Industry Experts Cite Teaching Budgeting, Compound Interest as Key Financial Education Topics for American Young Adults
As our country gradually recovers from the Great Recession, the overwhelming need for Americans to increase their financial competencies has risen to the forefront of public discourse. But what are the money lessons people most need to learn? We asked financial experts for their opinions about the financial topics most important to know at various life stages. Among the responses we received, one emerging theme was the compelling reasons to start early. That is, even teens and young adults should study methods for building wealth. To learn how to build wealth, they must comprehend the power underlying several key financial principles: budgeting, compounding interest, paying oneself first, start saving young, and how to invest.
“The most important and underappreciated is budgeting,” states Michael Solari, CFP, of Solari Financial Planning in Boston. “There are many individuals that lack this basic skill.” Solari believes budgeting starts being a meaningful addition to young people’s financial tool belts when they land a first job. Once they’re getting a steady paycheck, budgeting for expenditures while setting savings goals becomes essential. But setting spending priorities may lack appeal to youth. “Budgeting has a bad rap,” Solari explains, “because you’re taking the fun discretionary spending and putting it toward something boring. I don’t think it should be taught this way, at least when they are young. Have them save for something fun, like a trip or a car. The point is to help them develop the idea that they can delay gratification today for something even better tomorrow.”
Brett Gottlieb, Investment Advisor Representative at Comprehensive Advisor in Carlsbad, CA, has some further thoughts on learning to budget at an early age. “The key item in an average person creating good financial habits is the ability to create a budget and live within that budget without deviation. This is something that should be started early in life as soon as you have started working post-college.” Solid budgets form the foundation for a lifetime savings plan. “If you have a goal of saving 20% of your income each year, that’s fine,” says Gottlieb. “But if you don’t create a budget and know what you spend each month, so you know what excess you have to save or where you can cut extra expenses out, it’s almost impossible to get ahead and put that money aside.” According to Gottlieb, setting individual or family goals and prioritizing items within your budget establishes good habits that reinforce lifelong financial wellness.
“Save early; save often,” adds Gregory S. Ostrowski, CFP, CRPC of Scarborough Capital Management in Annapolis, MD. “Pay yourself first.” Popular opinion might suggest that the nuances of investment strategy are too complex for young people to understand. The experts, however, disagree: “I had an IRA as a paperboy at age 12 and I’m glad I did,” claims Ostrowski. “In fact, I think a large part of that early investing experience led me to my career today.”
Fairwater Wealth in Burr Ridge, IL specializes in working with Generation Y and Millennial clients. The firm’s President, Dennis M. Breier, explains that helping young adults grasp the principles of time horizon and compound interest empowers them to grow financially throughout a lifetime. “Most young people are completely clueless as to the opportunity they have to accumulate large sums of money later in life,” says Breier. “They have this opportunity for two reasons: first, they often have a 30- to 40-year time horizon to retirement. Second, they don’t have the financial responsibilities that often come later in life with marriage, children, etc.” Breier feels that demonstrating how their money can grow exponentially, when saving even a small amount on a monthly basis, will greatly surprise many young people.
These sentiments are echoed on by Kate Holmes, CFP, CEO and Founder of Belmore Financial in Las Vegas. “Since a lot of habits are formed early on, it’s imperative to learn the benefits of compounding and the effects of debt when you begin your first job,” Holmes states. “Knowing how to prioritize and save for long term goals is essential before big expenses like your first home, starting a family, getting married, or going back to school.” Holmes also mentions the fundamental need for young adults to study investment basics early on: “Learning the difference between savings and investment accounts and how different investments work should happen in your late teens or early 20s,” she says.
Colin Drake, personal finance coach and founder of Drake Wealth Management in Sausalito, CA, says saving a portion of salary and investing over time is the most appropriate method for most people to build wealth. However, it’s not the only method. “Many other methods are available – e.g. starting a business, brokering large transactions, building a collection of passive sources of income. Young adults should see the scope of possibilities and choose one that matches their talents and passions.” Drake also suggests calculating one’s probability of success with a chosen method. “Becoming a professional baseball player? Movie star? Extremely low odds. Real estate development? Higher probability.” Financial independence will remain elusive to those without a game plan and method. “Wealth builders need to understand how wealth is created,” Drake recommends, “and choose a method that offers them the best combination of probability of success and likelihood of meaningful enjoyment.”
Clearly many experts concur that a sound financial education must start with the basics of budgeting, savings, and investing. How early should these lessons begin? Michael J. Gauthier, Certified Financial Planner and CEO of Strategic Income Group in Chandler, AZ, reminds us, “Age does not matter. What matters is protecting today first before you worry about tomorrow.”