Young People & Money

To prepare students for future independence and the rigors of adulthood, proficiency in subjects like reading, writing and arithmetic has traditionally provided a solid foundation for future success. This belief has guided educational policy since 1948, when laws were passed making school attendance compulsory for minors. Unfortunately, academic priorities haven't evolved with the times to address changing societal circumstances. Though teens and twenty-somethings are lectured and quizzed in a wide range of academic subjects, they receive little-to-no formal instruction when it comes to the financial life skills that will enable them to succeed as newly independent adults. This is bad planning on an industrial scale because, though an understanding of the academic basics is as necessary as ever, many students lack the practical economic know-how and confidence to productively manage money, the very lifeblood of their labors. At great cost, our educational system ignores this aspect of youth development. Dan Ianicolla, former Deputy Secretary for Financial Education at the Treasury, spoke to the far-reaching seriousness of this issue when he said, “The downstream adult problems of rising bankruptcy rates, low savings rates and the frequent misuse of credit can all be traced upstream to how our educational system fails to prepare young people for their financial futures.”

 In a nation where 33% of high school students and 84% of college undergraduates carries a credit-card, it's peculiar that personal finance isn't taught in high school or college. What makes this fact all-the-more extraordinary is that, according to the latest research, many young adults are financially illiterate. Few know anything about investing, the importance of building good credit, the dangers of reckless borrowing or even how to create a budget and balance a checkbook. Curiously, though personal finance isn't on the curricular menu in California's public or private schools, the financial industry and some of the biggest names in it are taking a far more active interest in young peoples’ financial awareness. In April 2008, The JumpStart Coalition (a non-profit advocacy group that, ironically, is partly funded by an impressive roster of for profit financial firms, namely: Bank of America, Capital One, MasterCard, Wells Fargo and VISA) announced the results of a nationwide study conducted to evaluate high school seniors' financial awareness. The survey instrument, designed by Lewis Mendell, professor of Finance & Managerial Economics at SUNY Buffalo, asked 12th graders to answer 49 multiple-choice questions in a wide range of personal finance topics. All told, 6,586 students and 40 states participated in the survey effort. Its findings? Roughly half of high school seniors are financially illiterate. The average score: 48.3%; a result which--interpreted by academic standards--is failing.

In light of our information-age economy's dizzying complexity and the potentially ruinous consequences of financial mistakes, it's clear that adolescents can't afford to learn the ABCs of personal finance the old fashioned way, as prior generations of young people mostly did: through trial and error on their own. Financial literacy is especially relevant to students future welfare today because, in the blink of a generation, economic circumstances have shifted in ways that make financial ignorance and money missteps more costly than ever. Consumers who came of age before the proliferation of computers and the rise of the Internet would, if miraculously transported to present day, be positively amazed by what passes for currency these days. Before the tech revolution, commercial transactions were tangibly linked to the exchange of goods and services for payment in money that could be touched, like coins and cash. Nowadays, however, currency zips through cyberspace and is propelled by electronic transactions that originate on credit cards, ATMs, debit-cards, checkout kiosks and over the Internet. To be sure, technological innovation has, in many ways, fundamentally transformed our economy. Consequently, for adolescents, money has a new and dangerously abstract sort of quality. And though our currency's newfound modernity reduces or eliminates the hassle of having to carry and pay for things with cash, it also presents an entirely new set of problems--particularly for teens and twenty-somethings. Thanks to the widespread availability of credit, it's become much easier for young adults to casually (and, in some cases, recklessly) disassociate financial choices from their consequences. Ironically, though money is more virtual and easier to access than ever, the consequences of recklessly mismanaging it are as real ever. What's more, research shows that youngsters are especially prone to financial error. A 2008 study by the National Association of Retail Collection Attorneys found that more than 25% of college students find it reasonable to run up a debt to celebrate with friends or to use credit cards as convenient cash raising tools. Moreover, 23% of college students surveyed ignore overdraft fees and say they're undeterred by the prospect of having to spend months or even years paying off a debt in order to bankroll a moment of fun.  

