money skillsTeens might think they know it all, but how much do they really know when it comes to money? The U.S. Department of Treasury is partnering with the U.S. Department of Education to present the 2011 National Financial Capability Challenge so that high school students, educators and parents nationwide can find out.

The knowledge could mean the difference between financial independence and young adults who never leave home. Got your attention now?The Financial Capability Challenge runs from March 7 through April 8 and it's not too late for schools to join. Last year, 1,535 schools and 76,000 students participated, with the states of Virginia, Iowa, Wisconsin, New Hampshire and Pennsylvania generating the most participation.

The free program offers instruction in five key areas of personal finance (earning/income; spending; saving/investing; borrowing; protecting) and a voluntary, online test. As an added incentive, 25 financially savvy students who score in the top 20% of online test-takers will receive $1,000 scholarships through the Charles Schwab Foundation. The top 25 high-scoring schools will also receive $1,000 grants.

Linda Yaron, Teacher Ambassador Fellow at the U.S. Department of Education, participated in the challenge last year and said teachers will have access to a new educator toolkit that includes lesson plans and interactive, online lessons available in both English and Spanish.

"As an English teacher in an inner-city Los Angeles community for seven years," wrote Yaron on her blog, "I have seen the importance of empowering young people with the skills they need to build a foundation for long-term financial security.... knowledge is power."

According to a recent survey, however, most kids need help when it comes to managing their money. In 2010, the 11th Annual Junior Achievement/Allstate Foundation Teens and Personal Finance Survey revealed an "alarming majority" of teens who admit that they "lack the knowledge to understand and effectively reconcile spending and consumption with saving and investing."

Almost half the 1,000 teens surveyed nationwide said that they were unsure how to invest money, and 22% said they don't budget their money. In response to why they don't budget, 55% said that parents "take care of all my expenses" while 53% answered, "It's not necessary, given the amount of money I have." Insert sound of "wrong" buzzer here.

Still, teens are an optimistic bunch. Students in the survey overwhelming predicted that they'll be at least as financially well-off as their parents (52%), if not better off (34%).

But they better know what to do with all that green. For 2011, Yaron says the lesson plans included in the challenge will focus on:
  • identifying positive and negative spending behaviors
  • developing a personal budget
  • opening, monitoring and balancing checking and savings accounts
  • identifying costs and benefits of buying insurance and paying for higher education
  • using credit wisely
  • understanding interest rates and fees on credit card purchases
  • minimizing the risk of identity theft
Parents echoed the importance of these issues in the Families & Money Survey released by Charles Schwab in 2010. Their top concerns for their children were: sticking to a budget, living within their means, saving money, and investing wisely.

The survey also revealed parents' worries that their kids will repeat some of their own financial missteps, like not saving early enough for retirement, not saving money for emergencies, and carrying credit-card debt from month to month.

With the benefit of hindsight, parents of 20-somethings admitted that they should have done more to foster financial independence by teaching their children how to save and budget. Surprisingly, parents revealed that if they had it to do over again, they might not have helped out as much financially.

In fact, according to the survey, maybe it's kids who should be helping out more. Results found an unexpected link between helping with household chores and becoming financially independent. Of parents surveyed, 53% of those who described their children as "very financially responsible" reported that those kids also did "regular household chores" growing up. Parents of children who didn't do any regular chores thought of themselves as poorer financial role models.

"There's a connection here we shouldn't miss," said Carrie Schwab-Pomerantz, president of the Charles Schwab Foundation. "More than just sharing our financial knowledge as parents, fostering a spirit of personal accountability can inspire the right financial behaviors in our kids."

So right after loading the dishwasher and taking out the trash, here's what the National Financial Capability Challenge wants teens to start studying on the five critical areas of money management:

Earning and Income

Teens should understand the link between higher education, a valuable skill set, and a larger paycheck. They should also know the difference between gross pay and net pay, the purpose of income taxes, W-2 forms, how to complete a W-4 form, and what paycheck deductions to expect. And you thought the sex talk was tough?

Finally, teens should be aware of predictable stages in the life cycle that affect income, as well as the opportunities of entrepreneurship.

Spending

Teens should be familiarized with the components of a check and how checking and savings accounts work, as well as check-cashing services. Teens should know how to enter information into an account register to determine the balance, and understand why account records are important.

They should understand how to keep a spending log to track their expenses and devise a personal budget. They should be familiar with the savings concept of "pay yourself first."

Teens must also be aware of budgeting for unexpected expenses and financial goals (i.e. down payment on a home). Finally, teens should understand how personal values affect spending habits.

Saving

The concept of "paying yourself first" should be reiterated. In addition, teens must understand the variety of ways to grow savings and the risks and rewards associated with each. They must also know the concept of diversification, or not putting their eggs all in one basket. Students must be able to calculate simple and compound interest.

Teens should also be aware of the concept that wealth -- even millions of dollars -- can be accumulated through smart savings and investing. Of course, it helps to have an idea of what you are saving for. A 2010 Teens & Money Survey by Ameritrade found that 66% of teen savers are currently squirreling away funds for college. Surprisingly, 70% of the teens surveyed had never heard of a 529 Plan. So put that on the study sheet -- along with a cheat sheet of Secrets to Winning a College Scholarship.

Borrowing

Teens must be aware of the four types of financial institutions (commercial bank, savings and loan, credit union, brokerage firm) and the services that each offers. Teens should understand how to "shop around" for credit. Dollars to doughnuts, most will be very interested to learn how to evaluate the costs and benefits of car-buying options as well as what to look for and expect in a car purchase agreement.

It's vital for teens to understand how to calculate interest and payments on credit cards. Teens also should consider the idea of good debt vs. bad. Student loan, good. Department store debt, bad.

Finally, teens must learn about credit scores, what they are and why they should care.

Protect Their Assets Against Risk

They must understand what insurance is, how it works, and its risks and benefits. They must be introduced to the various types of insurance available (auto, health, life, disability, homeowner's/renter's), and understand what those policies cover.

Teens should also understand how laws and regulations protect their deposits.

In an age of identity theft, teens must also be alert to how thieves obtain personal information and what can be done with that information. They should know how to minimize the risks of identity theft, as well as be able to recognize the warning signs.

Serious stuff -- and critical if we're going to raise a generation that actually does a better job managing its money than we do.

To learn more about the National Financial Capability Challenge and to get involved, check out the program's website.

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