The pandemic has allowed parents to be more involved in their children’s education. Although fractions can be taught through baking, historical reenactments and science experiments are fun, this is also a great opportunity for parents to offer some practical and beneficial learning about financial literacy, especially with teenagers.
YOUNG ADULTS ARE UNPREPARED TO MANAGE THEIR FINANCES
The National Financial Educators Council’s annual survey found that only 24% of student respondents and 20% of parents said students are prepared to deal with real-world financial challenges.
More than three-quarters of young adults are afraid or uncertain about how to manage their finances and create systems that will set them up for success later in life.
4 FINANCIAL LITERACY SKILLS FOR TEENAGERS
In only 21 states in the country is a personal finance class required to graduate high school, according to the Council for Economic Education. A majority of high school students say that they get most or all of their personal finance knowledge from their parents.
There are some essential money skills that everyone should learn, which can help you communicate better with your teenager. Teaching them about financial terms and documents that you wish you had known about when you were their age can help give them the confidence and knowledge to make sound financial decisions.
If you help your child become familiar with these concepts in adolescence, you will be helping them take a huge step toward adulthood and financial literacy. Even though they might get some eye-rolls and long-suffering sighs, it will be worth it in the end.
1. CREATE A BUDGET
Many grownups aren’t very good at budgeting, which is clear from the fact that so many people’s New Year’s Resolutions fall by the wayside. If you go over your household budget with your kids now, you can teach them how to manage money better later on.
- Go over tools: If you use a spreadsheet or an app to track your money, show your child what categories your family needs and discuss what categories apply to them at this time of their life. If you don’t have a family budget yet, create one together using an online tool or app, like Mint or You Need a Budget.
- Have your child create their own budget: If your child is currently working or has a source of income, help them create their own budget and discuss with them the amount of money that goes into each category. Be sure to include savings, giving, and an entertainment budget.
- Research college costs: For older kids headed to college, have them research apartment rent around the schools they’re thinking about. How does that compare to what the cost of a dorm would be? Will they take (or need) a car? What about food and books?
Although it’s not an exciting task, teaching your teenager how to budget before they move out of your home can set them up for success later on.
2. GO OVER YOUR W-2
They often leave taxpayers feeling drained, anxious and paranoid. Tax forms are difficult to understand, especially if you’re new to the workforce. Many people only see them once a year, and they often cause a great deal of stress. Taxpayers may feel drained, anxious and paranoid after dealing with tax forms.
- Review your W2: When you download your W2, go over it with your teen and compare it to your end-of-year pay stub. Do the numbers add up? Can you see where and how the gross amount you made turned into the net amount through
taxes, FICA, and retirement savings?
- Explain a 1099: Did you get a 1099-NEC for contract work or a 1099-DIV from an investment account? 1099’s have a lot of information on them, but there are several youtube videos that walk you through what everything means.
- Review a W4: This is also a great opportunity to download a W4 form and go over paycheck withholding using an online calculator. Show your child why you elect to withhold what you do, and in the process, you might find some changes you want to make to your current withholding.
It is beneficial for both you and your child if you take the time to teach them about personal finance early on. This will give them a head start and alleviate some of your worries about their future.
3. TAXES
The next step is to complete the forms.
- Tax Software: If you fill out your taxes on your own, or use a software program, walk your teen through using it, especially if they have a part-time job, or have been gifted investment accounts in their name, and have to prepare taxes themselves.
- Gather Documents: If you use a tax preparer or an accountant, gather all your documents and show your child what the preparer will ask for, how you organize documents, and how much it costs to have your taxes done.
- Track Your Refund: Close the loop by either having them help pay the IRS (if taxes are owed) or checking your bank account for your refund and discussing what you’re going to do with that money. Make sure to emphasize savings for at least some of it!
4. RESEARCH FAFSA OR OTHER FINANCIAL AID
College is expensive and even if you have a 529 College Savings account for your children’s education, chances are good there will be a gap. Sit down with them and discuss:
- How You Paid for College: Tell them the story of college that we don’t often talk about. Did you have to take out loans? How long has it taken you to pay them back (bonus points if you discuss both positive and negative compound interest), and talk about if there is anything you would do differently looking back.
