Amid all the noise about how to raise money-smart children, the two most important steps may be simply putting kids on a budget and having them write down a set of financial goals.
These two measures correlate most highly with financial confidence and know-how among college freshmen, according to a study from Inceptia, a nonprofit that promotes financial education. No surprise: overall scores in the National Financial Aptitude Analysis were abysmally low. That’s been the case in just about every examination of youth financial acumen the last 15 years.
And to a degree the kids’ confidence is misplaced. They don’t know as much as they think. (Imagine that!) Three-quarters of college freshman say they feel capable of managing their future income to achieve financial goals. Yet half or fewer rated themselves as good or excellent at setting a budget, managing credit cards and student loans, or understanding investing and compound interest. The new data may shed light on how to finally break through such barriers.
Students who said they have a budget were very likely to say they feel capable of handling their financial future; of achieving their financial goals; and feel in control of their financial situation. They also were likely to be saving on a regular basis. Sadly, only 51% say they have a budget.
Students with specific financial goals like paying for college or buying a car were most likely to say that they track spending, save, compare loan rates before borrowing, have a budget, and check their credit report. Perhaps most striking, those who have written down their financial goals are way more likely to exhibit these positive money behaviors.
For example, 22% of students with no financial goals say they track spending. That doubles to 44% among kids with financial goals in their head, and jumps by half again to 68% among kids with written goals. Similar leaps are found among those who save, compare rates, budget and check their credit report. The good news is that 86% of college freshmen say they have financial goals. The bad news is that just 25% have committed those goals to paper.
None of this should be terribly surprising to parents who have paid their children an allowance—and forced them to make spending choices. There is some debate about how to administer allowance and even a rogue argument that allowance by itself is of little value. But most evidence points to benefits from an allowance system that forces kids to make spending choices and prompts discussion about money in the home.
Inceptia would like universities to focus on financial goal-setting and budgets as they carve out financial education programs for their students. “Everyone from college students to multi-millionaires should have financial goals, and a budget is simply a plan for reaching them,” says Kate Trombitas, co-author of the Inceptia study. With the web now full of virtual family banks there is no reason you can’t get started much earlier.