Tuesday, April 26, 2011

Lack of financial savvy hinders youths in debt

Millions of young adults in their 20s and 30s are mired in debt at a time when they should be building wealth as their careers grow. Many factors tied to a tough economy have contributed to this situation, but a lack of financial education isn't helping.

Credit cards don't come with instructions. Student loans lack an owner's manual. High-school and even college students don't need to pass personal-finance courses before facing the real world.

Instead, they typically gain their money education the tough way, through the school of hard knocks.

While a student at Arizona State University, Holly Huntimer made purchases using credit cards without really pondering the consequences. The Surprise woman, now 27, earned her bachelor's degree with relatively little in the way of student loans, just $3,500, thanks largely to scholarships.

But her credit-card bills were another matter, with her balance eventually topping $20,000 a couple of years after graduation.

"My peers all had a lot of credit-card debt, and we never seemed to worry about money," she said. "It was a way to maintain the lifestyle I was used to."

Roughly half of households headed by someone under 35 have credit-card debt, according to a recent report by Demos, citing Federal Reserve figures. Four in 10 households headed by younger adults have an auto loan.

Student loans pose special challenges for many because these debts can't be eliminated through a bankruptcy or repossession. Instead, they can follow someone around for years like a zombie.

Because of the recession and sluggish recovery, job prospects aren't as solid for today's young adults as they were for older siblings or parents, making it tough to repay debts. Unemployment rates are higher for those in their 20s and early 30s, and many employers have cut retirement, health and other benefits.

"After graduation, I felt I was drowning in credit-card debt," said Huntimer, who earned her degree in 2006. "And after graduating, I wasn't making as much as I expected."

Much has been made of boomerang kids who move back home with their parents as young adults. Financial pressures contribute to this trend.

"A lot of them don't have an option but to move home," said Mike Sullivan, director of education at Take Charge America, a non-profit debt-management and counseling group in Phoenix. "Many of them don't have any income, but they still have that student loan and credit-card debt."

Attention on finances

Heightened financial literacy can't do much to correct a tough job market, but it can ease problems tied to overspending and debt.

One hopeful sign is that finances seem to be emerging as more of a hot topic for people in this generation.

"The current credit crisis has caught the attention of a lot of students," said Joyce Serido, an assistant research professor at the University of Arizona. She and her colleagues have launched a research project following over 1,500 college students into middle-age to assess changes in their attitudes and behaviors toward finances.

One observation she makes is that parents can play an important role in educating their kids.

"We liken financial behaviors today to where drugs and sex were five or 10 years ago," said Serido, who is associated with the Norton School of Family and Consumer Sciences. "When parents started to talk more frankly to kids back then about sex and drugs, that's when we saw declines in risky behavior."

Parents as role models

Skeptics might question whether parents make the best role models, given that many have their own foreclosure, credit-card and overspending problems. But Serido said it can be instructive for parents to discuss their own financial missteps. "When parents talk to them, they tend to stay in line," she said.

Sharon Lechter, a Paradise Valley financial author and certified public accountant, notes that parents often make incomplete role models, especially when it comes to paying bills.

"Most young adults see a credit card being used every day by their parents, yet rarely do those same teenagers see the credit being paid off," she said. "This builds in the expectation of instant gratification."

Lechter, who collaborated with Robert Kiyosaki in writing books for the "Rich Dad, Poor Dad" series and served on the first President's Advisory Council on Financial Literacy, views credit cards as a double-edged sword. They are the "quickest way for young adults to build good credit," she said, and "the quickest way to destroy a young adult's credit."

Role of education

Although rare, financial-education classes also have value. Arizona now requires an economics class for high-school students, starting with the class of 2012. Serido applauds the effort.

While a single economics class won't help students deal much with real-world finances, she said, it could whet their interest enough that they're encouraged to take money classes in college and learn on their own, such as through financial websites.

Along with parents and formal education, Serido considers employment the third key part of the financial-education equation, as jobs expose employees to paychecks, taxes, bank accounts, benefits and more. "It forces you to interact with the financial-services system," she said.

Some of those interactions will be difficult for kids to make and for parents to watch.

Many experts feel it is best for parents to let adult children work out their own money problems, especially if doing otherwise could drag down the parents, too.

"As much as you'd like to help your child, it's better for the child to declare bankruptcy and start over than to ransom your own retirement," Sullivan said.

"Taking your kids back into the home is a great thing but paying off their debt is a bad thing."

Time to recover

As rough as many young adults may have it, they still have time to repair the damage and learn sound financial habits.

When Huntimer decided she had to solve her credit-card problems, she turned to Take Charge America. Part of the group's focus is on negotiating concessions from credit-card companies such as in lowering a borrower's interest rate and reducing or waiving fees, then putting them on a plan to pay off the debt.

Another component involves education - helping with budgets and other financial tools. "They have to be willing to make these changes," said Mona Flores, a Take Charge America counseling supervisor. "It takes a serious commitment on their part."

Progress on debts

Huntimer, who stopped using credit cards when she began the program in 2008, said she has pared her original $20,600 credit-card balance to $4,600. She also has cut her student-loan debt from $3,500 to $1,700.

She qualified for a mortgage and bought a home last year. Huntimer, who is single, said she earns between $35,000 and $38,000 a year as a marketing assistant at Peoria Sports Complex and as a part-time pet-sitter. She's even putting away money in a savings account and in a Roth Individual Retirement Account.

Huntimer said participating in the debt-management program didn't hurt her credit, and she feels optimistic about her future. "It was a challenge, but I didn't suffer," she said. "I'm a lot less stressed now."


Get educated about finances

Sharon Lechter, a Paradise Valley-based financial author and certified public accountant, offers several tips for young adults. These include:

• Read the fine print on credit-card agreements, limit the number of cards you have and keep balances as low as possible.

• Maintain a budget. "Once you know where your money comes from and where it goes, it is easier to make changes," she said.

• Delay making purchases on items for at least two minutes when in stores. This can help control impulse buying.

• Consider homeownership as a smart long-term financial strategy. While it might not appear obvious with the market so depressed, current low housing prices and tax benefits provide solid opportunities for young adults.

• View college as an investment in your future, despite benefits that might not be immediately obvious. If finances are tight, consider attending a community college first to minimize student loans.

• Set achievable money goals from which you can gain momentum, such as paying off small-balance credit-card debts first. "This feeling of accomplishment, this little win, will give you the courage to keep going," she said.

- Russ Wiles

Test your financial knowledge

Are you financially literate? Gauge your knowledge by taking the following quiz. Answers provided at the bottom.

• 1. Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, would you have more than $102, exactly $102 or less than $102?

• 2. Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same or less?

• 3. If interest rates rise, what will typically happen to bond prices - rise, fall or stay the same?

• 4. True or false: A 15-year mortgage usually requires higher monthly payments than a 30-year mortgage, but the total interest over the life of the loan will be less.

• 5. True or false: Buying a single company's stock usually provides a safer return than you'd get with a stock mutual fund.

This quiz was developed by FINRA, the Financial Industry Regulatory Authority. Typical respondents, both nationally and in Arizona, got three questions correct out of the five. For details, go to finra.org.

Answers: 1. More than $102. 2. Would buy less. 3. Prices would fall. 4. True. 5. False.

by Russ Wiles The Arizona Republic Apr. 25, 2011 12:00 AM

Lack of financial savvy hinders youths in debt

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