Teenagers lack basic budgeting skills
A worrying number of teenagers plan to spend on credit once they hit 18 despite being unable to stick to a budget, a new study reveals.
The research suggests that today’s young people lack basic budgeting skills to help them manage their spending on a weekly basis and are unable to make regular financial decisions. Despite this, a worrying 44% of 15 to 17-year-olds plan to take out a credit card once they turn 18.
The study, by the AXA Financial Task Force, found that 70% of teenagers are unable to stick to a basic budget for a week. The study, which involved independent psychologists, economists and industry experts, challenged teenagers to control a household budget for a week.
However, the results show the teenagers overspent their budgets by 16%, with one child spending over double the allocated budget.
Francesca Atter, one 16-year-old who took part in the study and overshot her budget by over £100, says: "Managing the budget was more difficult than I had expected. I will probably live at home forever following this experience. I don't think I could cope if I left home now."
Despite being under strict instructions to budget the money effectively, the teenagers often decided to treat themselves to luxuries. Further research revealed that nearly half expect to use credit cards once they are adults, with many also anticipating using personal loans and overdrafts.
Professor Nick Chater, a member of the AXA Financial Task Force, says many teenagers have “spendthrift” financial habits and believe that spending on credit is the norm.
"These studies emphasise what a huge challenge budgeting can be when you're still relatively new to managing money and making regular financial decisions,” he adds. “Many teenagers are on the cusp of leaving home for university or to get a job and while some will naturally approach money with diligence, our study suggests that they simply may not be able to cope with budgeting effectively.”
The research highlights the level of financial ignorance among many children and young people, which leaves them unable to manage their money efficiently and make sensible financial decisions.
Moneywise believes that, in order for the next generation to avoid debt and make the most of their cash, there needs to be a greater emphasis on personal finance in schools. We are currently petitioning the government for personal finance to be introduced onto the National Curriculum as part of our Kids and Cash campaign.
From this September, economic wellbeing and financial capabilities will be taught in secondary schools as part of personal social and heath education (PSHE) and from 2010, personal finance will also be incorporated into GCSE maths lessons.
However, these subjects will not be compulsory and it is still unclear how schools will teach them and monitor students’ progress.
Steve Folkard, head of savings and pensions at AXA, says: "While we fully support the government's plans to introduce essential financial life skills as part of the maths GCSE, our experiment shows that the teaching of this subject should be based around practical lessons in budgeting rather than being based on theory and we will be recommending that this is a key part of the syllabus."
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.