When my son was two-and-a-half, we went to the hospital where he was to have some uncomfortable medical tests. As we passed the hospital gift shop he pulled me to a stop so that he could see the toy cars in the window. I told him that he had some money sent to him by cousins and that when the tests were finished, he could buy one of the cars. He skipped along beside me, likely dreaming of playing with one of those vehicles. After the test, I gave him a dollar bill, which he handed to the clerk as he pointed to a truck. I told him that he didn't have that much money and suggested that he might choose one of the rubber cars that had a metal axel holding wheels that turned. His face was beaming when the car was handed to him together with some coins. I realized that this was his first experience with handling money and that one of my jobs as a mom was to gradually teach him money management.
Debt & Financial Literacy in Canada: Statistics Canada (2011) reported that, "in aggregate, households owed more than $1.50 for every dollar of disposable income."(2) The heaviest debt load belonged to the groups who were home owners with high incomes and were individuals who considered themselves financially literate and likely to seek financial advice. The less educated, unattached individuals and renters were more vulnerable and very likely to accumulate debt. (2) Not all debt is bad debt. If one borrows to take courses in preparation for a job, or borrows money to buy the family home that is likely to increase in value, or borrows money to buy a car which is necessary for work, the debt may be necessary. (5)
Debt & Financial Literacy in Japan: Nakagawa and Yasui write that: (a) Japanese households in general are resilient to shocks because, usually, 50% of their financial assets are in liquid assets such as cash and deposits (postal savings) rather than stocks, bonds, real estate, etc. (In the US, liquid assets comprise 16%; in Europe liquid assets comprise 25% to 33%). (b) Household net worth does not vary as much in Japan as it does in many countries. (c) The down payment for a house in Japan is high, but Japanese buyers save and those who buy do not borrow from multiple sources to finance the purchase. (d) Japanese are educated to believe that saving is a virtue. (e) Japanese banks hold a large portion of loans and securities on their books. As long as corporations borrow, the system works well. The risk of non-payment of the loans is concentrated in the Japanese banking system. (In the US and UK the risk is transferred somewhat to investors such as life insurers, pension funds and hedge funds). (3) Japanese people are not "home free". In 2005, blanket deposit insurance was removed, so bank deposits are not 100% safe. (9) My Japanese friend lost her home and investments when the loan she had guaranteed for her son's business was called in by the bank, and she became dependent on her daughter for her livelihood. Young adults, even those with families, who would prefer to live independently from their parents, find themselves sharing accommodation in their parent's dwelling.
Forms of debt include: credit card balances, mortgages, car loans or leases, insurance payments, overdraft protection, consumer loans, taxes owing, student loans, unpaid tickets or fines, arrears on personal accounts such as cell phones, electricity bills, rent, etc., money borrowed from friends and family. (1)
Student loans in the US and Canada: The rationale is that the government will lend students money to pay for their education without charging interest until the student graduates; after graduation, the student will get a job and pay off the loan before much interest has accrued. However we live in tough times; jobs are hard to find and the interest on the student loan adds up, often totaling more than the original debt. The students may be paying off their loan debts well into their 40s or 50s when they should be paying for their own children's education or saving for retirement. (5) Governments might make it easier for students to pay off loans and should encourage small businesses, the major creators of new jobs.
Credit card debt: Credit card companies are eager to supply credit cards to students and others who have no jobs. These loans are profitable to the card company because the borrower makes payments on the balance owing; often interest payments add up to more than the original amount borrowed. (4) (7)
My friend Sophie (name changed) is fifty years old. She kindly agreed to tell me how debt crept up on her. She has supported herself since finishing college, has a one-bed-room apartment and is paid a good salary for her junior management position. As she was about to max out one credit card, she took out another credit card, and then another and then another, giving little thought to the consequences. However, about ten years ago she took a moment to add up her total liabilities and was shocked. At the bank she was advised to bargain for a reasonable rate on a Line of Credit to pay off her credit cards. She followed through and paid off two of the credit cards. David Chilton's book, The Wealthy Barber, Everyone's Common Sense Guide to Becoming Financially Independent, taught her how to manage money. Now she pays herself first by putting aside money for an emergency, then she pays more than the minimum payments on each credit card and toward her Line of Credit. The balance she uses for daily life. She uses bonuses, birthday and Christmas gifts of money to pay down the debt balances and sometimes she can use some of her emergency money to make additional payments. She says she feels more comfortable now that her debt load is lessening and she is living within her means. She hesitates to think how much she has paid in interest on her credit card balances and Line of Credit loan through the years.
