California gets an “’F’ when it comes to preparing our children for the real world of money,” says the most recent report by the Champlain College Center for Financial Literacy.
The Center graded every state on their efforts to produce financially literate high school graduates, and California scored close to the bottom. There’s just no effort to teach the basics of personal finance as part of the state’s core graduation requirements.
Nationwide, financial literacy is sorely lacking. A 2017 survey found that 57 percent of respondents had less than $1,000 in cash savings.
To fill this dire void, we must teach our children about money and finance. So what tools should we provide to them which allow them to make wise, informed decisions on the big and small financial matters they’ll face as adults?
Understanding compound interest
This one is critical. Given enough time, even modest rates of growth add up: at 7 percent annual growth, an investment will just about double in ten years (and by comparison, the U.S. stock market, as measured by the S&P 500 index, has grown about 11 percent per year since 1980, which means the market doubled about every 7 years since that time. At 7 percent, $10,000 grows into $76,000 in 30 years and $150,000 in 40 years.
Learning how to invest wisely
Do not get carried away with investment fads and trends. Stick to basic diversified investments, focus on long term returns and do not worry about short term volatility. Teach your kids that if it sounds too good to be true, it probably is!
Building an emergency reserve fund
Strive to put at least six months’ worth of expenses aside in a liquid savings account as an emergency reserve. This can help ensure that unexpected expenses –an auto repair bill or health crisis– do not derail your life.
Not all debt is bad
If we all had a choice, it would be nice to live debt free. But for most of us, it is the only way we can often afford life’s larger costs. For example, a mortgage is the only way most of us ever get into a home. Auto loans can be useful, as can student loans, to help you to earn more and have a more meaningful life.
Avoiding credit card debt
Credit cards are useful for convenience, but they should not be used to support lifestyle decisions. They should be fully paid off monthly to avoid interest rates up to 20 percent if just the minimum payment is made. Young adults need guidance on how to shop for the right card: finding ones with lower rates and no annual fee.
Maintaining a good credit score
Young adults need to learn that every late payment is recorded on their credit scores – and once you go below certain thresholds, loans become more expensive or impossible to get, job offers can be revoked and apartments impossible to rent.
Read the fine print
When opening up a bank or investment account, you must read carefully. This is doubly so when taking out a loan. Are there pre-payment penalties? Is there a lock up or surrender period to get out of an investment? This is common with annuities and other life insurance products. What are the real fees? What is the real cost difference between a fixed and a variable rate loan or a loan of different terms (15-year mortgage versus a 30-year mortgage)?
Learning to budget
How much do you earn? How much will be deducted in the form of taxes, Social Security, and insurance (that’ll be an eye-opener to many young adults entering the workforce for the first time)? Then there are the fixed expenses: rent or mortgage, utilities, basic food, clothing and transportation, and maybe student debt. After that comes discretionary spending: vacation and travel and non-essential personal items and activities. Making a budget quickly shows what is possible and what is not.
Learning to save
Set goals. Whether saving for a home, a car, a trip, young adults should figure out ways of reducing spending so they can save more. It is a discipline to get into, no matter how little the amount is, but it is a vitally important lesson that will serve them well throughout their lives.
CFP®, Senior Wealth Advisor