Harsh Reality in an Envelope
This was the scene that unfolded recently at a friends’ house. (She gave me permission to chronicle her daughter’s state of financial ignorance on condition of anonymity.) Yes, this child graduated from one of the most elite private universities on the East Coast, and yes, she is now working odd jobs in her hometown and living back in her childhood bedroom. Go Liberal Arts! Unfortunately, given our weak economy, the story is not unusual, and neither is the young woman’s limited understanding of basic financial concepts.
According to the biannual survey by the Jumpstart Coalition for Personal Financial Literacy, less than half of high-school seniors qualify as “financially literate”. And their knowledge has actually been declining. College students were also surveyed for the first time in 2008. College students scored better than their younger counterparts, with 62 percent of the questions answered correctly versus only 48.3 percent for high-school students.
Here are a couple of examples:
- Forty percent of high-school seniors correctly answered that they could lose their health insurance if their parents become unemployed.
- Only 36 percent understood that a house financed with a fixed-rate mortgage is a good hedge against a sudden increase in inflation, compared with 45 percent in 2006.
- Only forty eight percent correctly said that a credit card holder who only pays the minimum amount on monthly card balances will pay more in annual finance charges than a card holder who pays their balance in full. There’s that pesky interest again!
How do we help our teenagers to become financially savvy? Many of us set a great personal example that just doesn’t seem to rub off on them. Some focused conversations can go a long way, especially in late high school, when issues like college loans, jobs, and car insurance become a growing concern. The National Endowment for Financial Education publishes a nice handbook, “40 Money Management Tips Every College Student Should Know,” which you can download and pass on to your child. My friend’s daughter could have benefitted from Tip #11: Understand Your Student Loan Obligation . . .