Studies show millennials are clueless when it comes to basic financial literacy. Is it their fault? What can we do?
I don't like talking about debt. But I spend a lot of time talking (and writing) about it mainly because our nation is drowning in red ink. From the recent college graduate with $80,000 in student loans, to the middle-aged working class adults that are still paying off student loans and have added a mortgage, car payments, credit car balances, and a home equity line - our nation has a serious debt crisis.
According to an article at Business Insider that published the results of a Trading Economics study, out of 30 countries, America ranks #10 for having the most debt. Americans have a collective $1.14 trillion in auto debt, $1.28 trillion in student loans, and $8.82 trillion in mortgage debt. The total household debt of Americans is up to $8.82 trillion (as of the third quarter of 2016).
These numbers give America a household-debt-to-GDP number of 78.8%; making us the country with the 10th highest debt.
A CNBC article ranks states with the most debt using the debt-to-income ratio number. Using this equation California has the most debt per person, followed closely by Hawaii, Virginia, Colorado, and Utah. Maryland and D.C. are also in the top 10. The difference between California, the state with the highest debt ratio, and Maryland, the #10 state on the list, is not much (1.84-2.34).
Is our nation's debt problem simply due to circumstances beyond our control and unforeseen accidents? Or is there a reasonable explanation that we need to admit and begin correcting?
Perhaps a George Washington University study will shed some light on why so many adults seem to have trouble with basic financial principles. The study concludes that “Millennials are overconfident and underprepared when it comes to managing their money.” To get to this conclusion the study reports the following troubling statistics:
-Only 24 percent of respondents showed basic financial literacy in the study, with just 8 percent showing a high level of knowledge. -Yet, 69 percent gave themselves a high self-assessment of financial knowledge.
-Two-thirds have at least one source of long-term debt (student loan, home mortgage, car loan).
-30 percent have more than one source of outstanding long-term debt.
-More than one-third have unpaid medical bills.
-About 20 percent of those with a self-directed retirement account either took a loan or made a hardship withdrawal in the prior 12 months.
It seems young adults accustomed to borrowing money – something they did heavily to get through college – continue this habit into adulthood. The result is a generation that, almost without exception, doesn't know anything but debt. Though millennials give themselves high marks for financial literacy, the gap between their self-evaluation and reality is quite significant.
But, as with any gap in knowledge, it didn't happen overnight. This is evidence of a greater problem in which financial education has been relatively non-existent for students. Though I've been out of high-school for a number of years, I can attest to the fact that financial education was not a part of my schooling. The last 20 years do not seem to have improved the financial literacy of students.
A new report from the Center for Financial Literacy reveals only 10% of states receive an “A” for financial education in public schools. It's bad enough that merely 10% of states receive an “A.” More troubling, in my opinion, is the low standard needed to achieve this grade. The report says that in order to get an “A,” a state must “require students to have at least 15 hours of personal finance instruction before graduation.”
Really, 15 hours? Considering the reality that financial decisions will be present in a persons life until they die, it seems critical that more than a mere 15 hours be required. The repot indicates that much of the financial instruction is embedded in other classes, which means it is not focused study. I'm not about to bash other classes, as each have their place. However, it seems schools would do well to place a little more emphasis on financial education for students; especially considering the following statistics:
-48% of millennials say they are certain or probably certain they could not come up with $2,000 within 30 days to pay for a sudden expense.
-Only 32% have set aside emergency funds to cover 3 months of household expenses.
-30% with a bank account have overdrawn the account in the last 12 months.
Yep, we need some financial education.
Here's a few suggestions schools should consider to prepare students for the financial decisions they will need to make:
1 – Many students start working a part-time job in 10th grade. With this in mind, Sophomores should be required to take a basic budgeting and banking class as part of their math and/or civics classes.
2 – Juniors should be required to take a next level budgeting class that includes an element of how credit works.
3 – Seniors should be required to take a basic economics class; including a section that builds on their previous budgeting and credit classes.
The responsibility does not lie solely with the schools, however. Parents must make it a priority to teach their kids the value of money, how banks works, how credit affects their finances, and basic budgeting. Parents, perhaps more than schools, should also include lessons on impulse control and delayed gratification. These are as important, if not more important than any other financial lesson.
Some practical steps parents can take to educate their children could include:
1 – Help your child open a bank account and begin saving part of the birthday, Christmas, or other money they receive.
2 – Make budgeting a family activity in which you teach your kids how you set your budget and how you stay on track.
3 – Involve your kids in financial decisions so they learn the process and priorities that contribute to the decision.
These are simple steps that can make a lasting impact in the life of students preparing for life. Students should not know more about the Kardashians than basic financial management. It's time for schools and parents to step up and teach the next generation how to wisely steward the resources they have been given.