Even though Americans and Canadians live in two of the wealthiest nations in the world, many are incapable of dealing with their finances. Although they may not experience a shortage of funds, many people find it very hard to balance their income versus their expenditures. This can lead to disaster, especially when the person ill-equipped to handle their own finances are in the position of teaching their children how to deal with money.
In a society that stresses the importance of material goods, studies show that Americans routinely spend more than they earn. Consumer financial assistance Myvesta estimates that for every dollar earned, $1.22 is spent. This leaves families ill-equipped to save money for the future, handle financial difficulties, or provide a solid foundation for the next generation.
It is not only parents who are unable to live financially smart but many Americans regardless of income level or resources. Because the availability of money is not the issue, but the capability of spending wisely, a shift in practices is necessary to better equip younger generations - children - to become financially responsible when they reach their majority.
There are several simple facts to keep in mind when parents try to help their own children to better prepare for the future. By laying a good foundation, parents can help their kids to avoid the pitfalls that they, themselves, encountered. Embracing the concept of savings and smart spending early on will help children to avoid problems in the future.
First, it is important to know that more than two million people declare bankruptcy on an annual basis, and the 20-24 year old demographic is the fastest growing subset of people in this situation. Because these young adults were not given a firm financial foundation as children, they enter the world ill-equipped to deal with their own budgets.
Second, most college graduates do not fully understand their own financial situation. On average, they owe nearly twenty thousand in school loans plus nearly five thousand in additional debt on an average of 4.5 credit cards. This adds up to FICO scores under 600. But these college-educated young adults have not been properly taught to understand the importance of a FICO score, or how it can affect their ability to get a job, buy a car, get a credit card or loan, or own a home.
Third, while it was once fairly easy to file for a personal bankruptcy, changes in legislation have now made the process harder. Not as many types of debts can be bankrupted as before, and the renegotiation plans for any debts that are not summarily cleared can make it very hard for young adults to get back on track.
Fourth, minimum payments have been raised by several percentage points on most unsecured debts such as credit cards. So while many young adults scrimped by previously to make monthly minimum payments, they are now even further challenged due to the necessity of paying higher minimums. The further pitfall of this situation is that missed payments leads to lower credit scores, higher interest rates, and higher minimum payments. Once people enter into this awful cycle, it is hard to break free.
Finally, it has become even more experience to obtain a college education. Not only have tuitions risen across the board, so have interest rates on student loans. As interest rates rise, so do future monthly payments or the length of time necessary to repay obligations. Add in higher living expenses, and students are faced with difficulties on all sides in obtaining the education they need to build a firm financial future.
Elizabeth DaSilva is the co-founder and educational consultant at KidsWealth, a company dedicated to helping children build successful money habits. She invites all parents to visit the Kids Financial Future Index to answer 12 yes/no questions that can determine if their kids will be financially successful (or not).