Now, in the grand sweep of economic history, these are extraordinary times. Interestingly, however, the significance of these developments is eclipsed by how abruptly economic circumstances have shifted in other areas of modern day life. For instance, how people plan and save for distant financial goals like retirement is markedly different as well. With the rapid obsolescence of employer sponsored pensions and workers' growing reliance on individually-funded and self-managed retirement savings accounts (think 401Ks and IRAs), people from all walks of life are now participating in capitalism more intimately than ever before. Not so long ago, stocks and bonds were mostly seen as the exotic play things of the super-affluent. Today, they're frequently peddled to workers of widely varying levels of financial sophistication on all rungs of the socio-economic ladder. For students and newly minted professionals, negotiating this new and mostly unfamiliar economic landscape requires a heretofore unprecedented (and largely absent) degree of applied financial knowledge. The future implications of this seismic economic shift are largely self-evident. Alarmingly, one needn't look beyond the retail sector for a preview of the shabby lifestyle that awaits future generations of retirees if they fail to save enough money to see them through their golden careers. A sizeable percentage of Wal-Mart associates and 7-11 counter clerks are working long and hard to supplement their social security income. If, throughout their professional lives, young adults are to successfully transform a steady albeit modest trickle of savings into a warchest capable of supporting a dignified retirement, it stands to reason that they should proactively acquire the financial savvy and discipline to undertake this important lifelong process. Interestingly, unlike macro or micro economics, which are occasionally offered as scholastic electives, applied economics isn't taught in our nation's classrooms. By default, this forces adolescents to learn the ins-and-outs of personal finance the hard way. For many, this glaring oversight threatens future hardship because, as many working-class parents will agree, to thrive financially, young adults must: 1) capitalize on time's wealth compounding power; 2) recognize the potentially sizeable opportunity cost of squandering it; 3) when managing their money, sensibly differentiate between "needs" and "wants" and multi-task among short-term, intermediate and long-term goals; 4) understand how taxes and inflation work, be able to estimate their long-term impact on one's bottom line, and finally, understand how varying economic cycles affect the performance of financial assets like stocks, bonds, real estate and commodities.   

Such knowledge is imperative to young peoples' future welfare because, though Newtonian physics makes the world go-round, money makes it work. Financial concepts like debt, cash-flow, interest, growth and value are deeply stitched into the mostly free-market fabric of our capitalist economy. Moreover, as guiding tenants, these principles apply as rigidly to individuals on a micro-level as they do to prospective employers that may someday hire them. The widespread use of credit cards illustrates just how dramatically financial circumstances have changed. Before they became commonplace financial power tools, credit cards were widely regarded as exotic status symbols. What's more, they endowed their owners with an aura of economic prestige. Initially, as a matter of strict operating practice, credit card companies thoroughly vetted a prospective applicants' financial history well before offering to open a new line of credit or issue a shiny new card bearing a prospective cardholder's name. In fact, before the advent of credit scores to regulate and price the torrential flow of capital between lenders and borrowers, just having a credit card was seen as a sizeable accomplishment in its own right because, as a badge of high financial honor, it loudly testified to one's sterling economic character. Remarkably, lending standards have since become so lax that, until the recent passage of financial reform to limit abusive lending practices, unemployed and financially illiterate high school and college students were plied with offers of in-store financing and flooded with "pre-approved" credit card applications sent via snail and e-mail. 

For adolescents, the odds of financial mishap resulting from the occasional misuse of credit are worsened by the inescapable influence of our consumer culture. In many of our nation's cities and towns, shopping is no longer merely an idle distraction, but rather, has become a celebrated national passtime. And since young people generally don't pause pause to consider the future consequences of their financial choices, they're apt to adopt and perhaps unwittingly reinforce self-destructive financial habits and behaviors that could severely jeopardize their future welfare. To be sure, there are other complicating factors as well. Since youth spending is seldom curtailed by the need to satisfy household expenses or pay major bills, like, say, rent or a mortgage, most of the money that slips through their fingers is disposable. For many teens and twentysomethings, this brief (albeit delightful) reprieve from the looming economic burdens and responsibilities of adulthood leaves them temperamentally unprepared for the important work of managing their financial lives in the post-diploma world.  

