Learning how to manage money is important for people at every age and stage of life, and the lessons that we teach our children now in relation to good money habits can enrich them as adults. Research shows that many of our attitudes and behaviours are entrenched in our subconscious before we reach our teens – and our attitudes and behaviours towards money are no exception to this.
Theory vs. practice
Learning how to manage money during the school years is a priceless benefit to young people who are embarking for the first time into the world of either full-time paid employment or tertiary study.
Understanding work for reward, basic budgeting techniques, and having a strong savings ethos can help to make the transition from study to work a little bit easier.
Yet as many teachers and experts have pointed out throughout this series, nothing beats real-life experience for effective learning. As parents and carers, we can help to ensure that those real life experiences have more learning benefits than costs!
Learning to live within their means
Ms Delia Rickard, Senior Executive Leader-Consumer and Retail Investors says, "If kids walk away from our schooling system having learnt just one thing from the financial literacy education, it would hopefully be to live within their means.
"This upcoming generation has a greater need for financial literacy than any before, because financial products are more complex. Often it's hard to navigate through the bells and whistles of many products to the underlying features."
Ms Rickard cites compulsory superannuation as an example of an area where complexity can confuse the underlying savings principle.
"By the time these kids are 18 they are often earning superannuation, so they need to know, for example, that a one per cent difference on fees could make up to a 20 per cent difference in the amount they will have available to them at retirement. Real life experience is great but some things are better learnt in theory."
Landing in financial trouble
Lola Mashado is a Branch Manager for Relationships Australia, and over her 15 years providing financial counselling, has seen her fair share of school leavers in financial trouble.
"There are some common areas where school leavers can find themselves in trouble before they realise what is happening," she says, "particularly for those school leavers who haven't really had money management skills taught to them along the way.
"Managing money is like any other skill – it needs to be deliberately taught, because you are not born with it."
Seven common traps for young people
Ms Mashado nominates the following areas as containing some of the most common traps that young people fall into:
- Credit cards
Even though the dangers of credit cards are fairly well publicised, young people can still find themselves in trouble. Often they may start off with just a small debt and a low credit limit, but over time the financial institution may offer automatic limit increases and the debt gradually builds up. With an average interest rate of around 14 per cent, credit cards can be a very expensive form of debt.
- Mobile phones
Many phone contracts can be very confusing. Sometimes the sales packages sound great, but if they don't thoroughly read the contract and conditions, young people can get caught in a long-term contract that doesn't suit their phone usage needs.
- Interest free loans
Retail offers to buy now and pay nothing for 24 months can sound very attractive when you are just starting out and setting up a house, but they come with a sting in the tail.
Often when school leavers first start work they like to set up their room with the latest technology and sometimes they will fund this through an interest free personal loan. If they have good money management skills and can budget out (and put aside) the monthly cost over the lifetime of the loan, it can work out well.
However, if they manage to pay only part of the debt by the time the 'interest free period' expires, then they will be hit with not just a service fee but also accumulated interest on the full amount borrowed since day one.
- Share house agreements
While moving out of home and tasting independence for the first time can be exciting, there are also some contractual traps. Often young people move out of home and take out a lease on a property with some friends. However, they don't realise that the question of who should sign the rental agreement is an important consideration.
If they end up as the sole signatory, they can potentially end up liable for the entire rental payment if their friends move out. The same holds true for telephone, electricity and gas accounts – if it is their name on the contract then they can be liable for whatever debts are incurred.
- Car loans
Buying a first car is an exciting event but it pays to do some homework first. Young people can get caught up in the sales hype, and end up buying a car that they can't afford, and which isn't suitable for their age and needs.
The projected loan repayments might look fine on paper, but sometimes the kids quickly discover that it's just not workable in real life, and often they will forget to budget in repairs, registration, petrol and insurance.
- Contract work
Without some financial management education, contracting jobs can be confusing for young people. For example, an advertised salary might be $500 per week, but the kids don't realise that they will need to put aside money for costs and tax. The net result might be closer to $300 per week.
- Payday lenders
Payday loans enable people to borrow small amounts (usually no more than $500) against their next salary. However, the fees and interest charges can be prohibitive.
The federal government recently capped the interest rate that payday lenders can charge at 48 per cent. However, there is still a raft of fees and charges that can apply. This is a very expensive form of lending.
Despite the myriad of traps, Ms Mashado is confident that with a little bit of parental guidance the majority of school leavers can navigate their way towards financial stability.
"The most important thing for you as parents is to encourage good money habits by talking to kids about all these issues, in a way that is age-appropriate," she says.
"But don't just talk about the negatives; about the dangers. As well, talk to your kids about their goals and dreams – get them motivated to succeed."
Tips for parents
- Encourage your kids to learn about types of consumer credit and the cost associated with them.
ASIC's consumer website (www.fido.gov.au) is a good place to research general information about credit cards, personal loans and payday advances.
- Help your kids to recognise 'sales hype' to avoid being pressured into buying something that they can't afford.
- Seek professional advice before signing contracts. "Teach your children to be wary if they are discouraged from seeking advice before signing a contract, or if they are not allowed to take the contract home to read through," says Ms Mashado. "Any legal document should be thoroughly reviewed before being signed."
- Talk about their goals and dreams as a way of both motivating your kids and encouraging them to develop a long-term vision.