He'll help us explore the factors that keep us from sticking to the tested and true principles of money management. Plus, what about preparing students to handle their finances after graduation? We will talk with a WPI student who's been studying what college students know about personal finance, and we'll learn about how this professor and student are working together to raise awareness about information that can help you achieve long-term financial success. Hi, I'm Jon Cain from the Marketing Communications Division at Worcester Polytechnic Institute. I'm here in The Global Lab in the Innovation Studio on campus. My guests today are Alexander Smith and Aedan Bingham. Alex is an associate professor of economics in the Department of Social Science and Policy Studies at WPI. Aedan is a WPI student in the class of 2028, majoring in robotics engineering and economics. Thank you both for being on The WPI Podcast. 

Aedan Bingham: Thank you. 

Alexander Smith: Yeah, thank you for having us. It's a pleasure to be here.

Cain: Alex, you're an economics professor. You do a lot of research, writing, and speaking about personal finance and the things that knock us off course from our financial plans. What inspired you to focus on this? 

Smith: Well, a number of things have inspired me on the pathway to where the agenda sits today. But let me try to highlight two of them. So, the first was way back when I first started as a professor here at WPI. I met an alumni. And he had graduated about five years prior, and when he found out I was teaching economics here at WPI, he said, Alex, I gotta tell you something. WPI is a great school and I learned how to be a good engineer and I have a flourishing career. I'm doing really well for myself professionally. Everything in life should be good, but it's not perfect. The problem is that I didn't learn anything about money management while I was a student, and now I'm out in the real world trying to navigate important financial decisions, and I just don't have the confidence that I need to know that I'm making the right choices. Now, when that alumni told me those things, it was an eyeopener for me and one that I didn't forget. Now, fast forward about 10 years. There was another thing that happened. I started teaching public economics. That's a course about the government's involvement in the economy, and there are two main sides. There's what the government spends its money on, and then how the government collects the money that it needs through the tax system. And so when I started teaching public economics, I very quickly became aware of the fact that they don't have a whole lot of basic knowledge about how the tax system works. That I found a little bit scary myself. And that was my call to action to get involved, beginning to teach students some of the things that they need to know. So, I did a little bit of research about personal finance, reading all the sources that I could. There's a lot of information out there about financial literacy, and it's all good information. I have nothing against it. In fact, I quite like it, but it neglects the human factors. And so very quickly I recognized that my contribution to personal finance could be to address the human factors using my expertise in behavioral economics. That's something I realized about two years ago, and I've been running with it ever since.

Cain: You know, Alex, I had not heard of the term behavioral economics before I met you, and I'm imagining some of the people listening might be hearing it for the first time as well. I'm wondering if you could define that term for us. 

Smith: Oh, yes, definitely. So, traditional economics has proceeded for hundreds of years at least, assuming that people are perfectly rational. And what that means is that they correctly interpret all the information available to them and then make optimal decisions based on that information. We all know that's not how it works, right? I mean, sometimes people are really impatient. Sometimes people take risks that are impossible to justify. Sometimes people let their feelings about others affect the economic decisions that they make. So, the traditional model, it just doesn't always hold up. Now, what behavioral economics does is it uses insight from psychology and sociology, insight about how real living, breathing people behave to update the traditional model. It relaxes the traditional rationality assumptions to do a better job of modeling and predicting how real people behave with money.

Cain: You know, that makes a lot of sense. I know in your work you've come up with something called Follow the Six, your six rules to follow to build wealth. Can you gimme the overview of those six rules? 

Smith: Oh, absolutely, yes. My six rules. Okay, here we go. So, rule number one is save significant amounts regularly. Rule number two, invest using long-term strategies that you understand. Three, reduce or defer your taxes. Four, take on good debt and avoid bad debt. Five, build a strong credit score.

And finally, six, ensure against the losses that you can't afford. And let me just quickly say this about the rules. They sound simple and straightforward. They do each have some kind of nuance attached to them. For example, with savings, notice that I say save regularly, which implies that there needs to be some consistency to it. And the other thing is that you've gotta save significant amounts. I'm thinking that once you're working full-time, you wanna save at least 10% of your income, and that's about double what the average saving rate in the U.S. happens to be right now. 