Moreover, when it comes to shaping adolescents' economic behavior and values, corporations wield tremendous influence. Businesses that cater to this artificially affluent demographic are understandably keen to court and accommodate young peoples' yen to spend; and the numbers tell the story. Every year, billions of dollars are spent on glitzy promotional compaigns that are designed to appeal to and, if at all possible, exploit adolescents' youthful sensibilities. Corporations, which are shrewd and calculating in their marketing efforts, do their best to coax young consumers to open up their wallets for the goods and services they manufacture. Think adolescents lack substantial economic clout? Think again. According to Packaged Facts, tweens (consumers between the ages of 8 to 14) influence nearly $40 billion in spending each year. By 2011, spending by young adults is expected to reach $209 billion. Not surprisingly, high school and college students are hammered with commercial messaging that's designed to strip them of their dollars and, in the process, sell them everything from fast food and fashion accessories to cell phones and sneakers--and everything in-between. Interestingly, in the tug-of-war that's being waged for young peoples’ hearts and minds, there's a growing social tension between commerical and academic influences. Though it's not always easy to tell which side is winning, it's telling that shopping centers in the U.S. outnumber high schools and they attract over 200 million consumers a month. Incidentally, in many states, the biggest tourist draw is no longer a historical, cultural or even natural attraction: in fact, it’s a mall.

Of course, there may be a dark side to all of this commercial stimulus. In October 2006, Lorrin Koran, professor emeritus of psychiatry at Stanford University, published the findings of a first-ever study documenting the prevalence of compulsive spending disorder. Koran found that over 5% of U.S. adults suffer from this condition. Commenting on the study’s findings, Koran observed “compulsive shopping can cause people to go deeply into debt and even lie to loved ones about purchases. Long-term consequences can include bankruptcy, divorce, embezzlement, and even suicide.” Though adolescents may not engage in such overtly self-destructive patterns of behavior, they face difficult financial circumstances on other fronts as well: low personal savings rates; rising living costs; escalating education expenses; stagnating wages; tightened bankruptcy laws; and the viccisitudes of globalization collectively pose a more credible threat to young peoples’ future welfare.

Now more than ever, signs of financial stress are glaringly apparent among high school and college students who, in increasing numbers, are using credit cards to make ends meet. According to BusinessWeek (Nov. 14, 2005), in 2004 the average credit card debt among 25-to-34 year olds was $5,200—which translates to a 98% increase from 1992 levels. Though this may not seem like a crippling sum, it’s just the median amount; half of young adults owe more. The skyrocketing cost of education is equally problematic. According to Kiplinger (Oct. 2008) the average debt carried by college graduates in 2006 was $16,432 and the maximum debt carried by the top 8% of student borrowers was $40,000. Robert D. Manning, author of Credit Card Nation, says “Young people are taking on levels of debt that were completely inaccessible to prior generations. In large part, this is because access to credit is no longer based strictly on income.” Manning observes that “Generations X and Y have a razor-thin margin for financial error.” Tamara Draut, author of Strapped: Why America's 20- and 30- Somethings Can't Get Ahead, warns “This debt-for-diploma system is strangling our young people right when they're starting out in life. It's creating a sense of futility, a sense that, no matter what they do they're not going to be able to get ahead.” Financial stress is affecting young people in other ways as well. Increasingly, graduates are moving back home to live with their parents. According to Money Magazine (Oct. 2006) though 25% of young adults between the ages of 18 to 24 lived with their parents in 1990, this figure rose to 52% in 2000. The vice-like power of the pocketbook is forcing many young people to put off rites of passage, this includes: buying a first home, postponing marriage, and delaying having children. Scores of books—including Young, Fabulous, and Broke by Suze Orman, Boomerang Nation by Elina Furman, and Generation Debt by Anya Kamenet—offer a more detailed accounting of young peoples' financial woes.

