I don't want to give any advice to a 19-year-old, because I want a 19-year-old to make mistakes and learn from them. Make mistakes, make mistakes, make mistakes. Just make sure they're your mistakes. Fiona Apple
So my oldest child turned 19 on Yom Haatzmaut (Israeli Independence Day). It must be her birth date because she loves Israel. Maybe because she is the oldest, but when it comes to money matters I can see that she has actually incorporated a good deal of the education she has received at home. She is conscientious about not spending frivolously, and saves for things that are of great importance to her. Pretty much her only failing is her continued resistance to paying us rent! Happy birthday and may you continue to contribute to Israel in a positive manner.
I mentioned that she received her money skills at home. She never received financial education in school, and in fact it’s really not emphasized in the Israeli curriculum. Maybe that’s why we live in a culture of overdraft.
This is not a problem specific to Israel. In the UK, the issue is just as bad. FT.com writes that according to the Young Person’s Money Index report from the London Institute of Banking and Finance, “Although financial literacy has been part of the National Curriculum since 2014, just 8% of young people said they learned the most about money skills in school.”
Education
The National Endowment for Financial Education defines the problem. “Young adults face major financial decisions about their postsecondary education, jobs and careers. They also are starting to live independently and form their own households. These changes require careful management of income and expenses and financial planning. If young adults take on large amounts of debt, either through credit cards, student loans, or other avenues and cannot manage the payments, this debt can be problematic years into the future.”
It’s imperative that if it’s not taught in the schools, then parents need to take the lead. The problem is that children are great observers of their parent’s behavior and if they are raised in a home of financial mismanagement, they will consider parental advice as hypocritical. If they see bad money habits in the home, and never are taught or shown how to properly deal with money, then chances are that they will make costly financial decisions when they get older.
So for you parents reading this, it’s time to get your financial home in order as well. Teenagers need to learn responsible money habits. Just like most things in life, if kids learn the “right” lessons they will have a much easier time being financially responsible.
Learn the basis
It’s important to teach your kids the importance of saving. Even in Israel, where no interest is paid, I think that teens should have a bank account. The bank account helps them learn great habits. Mainly that you can deposit what you earn, and you can only spend what you have. It’s not just an open wallet from mom and dad, rather they start learning lifelong lessons about money.
The downside in Israel is that it’s very hard for teens to invest. If you can open an account abroad for them, they can actually earn a bit of interest on money market accounts and can start learning about investing as well. As I have written numerous times, the earlier one starts to invest, the better off they will be in the future. Learning how compound interest works and how they can make money passively by investing is very important for their long-term financial security.
Self-control
Teach the negatives of overdraft and debt. As Amy Fontinelle writes on Investodpedia, “The sooner you learn the fine art of delaying gratification, the sooner you'll find it easy to keep your finances in order. Although you can effortlessly purchase an item on credit the minute you want it, it's better to wait until you've actually saved up the money. Do you really want to pay interest on a pair of jeans or a box of cereal?”
If we want to send our children out into the real world, perhaps the most important gift we can give them is to be financially educated. Parents have no choice but to start imparting these lessons, because the kids aren’t going to get them anywhere else.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill). He is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.