- Introduce FAFSA: Introduce them to the Free Application for Federal Student Aid, or FAFSA, and if they’re old enough, start working on filling it out. You’ll need your most recent tax return to complete it, so have that handy.
- Understand Financial Aid Options: If they aren’t quite ready for college yet, review the Understanding Aid section of the FAFSA website, and get familiar with the process of financial aid. Discuss what their plans for the future might cost, and answer or research any questions they have about paying for things together.
Financial Literacy Statistics (Editor’s Choice)
- The average rate of financial literacy in Europe is 52%.
- 50% of adults worldwide understand inflation and interest rates.
- The average score on the US national financial literacy test hovers around 68%.
- Utah residents know the most about handling personal wealth.
- Minnesota has the highest literacy rate on money issues of 82.08%.
- Americans over 51 years old represent the most financially literate age group.
- Only 12% of Millennials have asked for professional help with personal finances.
Global Financial Literacy Statistics and Trends
1. Australia, Canada, Denmark, Finland, Germany, Israel, the Netherlands, Norway, Sweden, and the UK have the highest financial literacy rates.
In countries where financial literacy is at least 65%, adults have a good understanding of financial concepts. However, in South Asia, very few people have a good understanding of financial concepts. In most African and South American countries, moderate levels of financial literacy among adults. In Russia and some other countries, financial literacy is poor.
(S&P Global Financial Literacy Survey)
2. In Europe, the average economic literacy among adults is 52%.
There is a large range in financial literacy among different European countries, with the highest levels in northern EU countries. Germany, the UK, Denmark, the Netherlands, and Sweden all have literacy rates of at least 65%. In contrast, Greece, Spain, and Italy have much lower average levels of financial literacy, at 45%, 49%, and 37% respectively. Bulgaria and Cyprus have similar levels of financial literacy, at 35%. Finally, Romania has the lowest level of financial literacy, at only 22%.
(S&P Global Financial Literacy Survey)
3. People in major economies have a better knowledge of fundamental financial issues.
The average rate of financial literacy in Canada, Australia, and the US is 55%. In contrast, the average rate of financial literacy in major emerging economies is only 28%. This includes India and South Africa with knowledge rates of 24% and 42%, respectively.
(S&P Global Financial Literacy Survey)
4. Inflation and interest rates are the best-understood concepts worldwide.
Approximately half of adults are knowledgeable about both risk diversification and compound interest. However, only 35% understand risk diversification in comparison to the 45% that understand compound interest.
There is a drastic difference in understanding between advanced and emerging economies when it comes to risk diversification. In major economies, about 64% of the citizens understand risk diversification. However, only 28% of adults living in emerging economies understand the concept. The difference between the rates is lower for the other concepts, but it is still not insignificant.
(S&P Global Financial Literacy Survey)
5. There’s a gender gap in financial literacy.
Over 35% of men scored 3 or more out of 4 questions correctly on a financial literacy test, compared to only 30% of women. Women also had a higher rate of opting for the answer “I don’t know.”
Despite the overall lower literacy levels in emerging economies, equality between men and women exists only in China and South Africa when it comes to financial knowledge. In advanced economies, people are more understanding of all concepts in general, although women still fall behind men. Nearly 60% of men got 3 out of 4 topics correct, while only 50% of women did the same.
(S&P Global Financial Literacy Survey)
6. There’s an age gap in financial literacy.
The most financially literate people are aged 15-35, with a 35% rate. The least financially literate people are aged over 65, with only 25% understanding the concept. In advanced economies, the average financial literacy rate among those under 35 is 56%, and among those aged 36-50 it is 63%. In emerging economies, the overall financial literacy rates are lower, but the trend is the same.
(S&P Global Financial Literacy Survey)
7. Wealthy people understand money issues better than low-income individuals.
According to financial illiteracy stats, lack of financial literacy is more common among the poorest 40% globally, with only 25% being literate. In contrast, over 35% of the wealthiest 60% are well-aware of how to handle personal assets. The difference is even more significant in advanced economies where about 45% of the poorest 40% are literate compared to 60% of the richest 60%.
