Recently, I wrote an article about the danger of payday loans and the alarming fact that more and more people are using them. I then received several comments about how we need to address the underlying reasons people use payday loans and, for that matter, why many people make poor financial decisions in general. I couldn't agree more.
As a former high school mathematics teacher, I can tell you firsthand that the main cause of this problem is education.
Specifically, while we do a pretty good job of teaching our children a variety of topics, personal finance is noticeably absent from the curriculum in the vast majority of schools.
They probably won't learn it in school
When I was teaching Algebra 2 in high school, I made a regular activity of incorporating personal finance into my lessons.
For example, kids will moan and groan when you try to teach them a concept like exponential functions. However, when they see how that concept can mean millions of dollars in investment returns, they tend to perk up a bit.
Unfortunately, it seems that personal finance doesn't make it into most classrooms. According to one survey, only 3% of kids say they learned what they know about saving and spending habits in school. And while we're doing a little better when it comes to teaching kids about investing, only 12% of kids learned what they know about investing in school.
What too many young people don't know
While it would be ideal if all young adults achieved complete financial literacy by the time they went off to college, there are a few select topics that are a priority for them to learn.
For example, it's essential to have a good knowledge of how interest works, particularly in regard to credit cards and other forms of high-interest debt like payday loans. Do you know how much you'll end up paying back if you pay the minimum payment toward a $4,000 credit card debt at 18% interest?
Maybe if your kids realize that they could end up paying more than $10,000 over 30 years or more, they would think twice before charging that expensive TV in college. Check out this credit card payment calculator to see how much a big purchase could really cost. The numbers might surprise you.
Similarly, if people realized that a $50 fee for a two-week $500 payday loan translates to an annual interest rate of 260%, it would seem like a better idea to wait until payday to make their purchases.
Other important financial concepts to learn are the basic concepts behind things such as taxes, loans, and checking accounts.
Finally, many younger adults simply have no concept of how much a dollar is worth. This is the main reason for reckless spending on credit cards by many college students, and other financial blunders like buying a car they can't afford.
Fortunately, there are ways to solve these problems.
It's up to you
Again, it's unfortunate, but your children aren't likely to become financially literate in school. Eventually, I would love to see this situation change, but for now it's up to you to teach your kids about money. And as American parents, we could be doing a much better job.
In fact, 95% of the respondents to the previously referenced survey learned what they know about saving and spending from their parents.However, only 20% of the kids surveyed reported having money-related conversations with their parents "very often."
So one excellent first step is simply to talk to your kids about money. Now, I'm not saying to let them know all of the details like your salary and bank account balances, but finances should be a regular topic of conversation.
The same survey revealed that 34% of kids wished their parents would talk about banks and credit cards more often. Another 29% wanted to discuss money management more, and 18% said they wish they knew more about their family's financial situation. So the desire to learn is there. Parents just need to open up about financial issues.
Also, if you have financial regrets, don't be ashamed. Share them, so your kids don't make the same mistakes. Did you wait too long to start investing for retirement? Do you carry high balances on credit cards? Embrace these blunders as a teaching opportunity for your kids.
For instance, when your child asks for something like a new iPad, don't just say "no," but let him or her know why you think it's not a great idea. And maybe you could let your child see one of your credit card statements, especially the part that tells you how much you'll end up paying by just making minimum payments.
Another good strategy if you give an allowance is to give it on a less-frequent basis, such as monthly. If your kids spend it all in a week or two, don't give them any more. Teaching them how to effectively budget money at a young age is one of the best skills you can give them.
After all, it's better for them to be broke for a couple of weeks while they live under your roof and eat your food than it would be for them to, say, bounce a rent check when they're 20 because they never learned proper money management.