Cain: There's a lot of details in each of these that people can find out about on your website, followthe6.com, that's follow, the, and the number six, we'll have a link in the show notes. And we're gonna talk about investing and debt a little bit later in the show, but there's a couple others here I wanted to talk about briefly. One, you mentioned reduce or defer your taxes. I always just assumed that was for people who are really wealthy. Should people be thinking of that a little bit differently?

Smith: Um, I would like for people to think about it differently. So I think what you're describing is what many people do. I don't think you're alone. I think there are a lot of people out there who hand over their tax information, uh, to an accountant or a tax preparer during tax season and they leave it at that. But people can do better. For example, contributing to tax advantaged retirement saving accounts has the potential not only to help you save for retirement, but also to reduce your tax burden a lot. And if you rely on an expert to just file your taxes for you and you never learn how the system works, then you don't know the benefits of contributing more to your retirement plan. You don't know how much it could save you in terms of the taxes that you pay. That's a strategy that's available for everyone. And so, I suggest that they learn a little bit about the tax system so that they can take advantage of tax reduction opportunities like that. 

Cain: There's two more here I wanted to ask about. Build a strong credit score. You hear it all the time, but where do you begin? And I think there might be some misconceptions here too, about the best pathway.

Smith: Yeah, definitely. I mean, let me start by acknowledging that credit scores depend on a variety of different factors, and some of them are obvious, like paying your bills on time. Other factors people might not know so well. So, for example, how many open lines of credit do you have? Uh, how old are they? And also what percentage of the credit available to you are you using? So, it's a lot of different factors that go into the mix, and it actually makes the determination of credit scores rather complicated. So in light of that reality, my first piece of advice is that people learn how the system works. And, and I'm actually a big fan of credit apps like, uh, Credit Karma and the Experian app. If you use the app, then you learn how the credit scoring system works and the apps even have simulators on them that you can use to, before you create new credit, figure out how it's gonna affect your score. And so that's helpful from a planning perspective, but it also helps you learn like how is a certain change to my credit profile going to affect my score? You know, I'm an educator, I'm a big believer in learning. I think people need to learn the rules of the game using the apps that are available and then that helps them to be strategic about how they manage their credit to max out their scores as soon as they can. 

Cain: You mentioned insuring against the losses that you can't afford. Is the losses that you can't afford, is that the critical, consideration that people need to, think about there?

Smith: Yeah, once you start building wealth, you wanna make sure that you have insurance against potentially large losses. So, uh, poor health, right? You, you wanna make sure you have enough health insurance. Insurance against serious accidents, whether in your home or on the road with auto insurance, uh, disability insurance, you know, those are the kinds of insurance that protect you against serious things that could go wrong. That's the stuff I encourage everyone to think about really seriously. Now there are other kinds of insurance, like extended warranties on consumer goods, uh, appliances and electronics and things like that. The thing about those policies: they're marked up by amounts of 50 or 60%, very profitable for the vendors. And so as a consumer, you have to think twice, is that really gonna provide me good value for my money or should I save my money and take my chances? I suggest that people keep the cash, maybe invest it long term, they're gonna do better, taking a few chances on the minor things that could go wrong in life.

Cain: And people can learn more about the six rules on your website, followthe6.com, and it seems so easy, Alex, but that's not the end of the conversation, right? Your advice and a lot of personal finance advice you can find online is a game plan. But why do so many people struggle to follow the rules? 

Smith: That's a great question. It might seem simple and easy at first, but there definitely is a fair bit more to it. Let me begin by saying that you do need to know the rules and some people don't know them, so that's the first thing. But once people have a knowledge of the rules, I think the larger struggle is that many people lack what I call financial self-awareness. And when I say financial self-awareness, I'm talking about a conscious knowledge of one's values, beliefs, emotions, and behaviors relating to money. So even if people know the rules, they don't have good financial self-awareness, and that can serve as a barrier when people are trying to follow the rules. Let me give you a couple of examples. A lot of people have triggers that cause them to overspend, and that makes it difficult to stick to a budget if one doesn't know what their triggers are. Then it can be really hard to, uh, follow the budget that you've planned for yourself. When it comes to investing, we all know that we should think about the long term, but then when you have market volatility and possibly face some short-term losses, how much of that volatility are you really able to handle before you get scared and contemplate selling? The answer to that question is one of financial self-awareness. So with investing, it's important to set up a good portfolio. One that provides strong expected returns, but also one that's diversified to reduce volatility. So that portfolio design and set up, that's a key part of the investing plan. And then what happens is, you need to have a plan for how you're gonna deal with the fact that every once in a while your investments might lose value. So, it's important to do some soul searching ahead of time to figure out what kind of losses you're comfortable with. Think about it before you get involved. Have a plan for how you're going to cope with potential losses and stick the course through the ups and the downs.