Remarkably, though many teens and twentysomethings would clearly benefit from personal finance training, few schools offer relevant coursework. In fact, at the time of this writing, only seven states (Alabama, Georgia, Idaho, Illinois, Kentucky, New York, and Utah) offer practical money management training and require students to satisfy minimum proficiency standards in this area before graduating high school. Given the considerable long-term benefits that could arise from knowing how to handle money sensibly, one might expect the Department of Education to devise and implement personal finance standards nationwide.

This hasn’t happened; but the problem, as we'll soon see, is largely one of context. In many ways, the Department of Education is ill-equipped to tackle this issue; and ironically enough, the dysfunctional economics of education itself are largely to blame. With massive budget shortfalls forcing schools to eliminate or slash traditional elective programming in art, music and physical education, there's justifiable cause for skepticism about when or even if California's schools will acquire the political will and wallet necessary to prioritize youth financial literacy. Moreover, the economics of education are also impaired by the mushrooming legacy cost of having to pay healthcare and retirement benefits to a sizeable (though, to be sure, still growing) population of already retired teachers and other school staff. Collectively, these factors put a tremendous fiscal strain on a system that's frightfully underfunded as it is. Add to this a renewed sense of political urgency to improve student performance on standardized testing in more conventional subjects like reading, writing, and arithmetic, and it's easy to see why youth financial literacy may not soon grace our Golden State's educational agenda.

Apart from these daunting challenges, however, education suffers from a debilitating structural problem as well. To a largely unknowable extent, public schools are slow to adapt and modernize because they face little-to-no competitive pressure from the private sector with respect to the enormous nationwide scale and scope of educational services they provide. Unlike the private sector, where a firm's continued survival depends on its ability to anticipate and respond to its customers' needs in a dynamic and fiercely competitive arena, our educational system operates in a far more sedate environment; one in which its "customers" are, by force of law, a captive audience. The absence of competition in the educational space doesn't give public schools a survival incentive to continually improve their methods and curricula. Because the Department of Education is a government run agency that's thickly insulated from free-market forces and the adaptive qualities that they foster, it can afford to be somewhat indifferent to the needs of the youthful and politically disempowered constituency it serves. Bill Gates, an iconic and reasonably astute businessman, has (with characteristic brashness) voiced concern about our educational system's effectiveness and its ability to meet 21st century challenges; he's said, “America’s high schools are obsolete. By obsolete, I don’t just mean that our high schools are broken, flawed, and under-funded… By obsolete, I mean that our high schools—even when they’re working exactly as designed—cannot teach our kids what they need to know today… This is not an accident or a flaw in the system; it is the system.”

But this raises a titillating question: is the absence of personal finance training likely to hinder students’ future economic development? In other words, is there hard evidence to suggest that financial knowledge and higher levels of personal affluence are positively correlated? Perhaps not surprisingly, there is; a study by Annamaria Lusardi, professor of economics at Dartmouth College, and Olivia Mitchell, professor of insurance and risk-management at the University of Pennsylvania, offers sobering insight. After quizzing survey respondents on simple calculations, such as compound interest and percentages, and comparing their knowledge to their net-worth, they concluded that there is a strong relationship between a person's depth of financial knowledge and wealth. People who understood the mechanics of compound interest, for instance, had a median net-worth of $309,000 vs. $116,000 for those who missed such questions.

