In a debt ridden world individuals find themselves constantly worrying about their financial situation. An extensive survey done by PWC focused on the millennial generation and their understanding of financial literacy. The results were absolutely shocking. Here are some of the most jaw dropping statistics from the survey:
- 24% of millennials can understand basic financial concepts
- Only 8% understand the importance of higher level financial literacy topics such as inflation and risk diversification
- 20% of millennials take loans out of their retirement accounts
- 30% of millennials overdraw their checking account
- 42% of millennials use Alternative Financial Services (AFS) and have no clue what these really are
- 50% of millennials believe they cannot come up with $2,000 dollars if an emergency happened in the next month
I’m not sure what you are thinking right now but these statistics are absolutely astounding. In a generation where there is an abundance of information online, for free, the technological generation seems to not use it.
Based on the stats above, it is clear that something needs to be done. Financial literacy does not only help individuals raise their standard of living but it also has the potential to improve the economy of a country.
From a macro perspective, financial literacy will reduce debt default thus reducing the bad debt expense of companies. Less expenses result in higher income and hence more profit for companies which inevitably leads to an increase in government revenues. If used properly, this can help increase the overall quality of life in a country.
In recognition of financial literacy month this April, let’s answer this pertinent question… “Who is responsible for teaching financial literacy?”
Below are five effective options:
- Schools (K-12)
Many of the facts below are from the 2016 Survey of the States.
Schools have the fiduciary duty to educate individuals of all ages. But is it their duty to teach personal skills? Currently there are only 17 states that require students to take a high school course in personal finance. While everybody is not interested in business, personal finance affects everybody’s life. Survey of the States argues that schools need to include financial literacy in their curriculum from kindergarten all the way through high school.
The organization has developed interactive games for students to better understand personal finance. If you would like to learn more about financial literacy teaching tools, refer to Retirement Savvy where James discusses software called Dollar Adventure which was developed by Frenel and Jamal from ignov8.com.
The concept of financial literacy was foreign to me in school as it was not in our curriculum. I believe personal finance should be taught at the high school level where students can be introduced to concepts such as investing, debt management and other money management skills.
Politicians can impact the education content of the schools within their jurisdiction. 99% of adults agree that personal finance should be taught in high school but there are two major hurdles:
- Only 20% of teachers feel comfortable teaching the subject
- Many schools are already underfunded
These challenges pose a major obstacle for educational institutions. The cost needed to train and hire teachers will be enormous as well as take a long period of time. There are long-term benefits to this project though. Financially literate individuals are less likely to default on their loans, more likely to save, and be more rational buyers. This can benefit the government by reducing their expenses on social programs as less citizens will require government support.
Just like an organization, a tone at the top is needed to increase the awareness of financial literacy. Whether it comes from government or state regulation, I think financial literacy needs to be stressed in today’s society.
Universities have the resources to teach students personal finance at higher levels. Many of the professors are amply educated and are capable of teaching personal finance. A large number of universities offer these courses to their students as they see the need for teaching valuable life skills. There are many universities that actually offer a financial planning major which allow their students to become Certified Financial Planners (CFP). The need is growing and universities have the capabilities of teaching their students the skills at the highest level.
What I think:
I had my first personal finance course just over a year ago during my senior year in college. Instead of taking a high level accounting course I opted into the “easy” elective and I am glad I did. I learnt skills that set me onto the path of financial freedom. The course placed a heavy emphasis on investing and understanding different ways of money management. Some of the topics included: budgeting, emergency plans, mutual funds, ETFs, stocks, CDs, and bonds. I think universities should tackle personal finance at a higher level to make us all financially savvy. Schools should help their students understand the basic concepts of personal finance while universities teach high level financial literacy classes. I would strongly recommend anybody who attends a university that offers these courses to take just at least one. It will change the way you think forever.
Parents are at the forefront of the battle on personal finance. They have the ability to instill crucial qualities into their children at a young age that can carry them through life. Unfortunately, only 28% of parents are willing to talk to their children about financial matters.
Kids have the ability to understand basic concepts from as early as five years old. Starting to educate children from a young age is one of the most underutilized practices undertaken by parents. Parents need to recognize that the lessons they teach their children can impact the way they handle their financial responsibilities for the rest of their lives.
Some tips for parents with kids:
- Give an allowance – Provide them with either cash or a prepaid debit card (one that cannot be overdrawn). Have a conversation with your child for mutual agreement on a predetermined date for replenishment of funds (weekly, fortnightly, or monthly). This will quickly teach the lesson of budgeting and money allocation.
- Match system – I recommend only doing this with smaller children as they will have less money. Tell them if they invest in a stock or put money into a savings account you will match a certain percent of it. This will get them in the habit of saving so they will understand how a 401(k) works.
- Money does not grow on trees – I am sure this phrase has been said countless times to many of us. Teach your kids where money comes from and that most parents only make a fixed amount per month. Depending on your child’s age, reveal the different areas that money is spent on a regular basis.
- Pay them to do chores – I do not mean pay them for the basic responsibilities expected of them (clean their room, wash their dishes, and basic family chores). Suggest extra ways they can make money by doing chores outside their domain as a child.
What I did:
I never realized the values my parent instilled in me until I matured. Simple things such as giving me an allowance for the week or cash to go out with friends made me learn the skill of budgeting. I will always remember the time I made a decision as a child to buy a stereo. I wanted one because I felt like it was the popular item at the time even though they were expensive. I did chores for weeks and kept getting paid until I finally saved up enough money. Did I buy the stereo? No… Let me tell you why. I never realized how long it would have taken to save up the amount of money needed to buy this big item. In addition to that, I did not want to see my bank account diminish to $0 to purchase something that I honestly would not have used for very long.
Last but not least is the individual person. There are thousands of websites, books, and videos that can teach people about personal finance. The key word in that sentence though is can. It is ultimately up to an individual to make a commitment to learning these crucial skills. Anybody can learn personal finance but nobody can help you achieve financial freedom except yourself.
Everybody is in control of their own life. While individuals are responsible for learning these crucial skills it is unfair to penalize people who are not even aware of financial literacy. The average person worries about making ends meet, not being financially literate. While they have the ability to learn about this topic, I think it needs to be made aware to them so they can have the opportunity to change their financial path.
What did you vote for? Why? Are there other influencers you believe I left out? Let me know below in the comments.