Cain: Alex, what strategies do you recommend to help us stay on track?

Smith: So, big picture, people need knowledge and then they need to do some planning. Now, in terms of knowledge, people need to know the rules of the game. They need to know some basic financial literacy. But then on top of that, they need an awareness of common biases when it comes to the money decisions that people make. So that's the knowledge side of things. Once all that's in place. Whether it's saving, investing, taxes, debt, you have to do some planning. You have to do some planning so you have a strategy for how you're gonna avoid succumbing to the common biases. Let's take saving for example. What's a good plan to help people reach their saving goals? Well, the first thing with saving is that sometimes people don't reach their saving goals because they have a good long-term plan, but then they make day-to-day decisions in the short term that are inconsistent with their long-term plan. For example, they overspent. The best way to defeat overspending is to find an appropriate commitment device. So, for example, set up an automatic transfer from your checking account that moves money to a saving or investing account on a regular basis. That should be part of your plan, but then after that money has left your checking account, you have to figure out how you're gonna live your life on the money that's left. And that means writing a good budget and finding the motivation that you need to stick to your budget. That's how you avoid making short term decisions that compromise your ability to achieve your saving goals. 

Cain: And how do you recommend people tap into that motivation?

Smith: So this is one important area where psychology has a lot to offer. You know, when it comes to saving, for example, and finding motivation to save, uh, there are both internal and external sources. Internally, people can motivate themselves by setting personal goals, and then once you have a saving goal in place, you create a plan with saving, it's often a, a budget. And you do everything that you can to follow through and achieve your goal by following your plan. So that's internal motivation. External means using social factors. Uh, talk to the people around you, the people close to you, your friends and family. You tell them what you're trying to do and you ask them for their support in, uh, helping you meet your goals. You ask them to provide positive encouragement as you're on your journey.

Cain: That kind of ties us into the next question in terms of good friends and working together. Um, Alex, you're, uh, you're not doing this work alone, you've teamed up with Aedan who's here with us, and as I mentioned, Aedan is a WPI student, and, uh, you've done this to get a better understanding of what college students know and want to know and maybe misunderstand about personal finance. And Aedan, you're doing research on this topic. How did you first get interested in personal finance and, and how did you end up working with Alex? 

Bingham: Yeah, the quick version is that I took his intro to microeconomics course last fall. But the bigger reason is I came to WPI because you can do research as an undergraduate. Other schools I was looking at, you're not doing research as an undergraduate. It's just not happening, but you could at WPI. So that was kind of what pushed the needle over the line for me coming here. So, I knew I wanted to get into research freshman year, so I came here and I took your course in intro to microeconomics and you know, I look at all my professor's profiles and I saw you were doing work in behavioral economics and personal finance. And that interests me because I had a lot of background in investing. I worked at a bank before I came to WPI, so there was a lot of very similar points of contact. So, I reached out to you in an e-mail and I just asked, hey, is there any research opportunities available? And you said, hey, I'm gonna make a pitch for my research in a couple of days. And that's what happened. I really enjoyed it and we just worked from there. 

Cain: And from your perspective, Alex, what was that like to get the reach out from Aedan and to know that there's, uh, somebody who's interested, who may be able to help you with what you're doing? 

Smith: Oh, it's, it's wonderful. And, um, I give full credit to Aedan. I will say in general, it's something WPI does pretty well. It encourages students to get involved in faculty research and Aedan's one of those people who decided to do so and we've accomplished a lot since, uh, that first discussion.

Cain: So Aedan, you, you went out and you surveyed students as part of your research and you've produced a report called What WPI Students Know about Personal Finance. We'll have a link to it in the show notes. I'm wondering if you could give us sort of the broad overview of what you found.

