One of the most common struggles faced by young adults today is debt. What’s worse, the debt problems most face aren’t mortgages or student loans—“good debt,” if you will—but credit and overdraft charges from reckless and gratuitous spending. Such widespread “bad debt” is creating an entire generation who not only get off to a shaky start in terms of personal finance and security, but risk losing the opportunities to take advantage of good debt resources when they’re older. The allure of instant gratification via the credit card is creating a risk that many of them may never be able to own cars or homes. Spending freely now with no thought for later is a perilous game to play.
Credit cards, like all forms of debt, are ultimately tools—when used sensibly, great things can happen. Unfortunately, most young people simply apply for them as soon as they’re eligible without learning how credit cards (and credit in general) actually work. The penalties lurking behind the illusion of quick access and carefree shopping can lead to serious long-term pain. For some, it can take years to recover from a youthful spending binge that leads to thousands of dollars in credit bills and interest payments despite barely having enough to cover the minimum monthly payments.
The solutions are pretty simple but often difficult to put into practice, at least initially. Learning self-control is probably the most important aspect of financial planning, but the naturally impulsive nature of a young adult can be hard to temper. In the same vein, most financial advisors say that young people should start planning for retirement as early as possible—but when you’re 18, it’s difficult to plan for being 65 because, quite frankly, it’s difficult to picture being 65.
It’s not that young people are necessarily destined to be terrible with money, but it’s very easy to mismanage your finances when you don’t really know what you’re doing. Personal finance is a skill that must be learned; ideally it is one that should be taught early, rather than forcibly gained through painful trial and error. Our generation is the first to have always lived with the “easy money” that debit and credit cards provide. Countless previous generations made use of paper slips, bank trips and hard currency—real-world, daily interactions with money that taught its value. Literally holding cash in your hand and watching it disappear is a simple but surprisingly powerful lesson.
The rise of ATMs and cards stripped young people of those lessons. It’s difficult to understand what you’re giving up in exchange for something else when you never have to see it happen. Swipe a card and, like magic, whatever you desire is yours. It’s only when the bills pile up that this “shoot first and ask questions later” mentality suddenly becomes a problem.
Some are born into families that, by virtue of wealth and structure, can foster this kind of activity. Many middle-class children see their parents living well and spending liberally, but fail to understand the years of hard work they put in to earn such a comfortable lifestyle. As adults, their desire to maintain that same living standard overrides the need to save and, yes, struggle to build a solid credit rating and sound financial independence as their parents did.
Similarly, most young people really have no idea how (or sometimes what) income taxes are and how they work before they get a job. Most have never seen an income tax form and likely have little ability to parse the financial lingo and terminology. Even for those who are naturally good with numbers, income tax can be monumentally confusing. There is little official indication of when and how one must start paying taxes, and more importantly, how to do so properly. This is a serious problem that government financial departments should be addressing far more aggressively. The financial, not to mention legal, problems that young people risk incurring by fumbling their tax obligations are too great to ignore.
There are signs of improvement, however. Like most things, learning how to deal with money from as early an age as possible tends to yield adults who make wiser choices. The Government of Ontario has recently decided to start teaching financial literacy for students in grades 4 to 12 throughout the province. Such a program will help young people move purposefully into financial security as they become adults. It’s a great start, and hopefully it will be repeated far and wide, both in Canada and beyond.
Personal finance isn’t hard, it just takes practice and discipline. Being forced to learn it is one thing, but true money sense comes to those who take the initiative to learn. There are abundant resources available to those who look for them: the Financial Consumer Resource Agency of Canada, for example, is a government agency that promotes and educates financial awareness and skills for Canadians. They’re youth branch implements some great programs and provides information for teaching personal finance. The sooner we educate young people about how to manage their money, the more confident they will become when they’re out in the world on their own. The sooner we educate ourselves about how to spend and plan wisely, the more likely it is that we’ll be able to own that dream home one day.