Would it surprise you to know that students graduating from high school enter college with little to no knowledge about their finances, how to budget, or save for their futures? The problem has become so severe that 40% of these students wind up going into debt in order to fund their social lives and 70% of these students wind up damaging their credit ratings shortly after college graduation.
Unfortunately, it seems as though this debt will not be going away anytime soon. The average student loan debt for the class of 2016 increased by 6% from the previous year and the financial literacy rate in the U.S. has not improved over the past three years. While college enrollment and the number of college graduates has continued to increase, financial literacy lags among these young people at record lows. Where does this disconnect come from?
Few states offer personal finance or economics courses and even fewer states test students on the financial knowledge they have acquired. It therefore comes as no surprise that American students (and we can infer American adults) have one of the lowest levels of financial literacy when compared to other countries. While the number of student loans has increased,
- 44% of Americans don’t have enough cash to cover a $400 emergency
- 43% of student loan borrowers are not making payments
- 38% of U.S. households have credit card debt
- 33% of American adults have $0 saved for retirement
Why does it matter? How is it affecting the economy?
Students are graduating with loans they can’t afford to pay back and with minimal financial knowledge in planning for their futures. According to Student Loan Hero, Americans have over $1.48 trillion in student loan debt, which is more than double the total U.S. credit card debt of $620 billion. This debt is becoming a major barrier to home ownership. 43% of student loan borrowers are not making payments and most of these individuals do not have any savings. A lack of sound financial knowledge will affect the economy as these millennials enter the labor force burdened with student loans.
As parents, we play a vital role in educating our children about the importance of personal finances. In the Sherman household, we are teaching our children the importance of finances on a daily basis. Our 4 year old son is learning about savings by doing chores in return for an allowance, which he saves in his piggy bank. He is learning to save and spend his money wisely.
Parents can begin educating their children at home in order to increase the financial literacy of their kids. By demonstrating wise financial habits, parents can serve as role models for their kids. Talking in an age appropriate way to your children about the dangers of debt and the importance of saving a portion of any money they earn instills financial values and lessons your child can use throughout life. You may find that using an allowance is a way that you can teach your kids about saving and spending appropriately. Since it has been shown that kids who manage their own money have been found to demonstrate better financial habits in the future, giving your kids the opportunity to spend and save their own allowance or money earned is a good way to prepare them for later on. Even a simple trip to the store can be used as an opportunity to start the conversation about the danger of credit cards and how they should only be used in an emergency. Educating your kids at an early age will enable them to better learn and practice sound financial habits while under your watchful eye and cause them to be less likely to make irrational decisions once they are out on their own.
This issue is not only affecting students and young adults. Many professionals with advanced degrees have spent countless hours studying and researching information in their particular field. Despite all of the hours spent earning their degrees, many of these people have never taken a single course in financial education and are surprisingly not prepared to deal with the important financial decisions affecting their futures. As a result, many extremely smart and successful people are making critical financial errors which can negatively impact the amount of money they have saved upon retirement.
Beginning in 2011, studies were conducted where participants were shown a computer generated rendering of what they might look like at their age of retirement. They were then asked to make financial decisions about whether to spend their money today or save that money for the future. In each study, those individuals who were shown pictures of their future selves allocated more than twice as much money towards their retirement accounts than those who did not see the age-progressed images. Seeing the images gave the participants a connection with their future selves that they did not possess before. As a result, their spending/saving behavior changed dramatically because “saving is like a choice between spending money today or giving it to a stranger years from now.”
The benefits of educating your children about the importance of personal finances are undeniable, and you’ll be able to set them up for a promising future and help them prepare for retirement. Visit us online for more information about how we can help improve your financial life.