Financial Literacy for Young Adults

Alan Greenspan, former Chairman of the US Federal Reserve, once described lack of financial literacy as “the number one problem in today’s generation and economy”. This might sound like a ‘first world’ problem—but financial literacy is undoubtedly an important attribute. It is defined as the ability to understand and use financial skills, such as understanding loans and savings, or being able to set and keep to a budget.

Lack of financial literacy can lead to problems such as excessive credit card debt, or being unable to pay your bills and rent when they fall due. Many of these skills do not become necessary until you are living independently. This page provides some advice about helping your adult children to develop these skills.

Building on a Foundation

The key to teaching financial skills is to build on a foundation over time.

Hopefully, therefore, you have been teaching your child about money over many years (and our page on Teaching Children about Money explains more about how you might do this). By the time they leave home and start to live independently, hopefully your adult child is more than capable of managing financially.

However, there may be subjects that have only come up since your child moved away from home, or perhaps that they did not understand when you mentioned them earlier.

How can you best support your now-adult child to develop this knowledge? These five tips should help.

Tips for Supporting Young Adults to Develop Financial Literacy

1. Point Them to Expert Resources

   One of the best ways to support your young adult is to show them how to find resources that can answer their questions.

   In other words, provide them with the information they need to manage without you. They might want to come to you with back-up questions—but it is important that they know where to look for reliable information if you are not available.

   There are two main sources:

   • Websites such as MoneySavingExpert.com.

     These sites, run by expert teams, provide comprehensive guides to a wide range of money matters. From understanding student loans, through to more general ‘what do I need to know’ guides, you can find pretty much everything you need.

   • In-person financial advice.

     There are also places that you can go to get financial advice in person. These include banks and building societies, charities such as Citizens Advice, and independent financial advisers. However, it is important that your young adult understands the advantages and disadvantages of each.

     For example, the role of independent financial advisers is to provide advice about investments and savings that is not tied to any particular institution. However, they are not there to explain budgeting or affordability, and they do want to earn commission on the products they sell. Similarly, banks and building societies can provide advice on potential loans and savings products, but only from that institution. You have to remember that they also want to make money from you. Both banks and financial advisers are regulated, which helps to prevent mis-selling, and protect customers—but you also need to protect yourself to some extent.

     Charities like Citizens Advice are there to provide help and advice to help people resolve problems. Advisers are not necessarily expert in financial matters, although they will provide information about issues such as budgeting to those in need of that advice.

2. Encourage Them to Enrol on a Money Management Course for Young Adults

   Financial and educational institutions are well aware that young adults may lack financial literacy.

   Many have therefore set up online courses to teach money management skills. From online courses run by organisations like the Open University or the Bank of England, through to quizzes and challenges from banks, there are plenty of options to choose from, and many are free to access and use.

   Encourage your young adult to explore the resources available, particularly from reputable organisations.

   As a bonus, this will also help to develop their research skills and critical thinking skills, as they assess the possible options.

3. Before They Leave Home, Show Them How to Budget

   This is one area of your child’s education that you can’t afford to neglect or leave to someone else.

   Your young adult needs to understand how to create a budget—and then stick to it.

   This is not usually something that is taught in schools, so make sure that you have a conversation about it before they leave home, even if it’s only a day or so before.

   Important points to make include:

   • Income vs. outgoings. Their planned monthly (or termly) outgoings need to be less than their monthly (or termly) income. It is mostly as simple as that—but see below.

   • The importance of cashflow. Even with income being more than expenditure, it is possible to run out of money if the timing is wrong. If your council tax or utility bills go out before your salary or student loan goes in, that can lead to a mess. Your child needs to understand this.

   • Planning for contingencies and one-off spends. They need to set some money aside from their monthly or termly budget for one-off spends like holidays or events, or disasters like their laptop breaking.

   Our pages on Budgeting and Student Budgeting and Economic Skills provide more advice, and may even be useful reading for your young adult themselves.

4. Make Sure They Understand Security and Protecting Themselves from Fraud

   Most young people are very savvy about online security and fraud.

   After all, they have grown up in a world with far more sophisticated phishing attempts than the Nigerian princes that their parents encountered. Indeed, if you ask a group of young people how they can keep their money safe, one of the first answers is likely to be ‘secure passwords’.

   That said, it is worth having conversations about potential fraud, especially if your young adult has not had a bank account before. They need to know that:

   • They should never give out personal details when someone calls, even if it sounds like your bank. If your bank does phone and asks for personal information, you should always call them back from a different phone, and to a number that you know is used for telephone banking.

   • Your bank will never phone and ask you to make a payment to an unknown account, especially not to deal with some kind of crime. There is NOT a ‘customer holding account’, and you are not part of an elaborate fraud-busting ring.

   • If in doubt, phone the number you know works for your bank, and ask. You don’t need to do anything instantly someone calls. It is better to hang up, and phone them back. This also applies to anyone who phones and wants you to make a payment immediately to a bank account whose details they will give you.

   • Keep financial information safe. Ideally, memorise your passwords and bank account access information. However, if you can’t do that, it is actually more secure to keep them written down somewhere at home, preferably encoded in some way. Do NOT keep them in a photo on your phone, because your phone can be hacked. Your home is much less likely to be broken into—and even then, would your burglars know what they had? A small notebook in a drawer or on a shelf is pretty uninteresting to most thieves looking for things to sell.

5. Encourage Them to Ask Questions

   The number one rule in adult life, especially about money should be: if in doubt, ask.

   Encourage your young adult always to ask questions if they don’t understand something. They can ask their bank, they can search online, they can ask you. It is crucial that they don’t just accept anything as ‘too complicated’. That is often how problems start, especially because people are often not aware of what they don’t know.

   It is also worth remembering that is hard for experts to appreciate others’ lack of knowledge, and therefore know what information to provide.

   Make sure that your young adult is never embarrassed or ashamed to ask someone to stop, slow down, or go back and explain more about bank accounts, loans, savings, investments—or anything else connected to money and financial affairs. After all, financial literacy doesn’t happen overnight, and it certainly doesn’t happen without education.

In Conclusion

Ideally, your young adult would already be pretty financially savvy by the time they leave home.

However, there are always gaps in any education—and these often only become clear under pressure. You can help them to fill those gaps by answering their questions. You can also give them the skills to answer those questions themselves, by encouraging them to access financial literacy courses or resources, and highlighting expert resources. After all, you won’t always be there to help, and you may not always know the answers yourself.