Bingham: I can. So, the big overarching theme is students don't know enough about personal finance to leave college in a financially optimal position. So what this means is that there's a lot of lost opportunity. When people graduate college, they have to learn how to, you know, do their taxes, how to save efficiently, how to invest. Compared to if they learned how to do those things in college, they would leave college knowing how to do them. And so, they would not have a lag time that they had to learn. So they're catching up on, you know, let's say five years of savings and investing that in the long run can turn into tens of thousands of dollars. So that's really critical. Students don't know enough. But there were three key themes in this paper regarding that. The first one was the more economic or finance courses you took did correlate to improved knowledge about such topics. The second one was that in general there were just a lot of large gaps in student knowledge, especially when it came to, you know, like debt and taxes. A lot of misknowledge and a lot of misconceptions about the capability of financial tools there. And then third, we saw that students said they wanted to do better. They wanted to learn about investing, they wanted to learn about their credit score, but yet when you look at the data, oh, have you, do you know what your credit score is? We see students don't really take action on that. So there's a big gap between what students say they wanna do and what they actually do.

Cain: Aedan, I'm really interested, you mentioned this idea of misconceptions. Could you offer a couple of examples from your survey that speak to this gap in knowledge?

Bingham: I can? We asked in total about 80 questions, so there's a lot of data there. But I'll just put a few highlights in here. So one of the more striking questions we asked about early literacy was that: do you know if interest earned on a savings count is typically considered taxable income? Only 32% of students answered that correctly. They said, you know, yes, you can be taxed for profit you earn your investments. Only 32% of students knew that. But there were other examples that were a bit more pertinent. The first one dealt with the compounding effect. So, when you invest your money compounds over time, the more time you leave it in, the more it's gonna grow. It almost looks like an exponential function. So, we asked students two questions regarding this because of how important we thought it was. We asked them about the interest rate needed to double a sum of money in 25 years, and then we also asked them how long it would take to double a sum of money at a 6% interest rate. So, these two different approaches. Both times about half of respondents thought it would take longer than it actually would for that money to double in size or to meet that interest rate. This gap in knowledge is pretty considerable. And we also have other investing data that goes along with this. Students broadly considered investing risky. There was a lot of, maybe not fear, but a lot of aversion to investing. We saw with more and more courses taken, that fear went down. So to give you some numbers, students that had taken no courses at all, about 50% thought investing was risky. Students that had taken one course thought 40% of students thought investing was risky. But then when you took two to five courses, only 10% thought investing was risky. So, we see students are less averse to investing when they have taken more courses. But the last example I would like to point out here is in regards to what students know about their credit score. So earlier I said that students really reported that they wanted to do better, they wanted to take action on many of these financial tools, but when we looked at what they had done, it was nothing near that. So, an example that goes right towards that is we asked students, do you know what your credit score is? 49% said they did not know what their credit score was. But then we asked them, do you wanna learn what your credit score is? And 84% said they did. So there's a big gap there between what students know and what they do wanna know. 

Cain: Alright, Aedan, as you were talking, I was getting my calculator out and I'm really curious, you mentioned the rate of return that would be required to double an amount of money in 25 years. Uh, I think a lot of folks might be wondering, what is that number? I know I am. 

Bingham: If we want a sum of money to double in 25 years, that interest rate has to be about 2.85%. So, that's pretty low by most standards, you know that that's very achievable. That's achievable in, in investment vessels such as bonds quite easily.

Cain: That number makes me feel a lot better about my strategy. I would've thought as, it sounds like a lot of the students did that that number would need to be much higher. 

Smith: Yeah. What we should add for listeners is that this is actually an example of the rule of 72, which is a rough, uh, rule of thumb that people can use to figure out what rate of return they'll need to earn for a given number of years in order to double their money. So you take 72, you divide it by 25, our number of years, and you get a number that's approximately 2.9, 2.9% the, uh, answer that Aedan gave us. So keeping the rule of 72 in mind is something that's helpful for figuring these problems out. But a lot of people have never heard it before. 

Cain: Yeah, I'd never heard of it. And it makes it really easy to calculate and remember. Um, Aedan, in your research you also found some overconfidence when it comes to student views on investing and risk. Uh, can you explain that for us? 

