With a lack of financial literacy courses implemented across the country, young people, especially those in college, must begin taking initiative to learn money management skills for themselves.
According to data published in a 2018 survey by the National Association of Student Financial Aid Administrators, only 40% of four-year college students have ever taken a personal finance course. This figure should be a cause for concern.
100,000 incoming freshmen from across the country were tested on six financial literacy questions in which they averaged only 33% correct. In addition, 60% of these students indicated they planned to take out student loans, though only 15% said they felt confident in their abilities to pay the money back.
The Brookings Institution alongside two other corporations found similar findings the same year. 100,000 students received three questions pertaining to inflation, interest, and risk diversification. Only 28% answered all three correctly.
Looking at these findings, there’s an obvious need for greater financial literacy for young people, both institutional and personally.
Dr. Patrick D. Witz, Assistant Professor of Accounting at UW, agrees that improvements could be made to reach a wider demographic of individuals.
“I would personally like to see more nudges that encourage/incentivize students to financially educate themselves,” he said.
“I feel more people would be motivated to take accountability in pursuing their own financial education if it was made more convenient to do so. Unfortunately, inertia is fairly strong and it isn’t until after you receive the financial education that you realize what you were missing out on.”
Why should it be the norm for young people to already be thousands of dollars in debt, or be one doctor’s visit away from financial ruin? College students need the money skills to be able to set themselves up for a comfortable and secure future.
Witz states there are multiple ways college students can begin taking control of their own financial situations, which should first include simply focusing on the money coming in.
“The best thing that you can do at this age is to focus primarily on the income side of your financial equation,” Witz said.
“Take advantage of pay transparency laws in many jurisdictions and figure out what career you would like to have that also sets you up for financial success, and then reverse engineer how to get there.”
As a secondary focus, young people should begin looking at ways to invest and break with debt like student loans.
“Pay off high-interest debt, learn about passive low-cost index fund investing, and consider utilizing financial tools that benefit from being young such as a Roth IRA,” he added.
A Roth IRA differs from a regular IRA in that its contributions aren’t tax deductible but withdrawals are tax-free in retirement, meaning you keep more of your hard-earned cash.
Services like Fidelity or Vanguard can make the process simpler. Time is on a college students’ side– the earlier you have your account, the more interest you will accumulate.
Budgeting is another essential skill that every college student should know. Try tracking your purchases for an entire month, then use the data to determine how much you should allot for essential and non-essential purchases, as well as savings. The objective is not to cut out all spending on non-necessities, but to plan them in. Budget according to what works for you.
Another practical tip is to set up different accounts to keep track of your money. For example, arranging to have your paycheck deposited into a savings account instead of your checking could help you from spending the entirety of your paycheck every month.
Starting an account for emergency funds to help cover an unexpected parking ticket or replacing a car part is also a great way to relieve financial burdens and alleviate stress.
These tips should be common knowledge by the time an individual reaches college. Implementing financial literacy courses across the country could help ensure this is the case.
Though Witz pointed out that greater financial literacy would impact the economy in more than one way— including a reduction in consumption which could weaken economic activity— he added that there are certainly benefits to a more literate population.
“I personally think that it’s important to have a financially literate college population, and in the long-run it clearly benefits society,” he said.
“Those who are more financially literate become wealthier, and are more likely to become future business owners and entrepreneurs, as they can use their wealth to pursue opportunities that they are interested in.”
