Financial decisions have only become more complicated with time, yet young people are not equipped with the tools they need to actually make smart choices with their money.
The financial climate has changed with time, making it more difficult to navigate. For example, in 1980 in the United States, about 40% of pension plans were defined contribution. This means that the value was dependent on how much money was collected during a worker’s career. By 2000, this increased to about 90% of pensions. In addition, creating a plan to save for retirement has also become more intricate.
People have resorted to the stock market as opposed to the near-zero interest rates for traditional bank accounts. Therefore, they can potentially receive a higher return, but also face an increased risk. When young people do not fully understand the financial system, they are more prone to making mistakes with their savings, especially in the uncertain environment of stock markets.
According to economist Annamaria Lusardi, it is not only young people who struggle with smart financial decisions. Based on her research, she found that wealthy people tend to face bankruptcy more often than others due to a lack of long-term planning. Even adults in general often cannot answer basic questions about interest rates and inflation. When adults struggle to handle their money, then the young people are even less prepared to make their own financial decisions.
Young people currently have very little experience with financial planning and therefore they are vulnerable to debt or mistakes through the popular use of day trading or cryptocurrency. As a result, there is a widespread need for education for students on how to save and manage money. When children are equipped with the tools to make financial decisions, they can better prepare for their future and face less money mistakes. Although education in this area will not prevent all money accidents, it can definitely minimize them.
Source: ‘We need people to know the ABC of finance’: facing up to the financial literacy crisis
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