Bingham: Yes. So I have a really good example for this one. So we compared how many students have invested compared to how much every student says they know about investing.  More students said they knew a moderate amount about investing than had actually invested before. So respondents say they know and care about investing. 76% said they knew at least a little about investing while 43.9% said they knew some or a lot about investing. Yet we only had 40% of respondents invest before. So, we have this weird clashing of numbers. Well, you kind of run into this issue. How do you know a good amount about something if you've never done it before? 

Cain: And you mentioned some misconception also about, um, risk. Can you talk a little bit about that? 

Bingham: There was huge misconception about risk. This is a really good point. So, we saw broadly that students that had taken less courses really wanted to invest in riskier assets. So, to just give some broad data, students identified cryptocurrencies being very risky. They also identified the stock market as being the second riskiest, and they also identified bonds as being the safest form of investing. So that's good. Students know the general tiering of what's safe and what's risky. But what was interesting is the less courses you had taken, the more prone you would be to investing in those risky vessels. So, students with zero courses or one course, they would frequently say that they would want to invest in the stock market twice more likely than they would be to invest in index funds or mutual funds or bonds. So, students with zero or one course really want to invest in the stock market, which is somewhat riskier. But when we move to students with more courses under their belt, students with two to five courses, we see a flat line. The same amount of students want to invest in stocks and bonds and index funds and mutual funds. Across the board, people with more courses are very more risk averse. They know what they wanna invest in.

Cain: I'm wondering what are some of the other implications if there are these misconceptions? Are students potentially leaving money on the table or maybe making decisions about how to invest and save that aren't based on the best information?

Bingham: Students are definitely leaving money on the table. The amount of misconception that exists definitely means that this is an issue that can be solved to an extent, not completely, but that there's significant lost opportunity happening here. And that's especially with investing. A lot of people, some that I know, they keep their money, they don't invest it. It's just sitting there and while if your money's sitting there, it's actually deflating because of inflation. So you're not gaining money, you're actually losing it in terms of purchasing power, that's concerning. So, you should at least try to stick with the current level of inflation, which, which sits around, you know, 2 to 3%. And you can do that through investing in safe assets such as bonds. But you know, if, if you want to make some stronger gains and you have, you have time and you have the money, you can invest in riskier assets, index funds, mutual funds, which aren't too risky, but then you can get into stocks, which are very risky. But students generally didn't know that you could do that. So there's a lot of missed opportunity here for making money by just putting it in some assets and leaving it there for 10 years. 

Cain: I should add that WPI offers a number of different ways for students to learn about managing money. WPI's Office of Financial Aid provides info sessions, presentations, and has other information online about building financial knowledge, filing taxes, and financial wellness. The Business School also runs regular courses on personal finance open to students for any major. It covers insurance, credit, taxes, and a lot more. That's taught by Karen Murray. And there's also the seminars and an upcoming course Alex is working on, which we'll talk more about later. Aedan, I wanted to ask, what are the next aspects of personal finance that you're gonna be studying?

Bingham: Yes. So we are looking into this year doing a investment research project. So we would set up groups of students, each working together within an investment account to make decisions and to make trades. So the thought behind this was that there's not a lot of qualitative work on investing. There's a lot of quantitative. So, there's a lot of cold hard data behind what people do, where people make decisions, at what time investors do this and that. But there's not a lot of data behind the qualitative side of things. There's not a lot into the, the rationale and the, the logic and the thought processes that go into making these decisions. So, what we want to do is we want to see what students think, what they think when making investment decisions. And the way we're gonna try to do this is, you know, we're gonna monitor the trades they make, and then we would interview them every couple months to kind of try to get at that thought process that's going on in their mind. And what's really interesting is we're doing this in groups for a reason. Individuals can act off of less reasoning sometimes. Compared to groups, you have to have more, more checks and more, more agreements to go before you make a decision. That's why you see investors at big banks that manage millions of dollars. They usually work in groups. It's for that reason. And by putting people in groups, we might be better able to see the logic that goes into making these decisions. 

