Do you want your children to be able to successfully handle money and use monetary gifts and inheritances wisely? Have you considered how well-prepared they are for this?
A study of the financial habits of those aged 23-35 reveals good and bad news. The bad news is Millennials have low financial literacy. According to the Global Financial Literacy Excellence Center (GFLEC), based on data from the 2012 National Financial Capability Study, only 24% of Millennials demonstrated basic financial literacy and only 8% demonstrated high financial literacy.
Take the Financial Literacy Challenge
If you're curious how your Millennial children would fare in this study, challenge them to answer these questions and demonstrate their level of financial literacy. These three questions measure basic financial literacy about interest rates, inflation, and diversification of investments.
1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
a. More than $102
b. Exactly $102
c. Less than $102
d. Do not know
e. Refuse to answer
2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?
a. More than today
b. Exactly the same
c. Less than today
d. Do not know
e. Refuse to answer
3. Is this statement true or false? “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”
c. Do not know
d. Refuse to answer
Of the young respondents questioned in the study, 66% couldn’t answer all three of these questions correctly. Being more educated did not mean a higher level of financial literacy. According to the GFLEC, only 49% of respondents with a college education and 60% of respondents with a postgraduate education could correctly answer the three questions.*
More Financial Responsibility
Unfortunately, Millennials carry a lot of financial responsibility with little financial literacy to handle it. Your adult children most likely have greater access to financial activity than you did at a similar age. According to a NERA Consulting report (2012), 72% have one or more credit cards to finance everyday expenses. Of those credit card users, some 60% had incurred significant charges in the 12 months prior to the study, had paid the minimal amount some months, used the card for a cash advance or paid a late fee. Nearly 30% are overdrawing on their checking account, and more than half have carried over credit card debt for more than 12 months.
They also have significant financial pressures, including economic uncertainty, entering the job market at lower salary levels, increased spending pressures, mounting credit card debt and long-term student loan debt. And GFLEC reports that 54% are concerned about their ability to repay the student loan debt. (For related reading, see: This is the Top Fear of Gen X, Millennial Savers.)
What Millennials Are Doing Right
The good news is Millennials are doing some things right. According to Matt Sadowsky, director of retirement for TD Ameritrade, “Millennials are doing something fantastic when it comes to budgeting.” Eight in 10 millennials have a budget and follow it most of the time. Even though they may not have much, they also get high marks in saving for goals other than retirement.
Even with their budgeting skills, 34% of millennials are not satisfied with their current financial situation, yet they are still not seeking advice on their day-in and day-out financial decisions. GFLEC reports that only 27% sought professional advice on savings and investments within the past five years and only 12% sought professional advice on debt management.
This may be in part because they don't always see eye to eye with those in the financial profession. When a Millennial makes the decision to pay off a substantial amount of student loans rather than paying down credit card debt, a financial advisor observing this behavior may think Millennials lack basic financial knowledge because they believe paying off smaller loans encourages momentum and motivation to tackle larger debt items. However, this has not proven to be a truer strategy and paying off the student debt first can also be a viable option.
The Financial Gap Is Widening
The financial literacy study concludes, “research has documented that the gap between the amount of financial responsibility given to young Americans and their demonstrated ability to manage financial decisions is rapidly widening.” It is up to the older generations to close the gap and ensure the financial success of Millennials and future generations.
(For more from this author, see: 5 Considerations for Women Who Want to Invest.)
*Correct answers: 1. a. 2. c. 3. b.
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