Last Updated Dec 10, 2010 9:37 AM EST
Part one in a series:
Smart money decisions that will lead to your kids' long-term savings success are rooted in five areas of understanding. With a little multi-media help (which I'll get to), most young adults should have no trouble grasping the basics of:
- Compound interest
- Employer match in a 401(k) or other defined contribution plan
- Tax treatment of retirement accounts
According to authors Aileen Heinberg, Angela Hung, Arie Kapteyn, Annamaria Lusardi and Joanne Yoong, the chief failures of adults who test poorly in money matters come in these five areas. Only half of adults past age 50 can answer a simple question about interest rates and another about inflation; the success rate falls to a third when a question about diversification is added, according to the paper.
Financial knowledge is particularly low among young adults, aged 23 to 28, which is a period when long-term saving should begin. According to the paper, those who display little knowledge of these basics are more likely to end up in a costly mortgage and less likely to refinance their mortgage when interest rates drop; they are less likely to plan for retirement, and less likely to participate in the stock market and to choose mutual funds with lower fees -- behaviors that can set back wealth at retirement.
So there is a lot at stake. The good news is that these five concepts can be learned fairly quickly, the authors found. My next five posts will explore each (one at a time) with a video and a written narrative to help explain the concepts in simple, understandable terms. Both of these learning methods were found to effectively deliver the message to young people.
There is evidence to suggest that the narratives promote greater knowledge retention while the videos promote more immediate action and behavior change. So why not take a look at both? They are short and painless, and may be as useful for folks in their 30s, 40s and 50s as they are for teens and tweens. I'm going to ask my 21-year-old daughter to take a look, that's for sure.
Photo courtesy Flickr user rmgimages
Video and narratives to share with kids:
- How Compound Interest Boosts Savings
- How Diversification Decreases Risk
- How An Employer Match Boosts Savings
- How Inflation Diminishes Savings
- How Tax-Advantaged Accounts Build Assets