But, apart from financial literacy's whopping long-term payoff, it seems that there are other equally compelling reasons for students to preemptively bone-up on the financial basics. Simply put, financial knowledge and its productive application to decisions encountered in everyday life isn't just an economic matter. More importantly, it's a quality of life issue. Obviously, over one or more decades, the cumulative impact of financial choices (either good or bad) will profoundly impact students' future quality of life and range of opportunities. Remarkably, this hasn't always been the case. A generation or so ago, financial literacy was arguably less relevant to personal success. And this brings us back to a time when finishing school and finding a good job with a stable blue-chip employer was widely regarded as the best way to achieve lasting economic security. But this conventional wisdom relates to a bygone era, one in which large paternalistic companies could be safely trusted to look after their employees' interests, provide for their healthcare expenses, and, at the far end of a 30+ year career, bankroll a semi-comfortable retirement. With the dawn of the 21st century, the rise of globalization, intensifying competition within a growing number of industries and the reduction or outright removal of trade barriers between mercantilistic nations, such thinking now seems downright quaint. Outside of a shrinking list of government and tenured teaching jobs, lifetime employment is frustratingly elusive. And the workplace has also been fundamentally changed in the last few decades. As recent news headlines somberly attest, the recent fall of seemingly unsinkable blue-chip employers (think Enron, WorldCom, AIG, Freddie Mac, Lehman Brothers and take your pick of U.S. automakers) raises rightful concern about the wisdom of relying on conventional economic assumptions as a recipe for future success. In short, the socio-economic status-quo has radically shifted and in a remarkably short period of time. Challenging times and circumstances have squeezed the middle-class, summarily leaving millions of rank-and-file employees out of work. Meanwhile, many workers are having to confront the dour prospect of diminished future economic security because of employers' unfunded and grossly underfunded pension obligations. Barron's, a respected and widely read investment weekly, recently reported that, among S&P 500 companies, only 25 or so have fully funded pension plans. 

The upshot is that there's good reason to question whether today's students and tomorrow's young professionals will be able to achieve a dignified retirement many years from now by relying on the assumption that hard work and devoted service to one or more employers will ultimately, over the course of 30 years, provide enduring economic security. The changing dynamics of the workplace put a giant exclamation mark on this point. According to the latest statistics, young adults will switch jobs ten times over the course of their professional lives. And the financial difficulties posed by a tight labor market make it all-the-more important for young people to intelligently manage what money they make throughout their careers. Data compiled by the Bureau of Labor and Statistics shows that, among working college grads, half are in positions that don't require degrees. Alarmingly, median compensation statistics for Americans under 25 who have a four-year degree have actually fallen 12% from 2000 to 2008. To make matters worse, the economic malaise following the aftermath of the financial sector's near collapse casts a long shadow over young peoples' future economic prospects as well. Lisa Kahn, a Yale economist, studied the lifetime impact of recessions on young workers' earning power and, after examining college graduate career paths from 1979 to 1989, concluded that, for every 1% increase in the national unemployment rate, starting incomes of new graduates fall by as much as 7%. And though it's true that good grades and a well rounded student profile will attract the interest of discriminating employers, a lofty GPA doesn't empower students with the hands-on financial expertise they'll need to skillfully manage the economic power that their high-caliber academic educations provide. Thomas Stanley, who exhaustively researched the habits and histories of the super-affluent for his book, The Millionaire Mind, found little-to-no correlation between academic achievement and economic affluence. Of the millionaires he studied, the median college GPA was 2.9 and the average SAT score was 1190--hardly the sort of academic performance needed to get into Harvard. Even students who successfully negotiate the academic gauntlet, graduate from an Ivy League school with sought after skills, and manage to land a high paying job aren't promised long-term economic security either. An income, even an obscenely large one, doesn't gaurantee financial success. As countless celebrities, professional athletes, lottery winners and more than a handful of lavishy compensated CEOs have rather artfully demonstrated, no matter how much money one earns, it’s always possible to spend more.  The takeaway point? In addition to a mostly academic education, teenagers and twentysomethings should also acquire and develop the hands-on financial skills they'll need to steadily advance their own economic interests in the real-world. 

Somewhat disturbingly, this is all part-and-parcel of a broader and much thornier dilemma: financial responsibility can’t be legislated. In other words, the decision to forego consumption today to boost personal savings and brighten one's future economic prospects is strictly a matter of discretionary choice. Luckily, this hasn’t discouraged our elected representatives in Congress from enacting forward-thinking legislation that requires employers (of a certain size) to automatically enroll new hires in 401K plans. The idea is that young workers will bankroll their own retirements. Apart from being able to opt-out of this clever default arrangement, such initiatives ring hollow. If, throughout their multi-faceted careers, young people are expected to assume a greater degree of personal responsibility for their own future economic quality of life, it stands to reason that their day-to-day financial choices should be guided by a compelling sense of personal urgency and a clear unvarnished appraisal of the sizeable long-term challenges they face. Bizarrely, though the term “ownership society” is occasionally bandied about by jabbering politicians and the media, there’s been no substantive follow-up discussion about what, exactly, this cryptically undefined term means. Well, if young people aren't very careful, they may someday find out.

