Are young people planning for their financial future?

The numbers suggest they are not, David Gens writes.

Every November, banks and money experts talk about the importance of financial literacy as part of Financial Literacy Month. Experts recognize the importance of understanding money matters; what often gets overlooked is the lack of financial education available to young people, the effect this has on their money-management skills and the subsequent impact on their financial freedom.

According to the latest census, more than a third of young Canadians aged 20 to 34 still live with their parents. While this can be partly attributed to rising housing costs, it also reflects the fact that our young people may lack the essential budgeting skills to live independently.

Money may be a finite resource, but ways to spend it aren’t — a reality that plays out for most young people before their real financial education begins.

According to a study from Cambridge University, children start forming financial habits from age seven. Most children at seven understand the concept of money — that it can be exchanged for goods (or candy) — but not always that it’ll do better for them in the long run if it stays in the piggy bank.

Financial education should start from a young age, both at home and in school. Some educators suggest implementing mandatory personal-finance courses in undergraduate curricula, but in reality, financial education needs to start years before university.

After all, by 17 or 18, young people are expected to make significant financial decisions — Should I borrow thousands of dollars to go to university? How can I finance buying a car? How can I save enough to spend my summer exploring the world? — and are forced to consider the prospect of debt long before they start to earn a salary.

The most valuable financial lesson I learned was the concept of compound interest when I was 19. Most adults flunk when it comes to understanding this basic financial concept, which is key to making a savings plan and managing money overall. That high school students graduate without this knowledge is worrying.

I remember stumbling upon a compound interest calculator app that breaks down the math. I realized that if someone starts with $10,000 in savings and adds $5,000 per year to those savings for 40 years, instead of ending up with $210,000 as the simple math would show, at a 10 per cent rate of compounding, that rate of savings produces an end result of $2.9 million. When I saw the math in action it blew my mind.

Figuring out how compound interest worked was a defining moment in my understanding of money. It made me question why something so fundamental and important in managing finances isn’t a part of the mandatory curriculum in school, like basic math or science. Money is a common thread that permeates every aspect of our daily lives. We all have to deal with it, regardless of how old we are or where we stand in the socio-economic order. Yet we are failing to teach fundamental moneymanagement skills to the next generation.

While young Canadians fare well in global rankings of financial literacy, and the thirst to remain a global leader is evident in the government’s financial-literacy strategy, it’s important that specific programs are developed for children and young adults.

Understanding how money works makes long-term financial goals real, and ultimately motivates you to work toward them. Being able to leave the parental nest and find a place of your own is a rite of passage for most 20-somethings. But with rising house prices and a lack of financial know-how, millennials have effectively had their wings clipped.

Money education from an early age isn’t just a more realistic approach to financial literacy, but crucial if young people are to experience financial freedom and security.

Parents, educators, governments and organizations mandated to promote financial literacy can all help improve the money skills of our young people. This knowledge can be imparted at home, in school or via resources shared online. Children learn differently and we need to offer different options for learning such fundamental skills.

The next generation leaving school will be our brightest and most educated yet. We don’t want a lack of financial literacy to hold them back from achieving their full potential.