Why young people need to learn about finance
There was an interesting statistic floating around at the end of 2017 that showed the ‘Bank of Mum and Dad’ had risen to become Australia’s fifth biggest lender with almost 30 per cent of Australian parents helping their children to buy a home, with parents loaning, on average, more than $64,000.
All parents want to help their kids, it’s simply a natural instinct. But what’s interesting, is that around the same time, the Reserve Bank of Australia’s Economics Research Department published a paper which stated very clearly that those young people who accessed finance from their folks, struggled with bills further down the track. The key findings of this research showed:
30 per cent of people who needed help from their parents to pay for a home deposit later found themselves in financial stress.
More than 15 per cent who received help from their parents later struggled to cover power bills, compared to 10 per cent of those who paid their deposit independently.
This research alone provides a good argument for why young people need to have a financial education.
Our ‘disconnection’ from money is a problem
It was easier to teach kids the value of the dollar when we all used cash – you could only spend what you actually had. But these days, we are ALL increasingly ‘disconnected’ from the money we spend: we swipe cards and pop pins, and it’s rare for someone to carry real paper money and coins around anymore.
Most people don’t give a second thought to putting a $15 lunch on the card a few times a week, or spending an extra $20 on magazines and snacks when they fill up the car with petrol, because they’re not actually handing over the cash – and then the monthly credit card bill or the bank statement arrives and perhaps then they can begin to see the financial drain. But believe it or not, because banks mostly provide access to online statements, many people don’t actually look at these – which can be a mistake – because errors do occur from time to time.
Our increasing ‘disassociation’ from money can be harmful, not just in terms of our over-spending, but particularly when it comes to facing up to big financial responsibilities.
Finance is complex
With all of these increasing ways to pay for the things we buy, finance has become more accessible, and also more complex. There are fees and charges a lot of people don’t understand, and while hopefully the current Royal Commission Inquiry will make many of these more transparent, there are basic concepts that need to be understood when it comes to financial arrangements like loans and mortgages.
Similarly, personal finance, car loans, credit cards, hire-purchase schemes, rent-to-own – they all offer instant gratification, (long gone are the days of lay-by or saving up for a big purchase) but they can all very easily become malignant financial traps if the debt is not managed wisely.
The new credit reporting scheme
Australia has also now introduced the Comprehensive Credit Reporting (CCR) Scheme, also known as positive credit reporting. Prior to CCR, your credit rating only included ‘negative’ credit history, such as defaults, or a long, sustained history of late payments. Now, it includes all the payments you make on time, as well as current accounts you hold, what accounts have been opened and closed, and the date that you paid any default notices. It provides a track record of how well you meet your repayments and gives potential lenders a more ‘holistic’ picture of your financial management ability. This is a good thing – and an incentive to ensure that you pay your bills on time.
How to teach wise money management
Young people need to learn finance. They need to learn a deeper understanding of money – over and above personal budgeting – we need to teach them wise money management.
One of the easiest, and most effective ways to teach young people is to start a managed fund. Managed funds can be opened with as little as a couple of thousand dollars. They can be used to help young people learn the discipline of putting money away for the long term, to understand concepts like compound interest, market gains, the simple fact that markets are subject to ebb and flow, as well as the associated fees and charges and tax implications that come with saving and investing.
By helping young people to understand these basic financial principles early in life we set them up to thrive financially, to be astute with the money they work hard for, make wise spending choices, and to prepare for life’s unexpected (and sometimes expensive) twists and turns.
What’s more important though, is that we can save them from a lifetime of financial stress.
MoneyLink Financial Planning Pty Ltd is an Australian Financial Services Licence Holder. No:.247360
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