RECOMMENDATIONS TO PARENTS
Many parents have messed up their money management and don't know how to teach their kids. Here are some recommendations:
- Teach children the difference between needing and wanting. When something is appealing, wait a day or two before making the purchase and rethink your status.
- Teach them to delay gratification, to develop self control.
- Teach them your family philosophy about handling money, what the family deems reasonable to spend money on, the objective of the family regarding saving, etc. Couples need to have like ideas about financial management and to have the same debt tolerance level or to work out a compromise.
- Teach them that money comes from work. They should earn a "commission" (allowance) for chores done for the family. The chores should be age appropriate. The six-year-old can match socks after they've been washed. The twelve-year-old can wash dishes, etc. Praise and pay them immediately or on a weekly schedule so that they see the relationship. Later when they are getting a higher commission, have them put the money in three separate envelopes marked "Give (gifts, donations), Save (for a goal such as college or a trip) and Spend (for movies, clothing, treats, etc.)."
- Teach children to save for a goal. You might offer to match their savings for something big, but do not allow them to buy something on credit.
- Teach children about impulse buys. Ask "Did you want that item before you went into the store or saw it on TV?" Show your kids how shops use marketing strategies to get them to buy. Teach them not to buy just because the item is on sale. (One couple bought toilet paper every time it was on sale and when they moved, they had to make an extra trip in their van just to move the toilet paper.)
- Before your kids get a credit card or leave home they should have learned elementary bookkeeping and how to make a budget. They should be aware of their spending limits.
- Many teens have jobs. Teens should learn about different avenues of investing, the costs and risks and be aware of their spending limit. Help them plan how to use their income wisely. (1) (5) (6) (7)
Bicyclers, playing children, and pedestrians often stop at the Community Center (background building) to buy treats. Most popular with teens is Gatorade $2.50, a sports drink, and next is pop $1.25.
I asked my neighbour, Ash, an Assistant Manager, Life and Security, how he teaches his daughter, Leah, to manage money. Leah often accompanies him to the bank to observe his transactions, and when she was ten-years-old the teller gave her a piggy bank so that she could save her own money and open her own bank account. She earns a weekly allowance of six to ten dollars based on the performance of household chores, specifically making beds and cleaning desks. He lets Leah handle his money to pay when they go for a chocolate milk treat at Tim Horton's, because he believes this gives her real life experiences. He and his wife want her to have a sense of freedom and responsibility, and recording her own transactions sharpens her mathematical skills and encourages her to save for a future need as well as to help those less fortunate. He's an advocate of advice from Barbara Stanny, a wealth coach adviser, who says, "Money doesn't give you security and power, understanding money gives you security and power."
Ash and daughter, Leah (age 13)
FINANCIAL LITERACY IN SCHOOLS
Canada: The Provinces of Ontario, Quebec and Saskatchewan have elements of financial literacy in core subjects. Ten years ago, British Columbia instigated a mandatory class teaching financial life skills in the 10th grade. Loriggio, writing for The Canadian Press, finds some shortcomings: They teach the math aspect of money management, but not that you should not spend more than you make. Recently the public has begun to request more emphasis on FL, but it cannot be mandatory until sufficient teachers are trained to teach this subject. Meantime, yearly talks and workshops fill the gap. (7A)
Japan: Sogano, a representative of the Bank of Japan, wrote about Japanese financial education programs for a meeting of the Asia-Pacific Economic Co-operation (APEC). Among other recommendations, Sogano writes: "FE (Financial Education) needs [sic] not be a 'new subject' in school curriculum, rather be included in existing subjects." "General Policies regarding Curriculum Formulation (GPCF)" are spelled out, specifying what subjects should include FE throughout the child's years in school. Timing suggested by Sogano,
Age 6-7: know value of money, to buy within a budget, and to save pocket money
Age 8-9: distinguish wants & no-wants, understand budget construction, and plan savings and record them
Age 10-11: plan shopping and know how to buy efficiently, know depository facilities
Age 12-14: understand household revenue & expense, acquire basic knowledge of bond, equity, loans & returns
Age 15-17: know long-term practical cash management, understand basic financial instruments & economic environments, manage one's life through life planning
The article states that there is no data on how much time is devoted to Financial Education at schools. Hours spent in various subjects vary, but dedicated teachers spend 20 hours on Financial Education in Home Economics at high schools. (9)
NOMURA began offering financial and economic education to Japanese youth in 2001. Teachers from Nomura hold classes in elementary, middle schools and high schools and sponsor the Nikkei Stock League Contest for junior high school students through college students. The article "Financial Literacy Programs in Japan" discusses their program and the benefits of this education. (8)
THE SHARING ECONOMY
The Sharing Economy began to take root in the early 2000s. "The Sharing Economy is a socio-economic ecosystem built around the sharing of human and physical resources. It includes the shared creation, production, distribution, trade and consumption of goods and services by different people and organizations." (11) It is a means of sharing and collaboration which arose because of fears that our growing population could deplete the world's resources. If people with similar needs could share the same assets such as time, possessions, space, skills and money, not only would humans use fewer resource, but the idea of borrowing instead of owning might lessen the debt burden. People could afford to borrow property, time, skills, etc., that are idling. This phenomenon is highly supported by the millennial generation (those born between 1980 and 2000) and it is spreading. Uber, Airbnb, RelayRides, Shared Earth, TaskRabbit and many, many other forms of sharing are commonly used these days.