Smith: I have a question for you, Aedan, if I may hop in for a moment. So, um, , when the student groups, when they experience market volatility, for example, for the better, for a positive gain or maybe for the worse, maybe they lose money, do you have any guesses about how they might respond?

Bingham: I bet you that a good amount of our participants, if the market starts going south, they will jump ship, they will try to get out. But it wouldn't surprise me if there's a couple of them in there with more of a investment background actually then, you know, use that as an opportunity to leverage the market to their advantage. 

Smith: And, you know, what I'm looking forward to is learning what they say about why they do what they do whatever they end up deciding. So I, I can't wait to see the results of this study. 

Cain: Yeah. I'm really fascinated too, um, . Aedan, You're a member of, uh, the WPI Investing Association, and that's a student led organization on campus. And that organization, uh, gives students in it a hands-on experience in investing, portfolio management and financial literacy. What types of things does the association do and what has that meant for you?

Bingham: Mm-hmm. You know, there's a lot of general body meetings. There's a lot of market move meetings where you analyze the market. There's also times where you can compete portfolios against each other. You can, you know, look at each other's investing strategies there is an event to where you're pitching a stock and we're doing that with Clark University. And that could be really cool because you get to see the different perspectives to which people come at these stocks, how they see the cost structures of them. So, it's a great association. They're really devoted to learning the ins and outs of the financial industry. There's constant discussions. But one of the best things about the association is its annual New York Stock Exchange trip. I went on this last year and it's by far been the most enjoyable experience of college yet, you know, as somebody from Montana, you drop me in the middle of New York City and it's a whole different world. It really blew my mind. I met somebody there that worked at the exchange and amazing interactions, very well spoken, could just, you know, tell you all the details and it was just a phenomenal experience. We watched the closing bell and it was just exceptional. But it was an amazing trip and it's something that most schools don't get the opportunity to do and it's because of the connections WPI has that we are able to go to the stock exchange and see what was going on. 

Cain: Sounds like a great experience. That trip has been going on for three years here at WPI and students get the chance to talk to traders to go on the floor, learn about trading and ask questions. And there's about 30 students each year that get to go on that trip. One other thing I wanna mention about the investing association is that the association will be involved in managing a student investment fund. It's a student led investment fund that the university has provided funding for to help give students some experience in managing investment funds and getting that experience in managing investments. Alex, I wanna bring you back in here. I'm wondering how you are using this information that Aedan has gathered and the research that you've done to help people be better informed. We've really talked about a wealth of tips and information and facts and figures today. What do you do with all of it? 

Smith: Yeah, Aedan's project has been very helpful for me. I'm working on a book, and it is based around my six rules. And I have a, a chapter that focuses on each rule, and I've been using some of Aedan's results to motivate each chapter. So at the start of the chapter, I use a few of his statistics to shed light on what students know and what they wanna learn. And then that's the lead into the content that I provide. So that's one way. And, and then the other thing is that I give a lot of talks and seminars at WPI and on other college campuses as well. And it's important to know your audience, and it's important to meet them where they are. Before Aedan did his work, I had some sense of what the gaps were, but I really didn't know enough about it. But now that he's done his project, it tells me where the students are. And I do a better job of meeting them where they are because of the work that Aedan's done. So it's been very helpful for me in the seminars that I've been giving over the past year. 

Cain: That makes a lot of sense. Uh, Aedan, how about you? How do you use the information that you've gathered?

Bingham: I do. I talk with other students about it all the time, but I also use it to motivate me to do more financially. There's always more you can do, and at a young age, it's prime time to get into these things.

Cain: And Alex, uh, I'm wondering what your take was on Aedan's finding that students are interested in learning more, but not necessarily taking the action to learn about personal finance. Uh, any theories on why that might be? 

Smith: Yeah, I have a few thoughts about that. Not just for students, for everyone, it's, it's easy to get caught up in the short term. You know, today, this week, this month, what are the things that I must get done? Uh, I think students like everyone else they can fall into that way of thinking. And then that means they focus on short-term priorities like current coursework and, you know, what's my internship gonna be this summer? And they're not necessarily thinking all the way ahead to their working lives, which are a few years down the road. Uh, so I think sometimes. Short term thinking is, is one of the challenges and one reason that people delay on learning things that are gonna be good for them long term. But I don't wanna put all the burden on the students. I, I, I think that's a mistake. I think that educators need to accept some responsibility too. And, uh, that's a responsibility that I accept. I need to meet students where they are and articulate why this knowledge is important and why it's gonna pay off in the long term. And then do a good job of providing that knowledge to them in a palatable, understandable, useful way. 