(S&P Global Financial Literacy Survey)
8. Account owners can be financially illiterate too.
About 60% of all people globally have a bank account, but only 38% of them are considered financially literate. This means that 62% of account holders don’t have the relevant knowledge when it comes to money management. In advanced economies, over 95% of individuals have bank accounts and 57% of them are considered financially literate. In emerging economies, around 70% of the population have bank accounts, but only 35% of them are considered to be financially literate.
(S&P Global Financial Literacy Survey)
Financial Literacy in the US
9. Americans scored an average of 68% on the national financial literacy test.
The average score for financial literacy among high school students in America is 67.93%. The percentage of students who pass financial literacy tests has dropped slightly in recent years, but the overall trend is positive. In 2014, the percentage of passing students was 60.21%.
(National Financial Educators Council)
10. Americans over 51 hold the highest average score on the national financial literacy test to date.
The average score for Americans aged 36-50 and 25-35 is 77.37% and 76.20% respectively, which is higher than any other age group. The average score for youth aged 10-14 and 15-18 is significantly lower at 56.60% and 63.34% respectively. Finally, the average score to date for those aged 19-24 is 71.14%.
61% of boomers have not written a retirement strategy, and 40% will never achieve a net worth over $10,000, meaning they will never retire.
11. Most Americans give wrong answers to investing, setting personal goals, and credit-building questions.
44.27% of people knew how much they would have if they invested $100 at the age of 21 with an annual return of 7%. 46.33% knew how to set personal goals, and 45.89% knew the first step towards building a good credit score. 20% didn’t keep track of their finances, and 70% of Americans have less than $1,000 in savings while 45% have nothing.
The National Financial Educators Council has some tips to help you get organized in minutes. One suggestion is to create a daily or weekly schedule to help you keep track of what needs to be done and when. Another is to make a list of the things you need to do each day and check them off as you go. Finally, the Council suggests setting aside time each week to plan and organize your upcoming week.
12. Minnesota has the highest youth financial literacy by state.
According to these statistics, the rate of economic literacy among young residents in this state is 82.08%. West Virginia and North Dakota have the next highest rates, at 72.55% and 70% respectively. The states with the lowest knowledge on money issues are Arkansas (50.44%), Idaho (51.67%), and Mississippi (51.82%).
(National Financial Educators Council)
13. Most Americans were taught about saving in high school.
More than 70% of high school students were taught about saving money, checking accounts, and meeting long-term saving goals, according to financial literacy statistics. The concept of earning, including gross versus net pay, benefits, and taxes, was taught to nearly two-thirds of high school students. 63.8% were educated about spending money responsibly, such as the difference between needs and wants.
Roughly half of Americans are unaware of how borrowing works and the ramifications of doing so, which may explain the high rate of identity theft in the country.
14. Financial literacy positively affects people’s credit scores.
Teaching people how to handle their money properly can not only lead to positive financial literacy trends, but to other improvements as well. For example, in 2000, Texas, Idaho, and Georgia introduced mandatory financial education. Within three years, the credit scores of students attending those classes increased significantly. The exact improvements were by 31.71 in Texas, by 16.19 in Idaho, and by 10.89 in Georgia. Only 17 US states require a personal finance course from high school graduates. If more states introduced this, financial literacy among youth would improve significantly.
(National Financial Educators Council)
15. A lack of financial knowledge can lead to fewer employment opportunities
Around 5.2% of Americans aged 35 to 54 report being turned down for a job due to their financial profiles, and 26.3% have had employers conduct a financial background check on them. It’s estimated that financial illiteracy costs people an average of $9,724.83. One in three respondents reported losses of $15,000, while one in four reported losses of over $30,000.
FINAL THOUGHTS
There are many topics related to financial literacy, such as investing, insurance, and banking, that are both pertinent to young adults as they enter the workforce and commonly not discussed when we first set out in the world. By providing a good foundation on these subjects and continually having conversations about them as your child grows, you will have given them a head start in the world.
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