In recent history there has been a growing amount of concern over the financial illiteracy of our nation’s high school students. One aspect of the problem is that parents and students both assume they know what financial literacy entails, when in truth they only have part of the picture. College Parent Central makes this pertinent observation about what financial literacy actually means: “Financial literacy involves the ability to read, manage, and communicate about personal finances and to have the skills and knowledge to make competent financial choices about banking, credit, insurance, taxes and investments.”
The concern revolves around how poorly prepared and ill-equipped students are after graduation from high school to manage their finances as adults without getting into trouble. High school students do not operate or live in a vacuum. The impact of the literacy problem is also felt by the student’s family. All too frequently parents are called upon to “bail out” a family member because of financial problems created by a financially illiterate family member. The bail out sometimes, sadly to say, comes at the expense of putting the rest of the family into financial difficulty.
The bottom line is that high school is where constructive habits are supposed to be learned. Many habits learned in high school are positive while others are negative habits. A lack of knowledge as to sound financial management principles, which seems to be endemic, would have to be considered, or classified, as a negative habit.
There has been a fair amount of effort expended to understand specifically where in education the process of learning sound financial management principles has failed and where it could be most effective. Interestingly, it appears that attempts to educate the student about sound financial management principles are more effective when the education process is between the high school student and a family member (i.e. immediate family member or relative acting as “the teacher”), and not when the teacher is a relative stranger (professor at the high school or other professional instructor).
The following are financial topics that high school students should know:
-
Bank Accounts: Obtain a basic understanding of checking accounts and savings accounts. Provide instruction on how to use checks and debit cards, as well as how to reconcile bank statements each month.
-
Credit Cards: Stress the importance of understanding that credit card spending actually creates a loan. Know the importance of not carrying a balance by paying off credit card debt each month.
-
Payroll Taxes: Walk through your student’s paystub to explain Social Security, Medicare, federal tax withholdings, and state tax withholdings.
-
Retirement Accounts: Know the availability of long-term savings tools like a Roth IRA. The wise saver can create a self-made millionaire by starting their retirement savings at a young age.
-
Spending within your means: Save first then spend. Teaching this habit early gives your child a better chance of creating strong financial habits.
-
The art of saving: Part of spending within your means implies that your student has healthy savings habits. Perhaps it is setting up a separate savings account. Perhaps it is putting a set amount away each month.
-
Mutual fund and stock understanding: Consider teaching your student some of the basic investment alternatives available to them. Stocks and mutual funds are most common, but also consider explaining bonds, CD’s, annuities and other investment tools.
-
Budgeting: Help your student create a basic budget and then help them track their savings and spending against this budget.
-
Cash flow: An easy example of this is to show the flow of funds that relate to a car. There are everyday expenses like fuel, there are monthly expenses like a car payment, and there are periodic expenses for car insurance.
Although it takes time and work to educate students about all of these topics, a family member can work out a long-term plan with the student and aim to tackle a few topics per month. If you spread the financial literacy education over a year, you could easily instill a comprehensive mastery of these topics in the child.
And that year might be one of those valuable years in the student’s life, especially as the wisdom begins to bear fruit in their adult years.