Cain: I want to ask you both, there's a lot of discussion today about student loan debt and the amount of money that people are borrowing to get college degrees. The questions largely surround: is it worth it? Um, Aedan, what did you hear from students when you asked them about debt? How did they view it?

Bingham: Yeah. So, students were extremely pessimistic about debt. That's in part because the connotation around the word debt is negative. Usually debt, you think about US national debt, or you think about debt on some bad asset, you think about debt in a very bad way. You usually don't associate it with good things, things that pay off in the long term. And it's a really interesting question, you know, why do students turn their backs to the upsides and the opportunities that debt enables?

Smith: You know, on the topic of student debt, it's one of the things that often comes up when I ask my students what they wanna learn about personal finance. Many of them first report that they wanna know about investing, but after that, I have a lot of students that say they wanna figure out how to manage debt. So it seems to be prominent in the minds of many students. I think it's an important topic. 

Cain: I'm wondering how you both think about that pessimism then that a lot of students have when they think of the idea of taking on debt. I'm wondering how you think that may affect the personal finance decisions that students and their parents might make when it comes to whether to take on student loans or, about how much to borrow.

Smith: It is going to discourage borrowing. So to the extent that people are pessimistic about the ability to pay back debt, or dare I say, fearful of the idea of taking on debt. People will borrow less and, uh, that's possibly not a bad thing, but here's what concerns me about it. If you don't do the borrowing, then what do you do? Does that mean you don't invest in an education? That's the part that I'm concerned about because I think potentially it scares people away from making what might be the right long term decision that being investing in an education that pays off many times over.

Bingham: Mm-hmm. And two, we can think about businesses. Most businesses at some point were in debt. A lot of businesses start by being in debt to get their feet off the ground. And so debt's really critical in some elements to being successful. It's just how you use debt, which is what matters. But then going with this theme of pessimism here that people have towards debt, people are also influenced by the state of the general economy. If they don't think it's doing well, then they might spend money differently. Pessimism also makes people keep money very close to the chest. They'll take less risk, and that decreases their financial mobility.

Cain: You make some really good points here, and I think you've got at the heart of the question, right? But at the same point, the price tag can be daunting. Um, so Alex, I'm wondering what you would advise parents and students who see the figures, right? The average federal student loan debt nationally is around $39,000. Uh, so parents and students might be questioning, how can I afford a college education and am I ever gonna be able to pay all that money back?

Smith: Yeah, that's a pretty important question. Uh, let me start by saying $39,000 is a big number. I would say that even though $39,000 is a scary number, it's important to try not to let emotions dictate decisions. I would encourage people to always think about the costs and benefits of different actions and set the fear and emotions aside for a moment. Try to make a decision based on the numbers. Now, I can't speak to every degree that's out there, but I will speak to the value proposition of a WPI degree. I know that it costs a fair bit of money, but I also know the success stories of our students. And the average starting salary is quite good. And then when you follow students over time and look at where they are 10 years later, that's a pretty good story as well. So the WPI degree pays off when you look at the long-term benefits, and I think it's important to keep that in mind, not be discouraged by the short term and some of the emotions that might come along with taking on debt. 

Cain: Yeah, it's a big decision and it, uh, really what you're pointing out is it's, uh, important to do your research and really think about it, uh, and take the time to understand, you know, that choice for, for you personally. Um, I want to add a few other points as well that, um, Alex mentioned, uh, a little bit about WPI offers a pretty strong return on investment. US News and World Report ranked WPI 18th on the list of colleges with the best return on investment. And it cited an estimated return on investment of A WPI education after 40 years at $3.4 million in 2023 dollars. WPI is one of five Massachusetts institutions to make that list. Uh, Alex, I understand you'll be teaching a special topics course at WPI early this year on some of what we've talked about today. What's the course called? What will it cover and what do you hope students get out of it? 

