When you talk to recent college graduates about what they learned – or didn’t learn – in their undergraduate education, you’re likely to hear a few of the same things: they were required to learn calculus and they’ll never use it, or they had to read a bunch of old Greek plays. What didn’t they learn? How to pay their taxes, make a budget, or even write a check. Now out on their own, these students say those skills would certainly be useful.
These educational gaps correspond with results by an EverFi and Higher One survey that showed reduced financial knowledge among recent college graduates. And while more students were shown to be in charge of their finances in 2014 than in 2012, this new crop of students was less likely to follow a budget or plan out investments.
As 2016’s college seniors are launched into the world this month, it’s time to pay attention to their financial literacy.
Here are four common money mistakes college grads make – all signs that we need to reassess how we pass along these vital skills.
1. The Penny Pile-Up
One common way that college students pile up debt is through little expenses. Maybe it’s a monthly digital service subscription – music streaming, TV services, or gaming. For others, it’s that daily cup of fancy coffee. Regardless of what the money goes towards, it adds up quickly and can sink young people’s (apparently non-existent) budgets.
College grads need to better assess these spending patterns in order to determine which expenses are worthwhile, which can be reduced, and which should be eliminated entirely. And ideally, once a budget item is tagged for elimination, the best strategy is to turn that money into an investment. Invested with interest, a daily coffee habit alone could easily be worth $500 down the road.
2. No Budget, Big Problems
Budgeting is a hassle, but most college grads have the skills to do it. The problem is that many young people have limited earnings and often a lot of debt, or at least a lot of financial anxiety. Setting a budget requires looking at those resources and coming to terms with how much money you can realistically spend.
How can we help young people break budgeting anxiety? The secret may be to tap into big dreams – budgeting is a widely shared habit of financially successful individuals. Instead of making the budget discussion about avoiding credit card debt or not overdrafting their checking account, frame budgeting as a path to bigger dreams – the business they want to open or a house in their dream city. This adds a little glamour and may be just what young adults need to help them stick to their budgets.
3. Letting Debt Linger
Students today are graduating with enormous debt loads. In 2013, 70% of graduates left school with an average of over $35,000 in debt. That’s a huge amount, and for students who don’t head to graduate school or into another post-graduation opportunity that allows for deferred payment, the first bill will show up shortly after graduation day.
Graduates should be encouraged to pay off their debt as quickly as they can, even if it means lean living for a few years. By paying only the minimum, students face long-term financial struggles as interest racks up. Many view paying the minimum as a great way to stretch their money in the short term, when it’s really a way to extend their debt well into the future.
4. The Credit Score Conundrum
College students are a popular target for credit card companies seeking to turn youthful financial irresponsibility into big interest payments, and this means many college grads find themselves tethered to high-interest, low-reward cards. These cards can damage their credit and make it hard to access better financial opportunities down the line.
College students need to be taught how to find and interpret their credit scores. An increasing number of credit card companies even offer a monthly score update as one of their services. Encourage students and recent grads to actively track this number and help them develop tools to improve it by discussing what metrics go into determining their score.
As they graduate and step out on their own, the most valuable gift we can give our young people is increased financial competency. It may not be the most popular gift, but they’ll recognize the value in the long run when they’ve paid off their debt and have a great credit score and savings in the bank.
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