Guest post by Josh Wilson, a Millennial personal finance blogger with a passion for financial literacy.
The state of personal finances in the United States is dismal. Credit card debt is as high as it has ever been with the average household owing more than $16,000. Less than 10% of adults have $1,000 or more in their savings accounts and more than half of adults feel they are inadequately prepared for retirement. Imagine how different things might be if people learned even the basics of money management and personal finance before they start making financial decisions that impact the rest of their life. Critical financial decisions are often made before a person even graduates from college. As evidenced by the current state of personal finances, financial illiteracy has come at a great cost to individuals and the society.
The Cost of Financial Illiteracy
By the time most people turn 40, they have already made the majority of their most important financial decisions; yet, only a third have a strong understanding of the concepts of saving, borrowing, and managing cash flow. This lack of financial knowledge can cost them thousands of dollars in extra borrowing costs, a seriously deficient retirement account, and the inability to pay for their children’s college education. Financial illiteracy has a snowball effect as children will grow up adopting bad financial habits and usually follow down the same path of personal financial hardship.
In most American households, personal finances are rarely discussed. According to the Council for Economic Education, most parents are uncomfortable talking about their finances with their children and that extends to teaching their children the ways of money management. For most kids, the first time they open a checking account is when they enter college, forcing them to learn good money management habits by trial and error. By the time they finish school, they may understand how to manage a checking account, but they know very little about debt, interest, budgeting, and savings strategies.
In the meantime, they have likely taken out $30,000 or more in student loans without regard for how they plan to repay them. If they truly understood the cost of money and the toll it can take on their finances, they likely would borrow less in student loans. As it stands, more than 40% of student borrowers have had to delay important life events, such as buying a car or a home, getting married and starting a family or even retirement. Roughly the same percentage are in the process of ruining their credit by falling behind on loan payments or going into default. Knowing enough to borrow less or having a sound foundation of budgeting and money management may have kept them out of trouble.
It Costs Young Adults the Most
The biggest missed opportunity for young adults is learning about the cost of money and the cost of waiting to save and invest. Knowing how much money costs, especially borrowing at high interest rates over long periods of time, is critical to understanding the negative impact it has on your ability to achieve financial success. Consumer debt, particularly credit card debt, is bad debt, which is an indication of poor money management or misplaced priorities. One survey found that 36% of Millennials have maxed out their credit card limit at some point. Over 23% of Millennials do not know the impact of a late credit card payment.
The most valuable asset is time, which allows money to work harder through the impact of compound interest. However, it is an asset that loses its value as we get older. When young people are able to understand the opportunity cost of waiting to save for the future, they might be more likely to save early and often. When they wait to save for retirement, it can cost them tens of thousands of dollars and force them to delay their retirement date
There’s a Personal Finance Course Near You
These are just some of the reasons why all college students should take a personal finance course or two before they graduate. An increasing number of colleges are starting to offer personal finance and money management courses as separate curriculums. Some states are now requiring personal finance as a mandatory curriculum for high school students. However, if your college doesn’t offer such a course, you can still take it upon yourself to sign up for any number of courses offered online by other colleges or private providers.
The University of California, Irvine offers a Fundamentals of Personal Financial Planning course that is open to the general public. CrashCourse.org works with many colleges to provide online personal finance instruction as a supplement to existing coursework. You can check with your school administrator to see if it’s being offered; or you can sign on as an individual student. There are also dozens of other personal finance courses available through accredited online educators.
If you’re in college or have recently graduated, before you dismiss the idea of taking a personal finance course, you should consider that there is an entire financial services industry waiting for you in the real world, and it is counting on your financial ignorance to make hefty profits. Don’t give them the chance.