Though parents have historically been responsible for teaching their kids the nuts-and-bolts of personal finance, nowadays, many Moms and Dads are understandably befuddled by the newfound complexity of their own financial lives. This is hardly surprising considering that, a generation ago, knowing how to handle a checkbook and maintain a savings account was enough to get by. In this day and age, however, young peoples' future economic prosperity is more closely linked to their understanding of credit scores, the mechanics of compounding debt, investment acumen, and other factors that, just twenty years ago, were either irrelevant or didn't exist. Obviously, making meaningful progress in this economy requires more than just a steady paycheck (a need which our educational system narrowly addresses), it also requires financial literacy. To get ahead, high school and college students must get an early start in learning how to: construct and live within the confines of a sensible budget; select, manage and periodically re-balance their retirement and brokerage account assets; know how to use personal finance software to track and measure their spending and financial progress over time; responsibly manage debt; establish and maintain good credit to minimize future borrowing costs; explain how state and federal taxes determine the difference between gross and net pay; minimize inflation's wealth biting effects over the long-haul; and finally, balance a checkbook. Though many parents are understandably eager for their children to become financially productive and mostly self-reliant adults, they're not always able to properly prepare them for the newly complex task of managing their financial lives. And the facts overwhelmingly bear this out. According to a Fleet Boston study (acquired by Bank of America) only 25% of parents feel confident in their ability to teach their kids the ABCs of personal finance. Nearly half of parents admit they don't set a good example for their children when it comes to how they manage their household finances. Perhaps not surprisingly, a study by VISA reveals that (81%) of parents think that personal finance should be taught in school.

Another point bears emphasizing: although financial literacy benefits high school and college students, it helps parents as well. Why? Because, as many parents intuitively recognize, when their children run into money trouble they'll most likely approach Bank of Mom and/or Dad for a bailout. And, rightly or wrongly, when it comes to rescuing their children from financial disaster, parents generally feel obliged to reach for their wallets or hit the nearest ATM. Meanwhile, the underlying problem--young peoples' dysfunctional relationship with money--is charitably dismissed as a one-time incident and is usually ignored. Over the course of a lifetime, however, this is a costly remedy for all concerned. Adolescents who don't learn to prudently manage their personal finances will be much costlier for their parents to support. But, apart from lessening the already sizeable economic strain of parenthood, this column and youth financial literacy workshops will improve parents' quality of life in another important dimension as well because it will spare them the tedious chore of having to continually or intermittently lecture their kids about the importance of managing their finances responsibly, and explaining (with varying degrees of success), how, exactly, they should do that. And since money can be an emotionally charged topic, strained parent-child relationships can occasionally prevent productive communication on this vital topic. Understandably, studies show that many parents today are feeling more anxious than ever about their kids' fiscal knowledge; a 2008 Parents & Money survey by Charles Schwab found that 93% of parents with teens worry that their kids will make financial mistakes such as: overspending and living beyond their means (67%), getting in over their heads with credit card debt (65%), failing to save for emergencies (60%), or failing to stick to a budget (57%). A third of parents anticipate that their golden years will involve helping their kids financially. In 2008, The Hartford Financial Services Group polled parents with children between the ages 16 to 24 and found that 55% of respondents are concerned about their kid's ability to become financially independent without monetary assistance from them.

Until now, parents looking to provide their children a sound and functionally oriented financial education have faced a difficult choice: they could either 1) muddle through this daunting topic on their own and hope for the best, or 2) trust their children to learn the ABCs of personal finance on their own while, at the same time, avoiding disastrous missteps along the way. For parents caught on the horns of this sizeable dilemma, this column and the Money 101 program offer a comprehensive turnkey solution. In a highly personalized and interactive learning environment, evening workshops will familiarize students with everything from the nuts-and-bolts of budgeting and taxes on up through the basics of investing and planning for retirement—and everything in between.