Chances are you highly value seeing your children successfully handle money and use monetary gifts and inheritances wisely. How well prepared are they? In studying financial habits of those aged 23-35, research shows there’s good and bad news.
Bad news—Millennials have low financial literacy
First, the bad news. According to the Global Financial Literacy Excellence Center (GFLEC), examining data from the 2012 National Financial Capability Study, of the millennial age group only 24% demonstrated basic financial literacy and only 8% demonstrated high financial literacy. How do your kids fare? Have them take the following test.
These three questions of financial literacy test basic knowledge of (1) calculating interest rates, (2) understanding inflation, and (3) understanding risk diversification of investments.
1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
a. More than $102
b. Exactly $102
c. Less than $102
d. Do not know
e. Refuse to answer
2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?
a. More than today
b. Exactly the same
c. Less than today
d. Do not know
e. Refuse to answer
3. Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”
c. Do not know
d. Refuse to answer
Did you try it, too? How did you do? Hopefully better than the 66% of young respondents who couldn’t answer all three questions correctly. Unfortunately having more education doesn’t guarantee having more financial literacy. According to the GFLEC, only 49% of respondents with a college education and 60% of respondents with postgraduate education could correctly answer the three questions. (Here’s the answers: 1. a. 2. c. 3. b.) Unfortunately, millennials carry a lot of financial responsibility with little financial literacy to handle it.
Millennials carry heavy personal financial responsibility
Your adult children most likely have greater access to financial activity than you did at a similar age. According to a NERA Consulting report (2012), 72% have one or more credit cards to finance everyday expenses. They also have significant financial pressures including economic uncertainty, entering the job market at lower salary levels, long term student loan debt, increased spending pressures, and mounting credit card debt. Of those credit card users, some 60% had incurred significant charges in the twelve months prior to the study, had paid the minimal amount some months, used the card for a cash advance, or paid a late fee. GFLEC reports that 54% are concerned about their ability to repay the student loan debt. Nearly 30% are overdrawing on their checking account, and more than half have carried over credit card debt for more than 12 months.
Good news—Millennials are doing some things right
Ready for some good news? Millennials are doing some things right! According to Matt Sadowsky, director of retirement for TD Ameritrade: “Millennials are doing something fantastic when it comes to budgeting.” Eight in ten millennials have a budget and were following it most of the time. Even though they may not have much, they also get high marks in saving for goals other than retirement (https://www.cnbc.com/2016/08/10/4-ways-millennials-are-smarter-about-money-than-boomers.html). Fortunately, this tech-y generation has many apps to help them. But what about help from professional advisors?
Seeking professional financial advice
A friend of mine was recently distressed to hear her son had paid off a substantial amount remaining on his student loan rather than paying down on his credit card debt. She remarked, “I’ve failed to prepare him with basic financial knowledge I gained as early as high school.” In all fairness some financial advisors encourage paying off smaller loans to encourage momentum and motivation to tackle larger debt items. However, this has not proven to be true strategy. Financially, in this case, her son would have saved money by paying the same amount on the higher interest rate credit card instead. Unfortunately, young people like him are not seeking advice for day in and day out financial decisions.
Thirty-four percent of millennials are not satisfied with their current financial situation. However, they are not consulting financial professionals. GFLEC also reports that only 27% sought professional advice on savings and investments within the past five years and only 12% sought professional advice on debt management. The financial literacy study concludes that “research has documented that the gap between the amount of financial responsibility given to young Americans and their demonstrated ability to manage financial decisions is rapidly widening.”
We want to give good gifts to our children. How can we help them be better prepared to use them as a blessing rather than a curse? I’d like to help.
How I may help you
As this blog points out, most millennials don’t consider contacting a financial advisor. I’d like to change that! I’d love to work with you and your college and millennial-aged children, evaluating their financial situation and increasing their financial literacy to help ensure their future success. Please call me to set up an appointment and let’s get started!
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