Debt crisis
Debt crisis looms for teens rich in credit, but poor in financial savvy
Teens need to learn how to save now or risk financial ruin in the future,
Scott Hannah only began to understand last year why so many teens mess up when it comes to handling money.
It’s because the subject rarely gets raised at home.
The Credit Counselling Society, a national organization where Hannah is president-CEO, held an essay-writing contest on how to teach young people financial literacy.
“Time and time again, we heard from teens that no one is talking about money at home,” Hannah says.
One contestant reported his mom’s response when he asked her about financial literacy: “It’s got something to do with money, right?” she answered.
Many of today’s teens have access to unprecedented piles of money, but parents’ and schools’ failures to teach them how to manage it will doom them to lives of financial pain, Hannah and other experts warn.
Many people will find themselves in difficult circumstances when they retire because they never developed the saving skills that should have been nurtured during their teens, Hannah adds.
“You’ll see families going through difficult debt cycles of not having (money), then catching their breaths, then not having again,” he says.
Even families whose financial lives are rocked by uncontrollable events such as unemployment or illness would be better able to manage if they had learned good skills as teens, Hannah says.
Despite the educational efforts of some schools, parents and financial advisers, teens’ financial literacy is getting worse, he says.
“We’ve seen a deterioration in the money skills of today’s youth,” Hannah says.
“They are more comfortable with carrying debt and having payments than in previous generations.”
On a scale of one to 10, where one is horrible and 10 outstanding, Hannah rates teens’ financial literacy “as four, at best.”
Teens should be developing the ability to set goals and do longterm planning. But far too many have not developed the discipline to manage daily money matters, observers say.
Bathed in cash and credit, teens have developed an entitlement mentality when it comes to gratifying their material desires, experts say.
Nancy Phillips, president of Dollar-SmartKids Enterprises in Kelowna, B.C., says that mentality saps teens’ will to understand how to spend wisely and to save.
Ignorance and entitlement also impairs teens’ ability to withstand the huge push they get to consume. North American teens account for $250 billion in annual spending — and teens are vulnerable to multimedia marketing campaigns designed to get a chunk of that, Phillips says.
“Without this ability (to manage money wisely), severe debt and potential bankruptcy are very real risks,” says Phillips, who is releasing a book this fall called The Parents’ Guide to Teens and Money.
Teens should be allowed to make mistakes with money as it’s better to misspend a few dollars in one’s youth than a few thousand dollars as an adult, Phillips says.
But they must also learn to deal with the consequences of those mistakes rather than being bailed out by parents, experts say.
Connor, one of Hannah’s teenaged sons, was walking home from school a few years ago when a friend stuck gum in his hair as a joke. Connor tossed a can of pop at his friend. It missed, but cracked the windshield of a parked BMW. The damage was $500.
Hannah and his wife had him pay off the debt by doing $10-anhour jobs around home. The repayment tally was posted on the fridge.
“It took him a long time to pay it off,” Hannah recalls. “It’s easy to go into debt, it can happen in a moment, but then you have to pay it off, and it can take forever.”
Teens’ temptation to use credit cards to spend money they haven’t earned is complicated by a false sense of financial ability, Ontario-based chartered accountant Robin Taub says.
She cites a 2011 study of youth financial literacy by the Chartered Professional Accountants of Canada. It found 47 per cent of young people are “somewhat confident” they can manage money well. But fewer than half are “very confident” they can develop and stick to a budget, limit spending or use credit cards responsibly.
“They’re over-confident,” Taub says. “They think they’re better at it than they are.”
Lack of confidence in their own financial skills is one of the big reasons many parents are reluctant to initiate conversations about handling money — or even to try to answer teens’ questions, Phillips says.
“It’s OK for parents to say, ‘I don’t know the answer, but I’m going to find it,’” Phillips says. “Parents might not be financial experts, but they have to stop pushing the subject to the back of the shelf.”
One of the responsibilities of schools is to ensure teens practise basic numeracy skills. Without them, teens may grow into adults who have trouble understanding credit card interest rates and returns on investments.
“Because they don’t understand, they not only make bad decisions, but are less likely to get financial counselling because they’re embarrassed at what they don’t know and because they can’t follow the conversation,” she says.
ACHIEVING FINANCIAL HEALTH
Frank Iuele, a teacher at the Vancouver School Board’s West Alternative Program, offers five rules of financial health to help teens become financially literate:
1. Forced savings: Put away 10 per cent of your gross paycheque in a “no touch” account. “By the time you’re ready to retire, even on minimum wage, you’ll have a comfortable chunk of change,” Iuele says.
2. Invest: Make your money work by investing in an RRSP, stocks, bonds, real estate or a small business. At first, these should be low-risk investments.
3. Find a financial planner: This can also be a good accountant, but it needs to be someone you can work with. “You need to revisit your stuff regularly and educate yourself,” Iuele says.
4. Get insurance: That means insurance to cover life, disability, car, house or personal belongings. “Insurance is replacement money,” Iuele says.
5. Emergency fund: It’s important to have a smaller, forced savings account for emergencies. If it isn’t needed, it can be tapped to finance something fun such as a trip.