Managing teens and young adults is a tough parenting job.
Teaching them finances is even harder.
Making sure they don’t make mistakes with their finances like you did, seems virtually impossible.
Let’s get into the shoes of a young adult.
- I am way smarter than the previous generation. With information freely available, who needs advice?
- I can work or open a business in any field I like, based on my passion.
- I want to enjoy life now and can’t wait to get hold of a credit card.
- I will learn money management as I earn more.
So young adults should be managing finances well and build savings over time, right? Wrong.
Let’s look at some statistics – are we really becoming smarter in personal finance?
The below table provides the data on average savings made at various ages.
Average American savings balance by age
|Age group||Average balance|
|35 to 44||$25,000|
|45 to 54||$40,900|
|55 to 64||$57,200|
By the age of 35, most people would have been working for 10-15 years. At a median salary of $30,000 ($15/hour X 2000 hours/year), even if taxes and expenses eat away 80% of it, a person should be able to save at least $6000 per year. Which means by the age of 35, the person should be sitting with a neat $60000 balance in account.
One may ask, that’s an expectation of saving 20% of the income. Is that easy? Why not, for young professionals when they have no or little financial responsibility towards family, it should be possible to save 20% or even more.
But sadly, the average is less than $10000, which means there are people with even below that number.
So why is the aspect of Personal Finance so less understood and followed in this age group?
A lot of youngsters’ behavior in initial life comes from the household where they grew up. Parents can influence most of these behaviors.
I don’t know all the reasons, good or bad which can contribute to the statistics but below are the few behavioral mistakes I have observed parents do while passing the personal finance knowledge to their kids, knowingly or unknowingly.
Let us see the five mistakes I have observed myself committing and I think are very common in other parents too.
In the happy-go-click world of e-commerce and readily available credit cards, everything is instant gratification.
We are all used to Amazon’s Buy-now-with-1-click button, and what else can be more convenient?
It saves you five clicks through the cart and proceed to checkout etc.
These instant gratification buttons are what makes the money disappear for most people before they even realize whether they can afford the item or not.
This is the new normal behavior and nothing wrong with it, except that as parents we can make them realize the rationale behind Amazon adding such a convenience.
Photo courtesy: Google images
What if we show them the better way to buy on Amazon? Its another neat feature Amazon (and many other e-commerce sites) provide is a Wish List.
Photo courtesy: Google images
In my household, I have a rule that everyone will put their non-essential shopping items into a personal wish list. Then visit the wish list periodically, typically in 24-72 hours and if they still want that item, then go ahead and add it to the cart.
Forget about the kids and teens, I have seen it working for us adults. I have resisted myself from impulsive buying by following this approach. It was very heartening to see my children also cancelling items from the list because their preferences and wants changed in next 2-3 days.
The scarcity mindset
How can this be a mistake? Aren’t we talking about saving money?
Yes we are talking about good personal finance habits and hence frugal living.
However for young adults, the scarcity mindset in their parents can cause a silent dissatisfaction and desire to break out of that once they start earning.
The result is mindless shopping and impulsive spending as they unleash the desire within, which was suppressed for years by the parents.
The scarcity mindset is the other extreme of bad personal finance habits. While it is okay to save money, but coupon pinching and not satisfying the basic wants at every age is also counter-productive in the long run.
Many households go through this where one of the parent is extra frugal (stingy) and others are constrained to work within the extremely tight budget, sometimes without any financial goals (or reasons) to achieve.
Instead, what should be taught by parents is responsible spending and having fun within limits. I teach my daughters to spend money on things which will enrich them. In my family, a portion of the monthly expenditure is planned for buying books and educational materials. If a good book costs less than $100, I don’t question it.
The dangers of debt
Today debt is all around us. We are buying houses with mortgage, spending with credit cards, buying big cars and SUVs with car loan and so on.
Naturally debt has become synonymous to normal financial behavior and is being adopted by growing teens as well.
The banks are promoting student loans, the college fees are increasing with more loans available and parents are forced to keep up with private college status and expectations – overall a self-feeding monster.
The problem is that before a young adult graduates from college, he or she is already chained to the debt burden.
The other day, one of my friends suggested he should get a credit card for his daughter. I asked why, and his reasoning was she needs to build her credit history. She is not even out of High School yet.
In such a debt culture, where do you as a parent draw the line? Is there a line at all between affordability and availability? Just because something is available does not mean we can afford it.
The way to solve this problem is to talk about whole numbers. What is meant by “whole numbers”?
“Whole number” is the total cost of the item or service, and not just a monthly payment. It puts the total cost into perspective and if we as parents talk in whole numbers, our young adults will also learn the same concept.
Here are some examples of monthly payment converted to whole number mindset.
- I can get a SUV for $400/month. It costs $30000 + interest.
- The service is only $9/month and I can keep adding a new one every few months. We are talking about TV channels or software services. Look at the total you are spending in a year (or multi-year) on such services combined.
- I can pay the minimum on my credit card every month. You are falling deeper into a debt hole. Understand how interest and fees are charged (compounded) on a credit card.
- Student loan rates are low, why not finance a great education? The problem will show up as soon as you start working, with a large part of the earning going to payments. With payments, the career options also become limited as you will be forced to do a regular job.
The comparison culture
The biggest culprit for this are the parents again. From a very young age, comparison with other kids is built into the young mind, in the name of healthy competition (at least in Asia where I grew up).
Instead of teaching a child to compare with his/her past self and how he/she can grow, the benchmark is always set to the other kid across the road.
Photo courtesy: Google images
This is another form of Keeping up with the Joneses. It automatically grows into the young adult and makes him or her feel inadequate till that gadget, car or house can be bought to justify a neighborhood status symbol.
As parents we need to stress the importance of uniqueness in everyone’s life. A growing adult should celebrate the uniqueness within him/her and not get into a rat race of competition and imitation.
I kept it for the last as it is one of the most important. Parents know the importance of financial education from the many mistakes they did in their own life.
However very few parents actually take the step of getting their young adults educated in personal finance matters. Finance is hardly talked about and the young adult is left to explore the world and repeat the same mistakes.
It does not have to be this way. Parents sometimes think that they will lose the rapport if they push the teen or young adult to be mindful of money education. Or the parent becomes so dominating (and pedantic) that the young adult loses interest.
It is always challenging to preach what the parent did not follow himself or herself.
As a parent of a young adult, there is no way we can go back and correct some of the behaviors. However, the young adult may be encouraged to enroll for help from outside the family and seek a Financial Coach/Advisor, who can help him or her start the right way.
The engagement with a coach or advisor will create an open and conducive environment for the young adult to talk about his/her dreams, fears and deep rooted ideas, mostly influenced by financial behavior of his/her own parents.