More Americans are defaulting on their student loans, according to the Department of Education. The two-year cohort default rate on federal student loans rose to 8.8 percent from 7 percent in 2008. While the economy is largely to blame, I would also argue that college graduates, while bearing degrees in computer science, finance and the arts, lack the basic financial literacy skills to manage their debt properly. With some students taking on more than $50,000 in student loans you have to wonder—do they realize this is not necessarily the best way towards protecting their finances?
Financial literacy can go a long way in preventing future financial struggles, from student loan defaults to bankruptcy. Here is some advice for parents on how to educate kids and young adults about money, with the understanding that financial literacy begins at home.
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Most parents feel it’s important to begin conversations about money with their kids early on. According to a survey by T. Rowe Price earlier this year, three-fourths (77%) believe in beginning the conversations before age 10.
But you don’t need to have big conversations about money all the time. Understand that children are extremely observant. You don’t need to sit down your 8-year old and talk about needs versus wants. He may not have the attention span for that. But do realize that your actions will speak louder than your words. That said, here’s some advice for the younger set of kids:
- Price Compare While Shopping. We tend to shop in a hurry or neglect to involve our kids in the decision-making process. I remember my parents taking me furniture shopping with them, traveling from store to store in search of the best deal. It was nauseating for the 11-year old me, but the message of why you need to price-compare came across loud and clear. The same drill occurred when my parents went house-hunting. I would overhear their discussions and watch as they financially sized up each home. Next time you take your kids on a shopping excursion, make sure to explain why you’re buying what you’re buying, especially big-ticket items. Is it a need or a want? How have you compared prices? Why did you ultimately go with the choice you did?
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- Tie Allowance to Out-of-the-Ordinary Tasks. I think it’s helpful to set up an allowance for your child, but it should be tied to above-average duties. Making your bed, for example, shouldn’t be rewarded with money. Cleaning out the garage or helping dad organize his workspace at home, on the other hand, is more appropriate. This sends the message that you need to work hard to make money. And if you decide on a consistent weekly allowance, know for a fact how that money will be used. Is this money to simply use at the mall? Or is this money going to go toward a cell phone bill every month plus clothes? The amount you allot should reflect how it will be spent.
- Integrate Fun Resources. There are innovative products and videos new to the market that can help parents introduce money concepts in an entertaining way. The JumpStart Coalition For Personal Financial Literacy has a new book called Pretty Penny Sets Up Shop, which is about a young girl who tries to plan, with no money, a birthday party for her grandmother. It teaches kids how to be resourceful and to think outside the box, which is sometimes needed in order to earn money. Also, Sesame Workshop and PNC Bank have joined forces to create some very cute videos starring Elmo, Grover and the rest of the furry gang, teaching kids about spending, saving, sharing and delaying gratification. Finally, for kids ages 7 and up, there’s the Savings Spree mobile app, which teaches kids how the choices they make each day can add up to big savings or big expenses, depending on how they decide to spend (or not spend) their money.
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Image: Bill Ward, via Flickr.com
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