Dear Readers: A recent Schwab survey about the money attitudes of young millennials (ages 21 to 25) and members of Generation Z (ages 16 to 20) showed an interesting dichotomy: When it comes to their financial future, today's teens and young adults are both optimistic and unrealistic. I suppose that shouldn't be too surprising. Youth is filled with optimism — and I love that. But when it comes to managing money, a healthy dose of reality is important in creating a secure financial foundation.
Statistics Reveal Both the Positive and the Negative
Here are a couple of revealing statistics from the survey that demonstrate the dilemma:
—Though more than 80 percent of young people surveyed saw their parents experience financial hardship during the Great Recession, 76 percent believe their own financial future will be better.
—The behavior of this same group isn't so positive. The average amount of savings is a pretty impressive $1,600, but unfortunately, the average amount of debt is more than $8,000 — with the millennials having saved only 15 percent more than those in Gen Z while having accrued 169 percent more debt.
Those two stats don't quite compute because creating a secure financial future means managing your money wisely in the present. A few other misconceptions also are cause for concern. For example, according to the survey, young people expect to retire at age 60 — seven years before they'd be eligible for full Social Security benefits (and 10 years before they would get the largest payout). Plus, more than half believe they'll receive an inheritance from their parents, which is increasingly less likely with longer life spans. In fact, according to a 2011 Bureau of Labor Statistics study, on average, only 21 percent of people actually received an inheritance of any kind between 1989 and 2007.
They also showed a lack of understanding about the fundamentals of debt, particularly the difference between debt that can help them build their financial future versus debt that can lead to financial distress. For instance, only 54 percent believe a mortgage fits the "good debt" category, perhaps related to seeing their parents lose their homes during the recession. Even more significant — and disturbing — is that a third of respondents do not recognize revolving debt, such as carrying a credit card balance, as "bad debt."
On the positive side, there's a real desire to learn about money management. And almost 40 percent of the respondents see their parents as the most trusted source for financial advice. Here's something else I find very encouraging: Young adults today say their parents are likelier to talk to them about money than other traditionally sensitive topics, such as sex and drugs. Maybe we're finally breaking the money taboo!
5 Ways to Turn Youthful Optimism Into Lifelong Action
Taken all together, these survey results point to a great opportunity for parents to harness this youthful optimism and help their kids take concrete steps toward the bright financial future they envision. Here's what I suggest:
1) Talk openly about your own financial mistakes and successes. Let's hope we learn from our own mistakes, and perhaps our kids can learn from them, too. Show them where you've failed. (A bad mortgage? A late start on retirement savings?) If you can add in some real numbers, so much the better. But show them your victories, too — and what you had to do to get there. There are lessons on both sides.
2) Have your kids set goals and make a plan to meet them. You may have heard the saying, "A goal is a dream with a deadline." Makes sense, especially when it comes to turning optimism into reality. So help your kids articulate their goals and come up with a plan and a timeline to achieve them. They'll need to figure out how much money they have, how much more they need to save and what other financial decisions they need to make along the way. If something doesn't support the plan, don't do it!
3) Advise them to live below their means. This is the key to achieving long-term financial goals — as long as you save the difference. Talk in terms of trade-offs, and try to demonstrate with your own behavior. If you or they spend money in a certain way, what's the gain? What's the loss? How does an expense fit in with a larger plan? How can saving rather than spending support their goals?
4) Put debt in perspective. Not all debt is bad if it's managed properly. Explain to your kids that a mortgage or a student loan can work in their favor. On the other hand, they need to understand the high cost of credit card interest. And as for student loans, a smart guideline can be to limit the amount they borrow to what they can reasonably expect to earn in their first year's salary.
5) Keep learning about money. This is something we can all do. As life changes, so do our financial needs. From starting to save for retirement to buying a home to learning to invest to refining our financial plan — there's always more to learn. Take it one simple step at a time, but keep taking those steps.
Finally, here's another positive takeaway from the survey: Young people want to be financially independent. And living without help from their parents is how the majority of them define financial success. To me, that's not just optimism; it's an underlying sense of responsibility. If we as parents and financial mentors can help these young people achieve that goal through a combination of practical guidance and emotional encouragement, perhaps we can all feel more optimistic about the future.
More information on the survey results can be found at https://www.aboutschwab.com/financial-literacy.
Carrie Schwab-Pomerantz, Certified Financial Planner, is president of the Charles Schwab Foundation and author of "The Charles Schwab Guide to Finances After Fifty." Read more at http://schwab.com/book. You can email Carrie at [email protected] The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.