Do Your Children Understand Money?

Are the young people in your life financially literate? By helping them learn about money, you give them an important head start on important life skills like developing good savings behavior, living within their means, and avoiding many common financial pitfalls.

Unfortunately, many young Americans are not learning the right financial lessons. Research shows that 46% of teens don’t know how to create a budget and 55% would like to know more about managing money. We can’t rely on schools to teach financial skills because many of the practical classes we took no longer exist. Too many kids reach adulthood without knowing how to budget or make important financial decisions.

Based on our experience working with young people, here are some recommendations for helping kids develop the right financial behaviors:

Start early. If your kids are old enough to ask for things, they are old enough to start learning about money. Teach young kids that we have to save for the things we want by helping them choose a toy and then saving to buy it. Use an allowance to teach budgeting skills and incentivize chores with older children. Give kids an age-appropriate allowance – Mint.com has a great piece on average allowances by age. Some parents choose to tie an allowance to specific chores, while others prefer to treat chores as an expected family contribution that is separate from an allowance.

Set financial expectations and be honest about money. Until kids start earning a living and being responsible for their own expenses, it’s easy for them to believe that money grows on trees. Involve kids in everyday shopping decisions so that they understand your thought process behind common financial decisions and learn your values about money. Depending on their age level and maturity, you can also ask for their input when making financial choices. Give them a budget for back-to-school shopping and help them prioritize their spending so that they learn about living within their means.

Expect kids to contribute to their financial future. If your kids have an allowance or receive money on birthdays or holidays, require them to set aside a certain amount for the future.

We recommend using the three-bucket approach: one third of every dollar goes to long-term savings, one third goes to charity, and one third is pocket money. Long-term savings can be used toward education expenses or to pay for a major purchase like a car. By teaching your kids how to allocate money, you help them establish critical saving while teaching them about your values.

Teach kids about debt. It’s very easy for young adults to get in over their heads with credit card debt or student loans. Teach your kids how debt works so that they can evaluate offers and avoid predatory lending. If possible, help your kids establish their credit through a secured credit card or low-limit card that they must pay off each month so that they learn how to manage debt responsibly.

If you’d like help teaching your children, grandchildren, or other young people about money, please reach out to us. As financial professionals, we know the difference financial education can make in someone’s life, and we want to offer ourselves as a resource to you and your family. Together, we can sit down and come up with strategies to make sure the next generation is fully prepared to navigate their finances and make smart decisions about money. We can help you:

  • Establish smart savings behaviors in young children
  • Create college savings strategies
  • Prepare teens for young adulthood
  • Develop strategies for boomerang kids

If we can be of service to your loved ones, please contact us. We’re always happy to listen and help.

Are Student Loans The Next Bubble?

As graduating students look to build their resume they might want to leave out one accomplishment: most indebted class ever to graduate.  According to National Center for Education Statistics, the average student graduating in 2014 will have $33,000 in student loans.1

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Not only is the average debt rising faster than inflation, the number of students needing to take out loans has risen from less than half in 1994 to just over 70% this year.1 The total debt is closing in on $1 trillion according to Federal Reserve Bank of New York, Bloomberg.2

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According to the Consumer Financial Protection Bureau, CFPB, more than 7 million borrowers of federal or private student loans were more than 270 days late on payments which puts them in the default category.  This means that from the $1 trillion of federal student loans about $90 billion has been defaulted on.3  Could this lead to a crisis similar to the subprime loan crisis of 2008? Although student loan debt is second in ranking on consumer debt it is dwarfed by mortgage debt.2  This chart should help put the two into perspective when it comes to the impact on our economy.

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Also, on average 90% of student loans are Federal student loans which are backed by the government.2   Having such a large amount backed by the federal government would reduce the amount of pressure put on the lending industry.  In 2006 leading up to the subprime crisis, 84% of those loans were from private lending companies.4  This means that the smaller size of the student loans and the minority being held privately would keep the student “bubble” from impacting the overall market in the same way that the subprime loans did.

So if there isn’t a risk of repeating the subprime crisis why all the talk about student loans lately?  One of the biggest concerns is the trend of both the student debt and the earnings the students are getting out of college.1   If this trend continues we could see more students in default as well as a drag on the growth of the Gross Domestic Product.

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There is some relief, Federal loans can sign up for the “Income Based Plan” or the “Pay As You Earn”.  These plans keep the payments below a certain percent of the income of the borrower and forgives any debt after 25 years (10 years for public service employees).5  Allow qualifying and the annual reporting can be a hassle.

You might be asking; “I have young kids that I hope will attend college one day, what can I do?”

  1. Start planning in advance for your children, look into opening a college saving plan that can grow tax free to increase your savings for college.
  2. Encourage your teenagers to consider the cost of college compared to the average salary for the career they plan on pursuing.  Some careers are better achieved by apprenticeship or an internship.
  3. Apply for all scholarships that are available for your children.
  4. Consider the costs of dipping into your retirement account.  It may be better for your kids to take out some student loans if it will keep you from putting your retirement in jeopardy.

Always seek advice from your financial advisor when making these decisions.

 

 

Resources

  1. http://blogs.wsj.com/numbersguy/congatulations-to-class-of-2014-the-most-indebted-ever-1368/
  2. http://us.milliman.com/insight/insurance/The-student-loan-debt-crisis-in-perspective/#2
  3. http://www.usnews.com/news/articles/2013/08/06/half-of-outstanding-student-loan-debt-isnt-being-repaid
  4. http://www.forbes.com/sites/stevedenning/2011/11/22/5086/
  5. https://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn