From the Center for Financial Services Innovation
First Encounters: Youth and Their First Financial Experiences
All kinds of organizations and institutions play influential roles in the lives of young people. This presents these organizations with an opportunity to promote the development of young peoples' financial capability. Depending on the nature of their relationship, these entities can play a critical role in providing resources and support to help young people establish healthy financial habits. This First Encounter Series outlines recommendations for young people to learn about, choose, and interact with various financial products. Specific recommendations are made for: financial educators, schools, and public officials; financial services providers, community organizations and NGOs; and mono-line credit providers. More
By Dan Kadlec | Nov 8, 2010
WASHINGTON, D.C.//October 6, 2010//Do you want to make sure your kids start out with the right tools they need to be informed investors when they grow up? Do you want them to learn the value of a dollar and why it is important to save? In these difficult financial times, teaching your kids what to do and what not to do when it comes to saving and investing is more important than ever.
Parents can now benefit from a major new resource being made available today from the nonprofit Alliance for Investor Education (AIE) highlighting 10 of the best Web-based resources for parents to teach their kids about how to save and invest in today's tough financial times. The Alliance's new "Teaching Your Kids About Saving and Investing: A Guide for Parents" is available at http://www.investoreducation.org/teachingyourkids.
AIE is the organization of the 20 leading U.S. financial-related foundations, nonprofit organizations, associations and governmental agencies.
Alliance for Investor Education President Dallas Salisbury, who also serves as president and CEO of the Employee Benefit Research Institute (EBRI) and chairman of the American Savings Education Council (ASEC), said: "It is important now more than ever that children learn the important lessons about money. Parents can teach their kids by example and also relay important lessons through the many resources available from trusted financial associations and agencies. We have assembled a collection of these resources for parents. The featured resources include online games, which are a fun way to teach kids financial lessons. Members of the Alliance are devoted to providing resources for parents to share with their kids to teach them the necessary lessons for them to become responsible investors as they grow."
The new "Teaching Your Kids About Saving and Investing: A Guide for Parents" section of the AIE Web site features the following 10 top resources for consumers:
1. Investing ABCs: Teaching Your Children About Stocks – http://tiny.cc/cq9nb, AICPA's 360 Degrees of Financial Literacy.
2. Gen I Revolution - http://tiny.cc/o3stv, Council for Economic Education.
3. A Hitchhiker's Guide to Planning for College Expenses – http://tiny.cc/qxlt8, CFA Institute.
4. Choose to Save: Savingsman Episode 5: Saving Early - http://tiny.cc/1epiw, Employee Benefit Research Institute.
5. Tips for Teaching Students about Saving and Investing - http://tiny.cc/f9sp3, Securities and Exchange Commission.
6. Teach Your Children - http://tiny.cc/xgyow - Certified Financial Planner Board of Standards.
7. The Basics of Saving and Investing - http://tiny.cc/oo6a5, Investor Protection Trust.
8. Cover the Basics Before Your Child Leaves the Nest - http://tiny.cc/k4dr9, National Endowment for Financial Education.
9. Great Minds Think: A Kid's Guide to Money - http://tiny.cc/rtcuo, Board of Governors of the Federal Reserve.
10. Fraud Scene Investigator - http://tiny.cc/5w7ga, North American Securities Administrators Association.
For an overview of the rest of the best investor education resources on the Web from AIE members, go to http://www.investoreducation.org.
"She's saying, 'I will buy you a car, mom,' " chuckled her mother, Julissa Cruz, who walks or takes public transportation to pick up her daughter from the school near Dolores Park.
But for young Ingrid's plans to become reality, "she needs to go to college, she needs to go to a university," her mother, speaking in Spanish, said through an interpreter.
Today, Ingrid will be helped in taking a small first step as officials unveil Kindergarten to College, the nation's first city-bankrolled college savings plan. The program is fueled by the belief that those who save for college are more likely to go.
The 5-year-old will be among about 1,200 newly enrolled kindergartners at 18 San Francisco public schools who will get a one-time payment of at least $50 in taxpayer funds placed in a special trust account. It can only be used to fund post-secondary education like a city college, vocational school or four-year university.
Lower-income students who qualify for the federal government's free or reduced-price lunch program will start with $100, city officials said.
The plan is to have corporations, nonprofit groups and others offer matching incentives to encourage children and their families to save.
EARN, a local nonprofit that specializes in micro loans and other financial services for low-income workers, has already committed to contributing $100 for every student whose family also saves $100 during the first years of the program.
The San Francisco Foundation has agreed to make additional matches for parents who take financial education classes and make recurring deposits.
Citibank has agreed to set up the accounts at no cost to the students or parents, said Robert Annibale, global director of Citi Community Development. City officials plan to have the accounts open and funded for families by Dec. 1.
"No one else in the country is doing this," Mayor Gavin Newsom said. "We are not just saying every child can go to college. We are now providing families with the financial tools necessary to make this a reality."
Officials acknowledge that the city's portion alone won't pay for a college education. But family deposits, other matches and compounding interest over about 12 years will go a long way toward tuition, they say, especially for the roughly half of all Latino and African American families in San Francisco that don't have savings accounts.
"We're going to work with the families so they can see that if they could do just $5 a month, or $10 ... that's going to result in literally thousands of dollars after 12 or 13 years," city Treasurer Jose Cisneros said.
City officials point to a study from the Center for Social Development at Washington University in St. Louis that found children who had just some savings set aside for college were about seven times more likely to go.
"We have to start somewhere," said Supervisor David Campos. "The fact that this isn't full tuition from the start doesn't mean this is not something we should do. You cannot overestimate what it means for a child to know that college is a possibility."
The program is the evolution of the Baby Savings Bond proposal that Newsom rolled out in his inauguration address in 2008 that would have covered all children born in the city. Newsom says he poached the idea from then-Sen. Hillary Rodham Clinton.
Great Britain has a similar program, but the local version stalled amid resistance to publicly subsidizing a college education for wealthy residents.
The current program, which Cisneros formulated with Newsom, covers only students enrolled in public schools. It is designed to be rolled out over three years.
This year, there is $257,000 in the city budget to set up the program and cover about one-fourth of incoming kindergartners. Schools in every supervisorial district, including those in low-income areas, were chosen for the initial year. The number of pupils would double next year, with the entire kindergarten class covered by the third year. The money will come from the city's general fund, and officials have not decided how to invest it.
$460 million deficit
But that expansion is dependent on future funding, and the city is already looking at a projected deficit next year of about $460 million. Supervisor Sean Elsbernd, a Newsom ally but also a fiscal hawk, fought to strip funding for the program from the current budget and vows to do so again.
"It's an absolutely wonderful idea if the San Francisco government could print money, but we can't," Elsbernd said. "It doesn't get to the core function of local government, and I don't think it should be a part of our budget."
Julissa Cruz, whose husband supports their family by working at a coffee shop, said the program would allow her two daughters to thrive in an increasingly globalized world.
"We're here in this country to become more educated," Cruz said. "That's what I want my daughters to have, what I didn't have."
Kindergarten to College
This year, $257,000 is budgeted to set up the program and cover about one-fourth of kindergartners. For now, 18 elementary schools are covered, with full coverage planned for 2012-13. How it works:
The accounts: The city gives kindergartners at public schools $50 to $100 in a trust account.
Other funding: Nonprofit organizations and other groups offer matching funds.
Spending rules: Money from the accounts can be used only for post-secondary education.
"Those were the days when credit card companies could take extraordinary steps to attract college customers," says Paul Golden of the National Endowment for Financial Education® (NEFE®). "They'd mail preapproved card offers with high credit limits to students who had little or no income. And they'd storm campuses with booths where reps would entice young borrowers to fill out applications in exchange for free T-shirts or other giveaways."
No more. Because of provisions in the Credit Card Accountability, Responsibility and Disclosure (CARD) Act enacted in February, 2010, credit card companies cannot:
- Issue credit cards to applicants younger than age 21 unless they can prove they have the financial means, such as a pay stub or bank statement with adequate funds, to pay the bills or, a parent or another adult over age 21 must co-sign the application.
- Increase credit limits on cards that have a co-signer unless the co-signer approves.
- Offer freebies while soliciting credit card applications on or near college campuses.
- Receive details about borrowers under age 21 from the credit reporting agencies.
So how many parents plan to co-sign for their college children to have a credit card? It seems the majority of parents won't. According to a recent online poll commissioned by the National Endowment for Financial Education and conducted by Harris Interactive in July 2010, 61 percent of parents who have a child age 18-20 years old said they would not co-sign for their children to have a credit card. Another 16 percent said they were not sure if they would co-sign for their children to have a credit card.
The credit card legislation makes it harder for college students to get credit cards, but it also offers a teachable moment for parents who want their young adults to learn to use credit wisely. Recent research funded by NEFE and conducted at the University of Arizona shows that parents have the greatest influence on building positive financial knowledge, attitudes and behaviors in their children.
"Even if you have less than perfect credit, it's important to communicate the basics of credit use and responsibility to your child—especially if you're co-signing and liable for his or her account," says Golden.
Covering Credit Basics
A Sallie Mae survey reported in 2009 that just 17 percent of college students pay their balance in full each month, and the average card balance for students rose to $3,173. "As a parent, it's my obligation to teach my son about responsible spending," said Crimmins, who reviewed basic lessons with her son before he could start using credit.
Does your child know how interest rates impact the ultimate price he or she pays for goods or services and how easy it is to fall into debt? Use one of your credit card statements to demonstrate how billing cycles and interest calculations work. And this just got easier because under the CARD Act, these calculations now must be shown on all monthly statements. Next, explain the importance of on-time payments and the negative impact on your child's credit score if payments are late. Discuss credit limits and what fees may be imposed on your child if he or she overspends. Be sure to mention that although it may seem like a compliment when a lender raises your child's credit limit, it also can increase the dangers of overspending and falling into debt.
Finally, discuss the kinds of purchases that are appropriate for credit cards. The NEFE-University of Arizona study found a 26 percent increase in students using one credit card to pay the balance on another during the economic crisis. To prevent your child from resorting to such behaviors, set up a plan to monitor your child's spending, and discuss how your student plans to pay off his or her purchases. And keep the conversation going once he or she starts using the card.
New Jersey resident James Gallo was unwilling to co-sign a credit card for his daughter, who is entering college this fall. Instead, Gallo opted to give his daughter a card linked to his own account so he could monitor her spending habits. "It's like learning to swim," Gallo explains. "First, they go in with a life jacket—a card linked to my account. Then, maybe some 'floaties'—a co-signed card. Then, they go in the water by themselves, knowing that I am by the pool ready to throw in a line when they screw up. Finally, after they swallow a little water, they come out with respect for the water but knowing they can swim alone."
Before You Co-Sign
If you decide to co-sign an application for your young adult, you are putting your own credit at risk. If your student falls behind on payments, your credit score could be affected and you will be responsible for the balance. Make sure your student understands that.
If you are wary of co-signing, there are options.
Prepaid card: To make a purchase, your child must have sufficient funds in the account attached to the card. Otherwise, the transaction won't go through and the card issuer won't extend credit. This should ensure that you and your child's credit scores will not be tarnished.
Bank-secured card: A bank can set up a secured credit card, with the card's credit limit generally equal to the amount of money in your child's savings account. If he or she fails to make the monthly payments, the bank taps the savings account for reimbursement.
"There are options for introducing your child to using credit responsibly," says Golden. "But it's up to parents to start the conversation."
For more tips on talking to your children about money, visit www.smartaboutmoney.org. NEFE is an independent nonprofit organization committed to educating Americans about personal finance and empowering them to make positive and sound decisions to reach financial goals. For more information, visit www.nefe.org.