Smith: Oh, right, my course. The code is Econ 1800, but specifically what it's called is the Behavioral Economics of Personal Finance. And so broadly speaking, what I'm doing is bringing the human factors, the behavioral economics into personal finance. It's going to be based on my six rules, we will cover some basic financial literacy, the stuff that everybody needs to know, but then above and beyond that, we will focus on financial self-awareness. And so that means developing an understanding of the common biases that people have when it comes to making decisions about money. On the front end, we're gonna talk about people's prior experiences with money, because that often shapes current behaviors. And then we will cover the six rules. And after that, I'm gonna spend a little bit of time talking about the fact that the pathway to financial security and success typically isn't linear. There are ups and downs along the way. I've definitely had some wins. I've also had a couple of losses, and I'm gonna talk to students about that. I'm gonna make it personal and I'm gonna talk about the potential to learn from the things that don't go well and the reality that the ups and downs are part of the path.

Cain: That knowledge will be very powerful, I'd assume. And I think that those personal examples people will be able to relate to, I would imagine. I want to ask you both this question as we start to wrap up. Aedan, you first, uh, what do you wish everyone knew about personal finance?

Bingham: So two things. Invest your money and the power of the compounding effect. If everyone saw the graph of exponential growth, they would know how much investing your money does and how much of a better financial position it puts you into. And it also circulates more money into the economy for growth and innovation. And I've talked extensively with friends about saving and investing and too many of them simply keep their money in a lockbox under their bed. The thing they don't know is that their money's depreciating. And by simply investing your money into basic assets such as bonds, you can put yourself and your family in a better position to deal with losses or unexpected events that are going to happen in life.

Smith: I think the first thing I want everyone to know is that personal finance is for everyone. My view is that some people believe personal finance is for those who have money, but that couldn't be further from the truth. It's for everyone in the sense that even if you don't have any money, well actually, especially if you don't have any money, then you've gotta think about what you're gonna start doing to change your situation. So how can you start earning something so that you have some money to work with? And then how are you gonna manage those funds so that you can make them grow? That's how you create a better situation for yourself in life. And it only starts by thinking seriously about what you can do in terms of personal finance. So that's one thing. It's for everyone. And then beyond that, personal finance is about more than financial literacy. So, people are out there gaining financial literacy and that's a wonderful thing. I'm all for it. But there is another step, and that additional step is the financial self-awareness piece. And that's what I just don't think there's enough knowledge about. So that's what I'm pushing. It's what I bring to the table in personal finance and uh, I hope that message gets out there and heard. Money and financial management, it's often a, a complicated topic that can have a lot of emotional baggage attached to it. I think it's something that some people, uh, dread and, uh, it can be scary. We need to reframe that and, uh, let's take Warren Buffett for an example. So he's 95 years old. He's in the process of stepping back from work and retiring. He's someone worth more than a hundred billion dollars. Why does he continue to work up to the age of 95? Because he enjoys it. And I think that says a lot about how money management can be framed. Is there a way to make it a fun and interesting, enjoyable thing instead of something of fear and dread? If we can figure out that reframing more broadly, I think people will have a better time figuring out what the best financial decisions for them will be. 

Bingham: That's a good point.

Cain: Yeah, that's a really good point. Um, thank you Aedan and Alex for joining me and, and sharing your insight and expertise. Uh, I feel like I've learned a lot. I'm sure our listeners have too. So thanks for being part of The WPI Podcast. 

Bingham: I appreciate it.

Smith: Yeah, thank you. It's been a great time. 

Cain: Alexander Smith is an associate professor of economics in the Department of Social Science and Policy Studies at WPI. Aedan Bingham is an undergraduate robotics engineering and economics student. Be sure to check out the show notes to learn more about everything we've discussed today and find out more about student research at WPI on our website wpi.edu. This has been the WPI podcast. You can hear more episodes at wpi.edu/listen. There you can also find audio versions of stories about our students, faculty and staff. Please follow this podcast and WPI News on your favorite audio platform. You can also ask Alexa to open WPI. This podcast was produced at the WPI Global Lab. In the innovation studio. I had audio engineering help from computer science and music, undergraduate student Aster Dettweiler, and PhD candidate Varun Bhat. Tune in next time for another episode of the WPI podcast. I'm Jon Cain. Thanks for listening.