Large industries have seen the trend. Mercedes Benz, for example, is adjusting its economic process as demonstrated by their Car2Go offering. Although critics of the sharing process list hazards and claim that when there is a middle-man collecting the money, it isn't really sharing, the shared economy is likely here to stay. (10) (11)
The debt load of many families in the industrialized world is out of hand. Our children need to be taught by their parents and schools how to manage money. Those who don't learn to manage money suffer many hardships throughout their lives. Governments could make it less costly for students to borrow money for education and governments should support small businesses that are leaders in job creation. At every level there are books kids can read to learn about money management. The new socio-economic Sharing Economy is taking hold and making it possible for people and companies to use property, space, time and talents which are idle much of the time. It also means that fewer of our resources are used up. Critics of this new system point out pitfalls. Our society has a problem. Something must be done to prevent continued escalation of huge debts by families, companies and governments. What can we do?
- 1. Cochrane, Michael, LLB. 2008. "Debt and Divorce (Canada)." DIVORCE MAGAZINE.COM. http://www.divorcemag.com/articles/debt-and-divorce-canada. Retrieved July 1, 2015.
- 2. Chawla, Raj K. and Sharanjit Uppal. 2012. "Household debt in Canada." Statistics Canada. http://www.statcan.gc.ca/pub/75-001-x/2012002/article/11636-eng.htm. Retrieved July 6, 2015.
- 3. Nakagawa, Shinobu and Yosuke Yasui, "A note on Japanese household debt: international comparison and implications for financial stability." Speech delivered May 2009. http://www.bis.org/publ/bppdf/bispap46.htm. Retrieved July 6, 2015.
- 4. Thorne, Deborah. "Sitting Down With Professor Thorne - Young Adult Debt: It's a Drag." NerdWallet. http://nerdwallet.com/blog/finance/prof/sitting-professor-thorne-young-adult-debt-drag/ Retrieved July 1, 2015.
- 5. Penner, Derrick. 2014. The Bank of Mom and Dad, Money, Parents, and Grown Children. International Self-Counsel Press. Ltd., North Vancouver, B.C.
- 6. Phillips, Nancy. May 31, 2012. Teaching Kids About Money in This Complex World and troubled Economy. ZelaWela blog. http://www.zelawelakids.com/blog/bid/105847/ Retrieved July 27, 2015.
- 7. Hellmich, Nanci. 2015. "Ramsey: Here's how to raise money-smart kids,." U.S.A.TODAY, March 18, 2015. http://www.usatoday.com/story/money/personalfinance/2015/03/18/dave-ramsey-money-smart-kids/23506357/ Retrieved July 6, 2015.
- 7A. Loriggio, Paola. "Canada's schools need focused, consistent financial education programs: experts." December 14, 2014. http://ctvnews.ca/.../focused-financial-education-program-needed-in-can... Retrieved July 13, 2015.
- 8. Nagasawa, Yumiko and Katsuya Takahashi, Rumi Koike, Yuichi Toh. NOMURA http://www.nomuraholdings.com/csr/dialogue/education.html. Retrieved July 13, 2015.
- 9. Sogano, Hidehiko (Bank of Japan). "APEC EXPERIENCES: JAPANESE PROGRAMS ON FINANCIAL EDUCATION AT SCHOOLS."For the APEC Conference "Improving Efficiency of National Strategies for Financial Literacy. sogano-japanese-prorams-on-financial-education-at-schoool.pdf. http://www.finlitedu.org/.../sogano-japanese-programs-on-financial-edu. Retrieved July 13, 2015.
- 10. O'Reilly, Terry. July 21, 2015. Under the Influence. CBC. Radio (recording about the Sharing Economy). http://www.cbc.ca/undertheinfluence. July 21, 2015.
- 11. Matofska, Benita. "What is the Sharing Economy?" The People Who Share. http://www.thepeoplewhoshrare.com/blog/what-is-the-sharing-economy/ Retrieved July 28, 2015.