Improving teenage financial literacy

WASHINGTON – While the sight of their parents mulling over income tax forms may be familiar to them this time of the year, high school students don’t understand the impact of taxes on take-home pay.

This is according to a coalition of more than 100 governmental, educational and business organizations working together to improve financial literacy among young people.

This lack of understanding is leading students to be overly confident in their future ability to pay expenses once they’re out on their own, according to a book just published by the JumpStart Coalition for Personal Financial Literacy.

The book, “Improving Financial Literacy: What Schools and Parents Can and Cannot Do,” examines the results from JumpStart’s 2000 survey measuring 12th graders’ level of knowledge of personal finance basics.

The researcher for last year’s survey and a similar one conducted in 1997 was Lewis Mandell, dean of the University at Buffalo School of Management.

Tax questions.

A question in the 2000 survey asked about the dollar amount change in federal income taxes for “Wendy,” who worked her way through college earning $15,000 per year and then got a job after graduation paying $30,000 per year.

More than 60 percent of survey participants answered the question incorrectly, saying her taxes would “increase a little” (40.4 percent), stay the same (11.3 percent) or even be lower (8.8 percent).

Only 38.3 percent correctly answered that her taxes would “double at least” (a considerable decrease from the 49.4 percent of participants who answered a similar question correctly in the 1997 survey).

Asking for trouble.

“Students who use their current part-time jobs as a way of estimating future income taxes will be in for a very great disappointment – and may find themselves in some difficulty in the future,” said Mandell.

For that reason, knowing one’s take-home pay is one of 12 personal finance principles for young people included in a new list compiled by the JumpStart Coalition.

The coalition believes the principles on its list – released in conjunction with tax season as well as Financial Literacy for Youth month in April – are practical ones that, if comprehended and heeded by young people, will make a real, positive difference in their financial outlook.

List helps prepare.

“If the next generation of financial services users abided by these concepts, it’s safe to say that -10 to 20 years from now – the country would have a far greater number of people who were better prepared for retirement, able to manage credit card and other debts and avoid bankruptcy,” said Mandell.

For the “Know Your Take-Home Pay” principle, the coalition has a sample lesson that asks young people to analyze a sample paycheck stub and identify common payroll deductions.

The lesson is posted within the “Downloads” section of JumpStart’s Web site located at www.jumpstart.org.

The coalition plans to offer sample lessons for each of its 12 principles in the near future and use its network of 100+ partners to disseminate the principles and sample lessons to educators, youth organizations and parents.

“Our goal for these principles is to generate discussions in classrooms throughout the country and at the family dinner table,” said Dara Duguay, the coalition’s executive director.

“While the main audience for these principles is future adults, present adults should benefit from these discussions as well.”

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12 principles to spend by

The JumpStart Coalition’s list of 12 principles will help teen-agers to improve their financial literacy level. The principles include:

* Know your take-home pay – Before committing to significant expenditures, estimate how much income is likely to be available for you.

Net income, after all mandatory deductions, is more important to estimate than gross income before deductions.

* Pay yourself first – Before paying bills and other financial obligations, set aside an affordable amount each month in accounts designated for long-range goals and unexpected emergencies.

* Start saving young – Recognize that your total savings are determined both by the interest you earn on those savings and the time period over which you save.

The sooner you start saving, the more funds you’ll be able to amass over time.

* Compare interest rates – Obtain rate information from multiple financial services firms to get the best value for your money.

* Don’t borrow what you can’t repay – Be a responsible borrower who repays as promised, showing you are worthy of getting credit in the future.

Before you borrow, compare your total payment obligations with income that you will have available to make these payments.

* Budget your money – Create an annual budget to identify expected income and expenses, including savings. This will serve as a guide to help you live within your income.

* Money doubles by the “Rule of 72”- To determine how long it will take your money to double, divide the interest rate into 72. For example, an account earning 6 percent interest will double in 12 years (72 divided by 6 equals 12).

* High returns equal high risks – Recognize that no one will pay you high interest rates on a sure thing. In most cases, the higher the interest rate offered to you, the investor, the higher the risk of losing some, or all, of the money you invest. Diversification of assets is the best protection against risk.

* Don’t expect something for nothing – Be leery of advertisements, sales people or other sources of financial offers promising anything free.

Like non-financial opportunities, if it sounds too good to be true, it probably is.

* Map your financial future – Take time to list your financial goals, along with a realistic plan for achieving them. You can go places you want to go without a road map – but seldom on the first try.

* Your credit past is your credit future – Be aware that credit bureaus maintain credit reports, which record borrowers’ histories of repaying loans. Negative information in credit reports can affect your ability to borrow at a later point.

* Stay insured – Purchase insurance to avoid being wiped out by a financial loss, such as an illness or accident. An insurance plan should be part of every personal financial plan.