One of the most common struggles young adults face today is debt. What’s worse, the debt problems most face aren’t even mortgages or student loans – “good debt,” if you will – but credit and overdraft charges from unchecked spending. Such “bad debt” is creating a generation of young adults who are getting off to a shaky start financially, but risk losing opportunities to take advantage of credit resources when they’re older. The allure of easy credit creates a risk that many may never be able to own cars or homes. This game of instant gratification with no thought of long-term consequences is a perilous one.
Credit, in all its forms, is a tool – it can lead to prosperity and success if used properly. Unfortunately, after reaching age of majority, most young people simply apply for a credit card and are never instructed how credit actually works. The penalties lurking behind the illusion of quick and easy money can lead to serious problems down the road. It can take years to recover from a youthful spending binge; thousands of dollars in credit bills and interest payments can impact one’s personal finances well into adulthood.
Learning self-control is probably the single most important aspect of financial planning, but the naturally impulsive nature of teenagers can be hard to temper. Most financial advisors say that young people should learn smart financial skills and start retirement planning as early as possible. When you are 18, however, it can be difficult to prepare for age 65 because, quite frankly, it’s difficult to imagine being 65.
It’s not that all young people are predestined to be terrible with money, but there is a serious deficit in how we teach them to use it. Personal finance is a skill that must be learned; ideally, it is one that should be taught early, rather than forcibly gained through painful trial and error. Young adults today live in a world quite different from that of their parents. This generation is the first to have always lived with the quick access that debit and credit cards provide. Previous generations dealt with paper slips, bank tellers and hard currency – real, daily interactions with money that taught its value. Literally holding cash in your hand and watching it disappear as you spend is a simple but surprisingly powerful lesson.
Now, the rise of ATMs and cards has stripped us of those lessons. It’s difficult to understand what you’re giving up in exchange for something else when don’t see the physical transfer. It’s only when the bills pile up that this “shoot first and ask later” mentality suddenly becomes a problem.
Some people are born into families that, by virtue of wealth and structure, can foster this kind of activity. Many middle-class children see their parents living well and spending liberally, and fail to understand the years of hard work they put in to afford such a comfortable lifestyle. As adults, their desire to maintain that living standard overwhelms the need to actually work towards a solid credit rating and sound financial independence as their parents did.
Signs of improvement are growing, however, and the lack of financial education is being addressed. As with learning a language, learning how to deal with money from as early an age as possible tends to yield the best results. Children and teenagers who learn how things like money, credit and debt work become adults who make wiser choices with their dollars. The Government of Ontario has recently decided to institute mandatory financial literacy courses for students in Grades 4 to 12 throughout the province. Such a program will help young people move leaps and bounds into sound financial security as they become adults. As they learn the benefits of money and credit, as well as the consequences of their mismanagement, they’ll be more competent when they enter the economy as consumers.
Personal finance isn’t hard; like any learned skill, it just takes practice and discipline. Mandatory education is one thing, but true money sense comes to those who take the initiative to learn. There are abundant resources available to those who seek them out: the Financial Consumer Agency of Canada, for example, is a government agency that promotes financial awareness and skills for all Canadians. Through their youth branch, they implement learning programs and provide information for teaching personal finance.
The sooner we educate young people about how to manage money, the more confident they will become when they’re out in the world as financially independent adults. The earlier they learn how to spend and plan wisely, the better the odds of a more prosperous future.
The author of this article is Phillip Cutter.