Roshawn Watson recently wrote a very interesting post on why young people are avoiding investing their money in record numbers. He outlines three main reasons: fear, ignorance, and inexperience. As a (still) young person, myself, I can relate to all three of these reasons. In my own experience, ignorance has been the predominant reason why I haven’t invested my own money in the past. I can walk you through some of the silly (and stupid) things I used to believe, as well as point out the dire state of our educational system.
School doesn’t teach our kids the tools they need to succeed in life.
I remember this sort of thing being said as far back as when I was in elementary school. “Sure, knowing about the settlers is great, but why don’t kids learn about paying a bill, and late fees?” Maybe the people saying that had a point. Now, I had a crappier education than others due to a turbulent childhood and getting bumped between schools in the middle of a grade, but I had friends that had much better backgrounds and stable lives, and many of them didn’t know much more about money than I did.
Throughout my elementary and high school “career”, I did remember learning a lot of things that were useful to me later on in life: How to write proper English, how to write an essay, how to do math, solve algebraic problems, and things like that. Some classes were interesting, like science and history, and some classes were useful in enhancing our coordination, like gym (even if I wasn’t athletic at all). However, can a kid really succeed in life just knowing how to graph “y = sqrt(x)” or learning about the colonization of North America?
At least in my time, I never learned a thing about credit card interest, about inflation, the stock markets, bonds, debt, mortgages, etc… nothing. I dissected a frog and a lamb heart, but I never dissected simple household finances. I think that some schools have started including some basic material in their cirriculum, but is it enough to teach children the importance of saving away a portion of their income? Do they teach kids about the power of compounding interest, especially if they are on the receiving end of it via credit card debt?
Educational costs have been spiralling upwards, in the name of the children, but this money has gone everywhere except toward actually improving the quality of their education. I know that there are a lot of great teachers out there, even if there are bad ones as well, but the problem is the same as it is in some countries around the world: Changing the figurehead of some government isn’t enough. You need to change the system.
Investing is made out to be more complicated than it has to be.
For a young person who doesn’t know much about finance, the jargon and terminology can be overwhelming. “What the heck is an option? Derivatives? Futures contracts? Sounds boring and complicated; I’ll just see a financial advisor.”
I remember when I was in college in my early 20s, and a fellow classmate was talking to me about “buying a RRSP”. I had no idea what that meant. Did you have to go to a government office to get one? Was it a special type of mutual fund? My classmate didn’t know much more than me at the time; our ignorance was appalling! I now know that a RRSP is just a special type of tax-sheltered account, and you can put any eligible investment into it. For example, you could have a guaranteed certificate of deposit, and have that in a regular account or in a RRSP. Same investment, but the tax treatment is different.
This whole bother with RRSPs and TFSAs is just one way that our finances are made out to be more complicated than they really are, and then we feel obligated to go see a financial advisor in order to take care of it. However, seeing a financial advisor without knowing anything about finance is like swimming with sharks. The advisor working for the bank has an interest in maximizing the bank’s returns and in maximizing his own bonus and salary, not your investment returns. He will use your fear to steer you toward investments that are profitable for him, but are expensive for you.
Knowledge is power
I am a lot less ignorant these days when it comes to investing, or at least I hope I am. 🙂 I’ve made my share of stupid mistakes, such as leasing two new cars while a student. I think that to a certain extent, everyone has to learn from their own experience and their own mistakes.
At the same time, isn’t it a shame that you had a bunch of 20 somethings in college, and they didn’t know a thing about investing toward their own future? Isn’t it unfair that banks are charging such high fees to retail investors, when the evidence points shows that they would do better by using index funds? In Canada, the average mutual fund is taking 2.5% off the top. If John invests $10,000 a year, and the markets return 7%, then John should end up with about $678,000 after 25 years. If he is also paying 2.5% a year in fees, he will only end up with about $462,000. Where did the other $216,000 go? To the bank.
Roshawn is doing a great job in doing his part to spread real education, and I am optimistic for the future because young people are increasingly turning to other sources to get their information, such as online blogs. A good friend of mine jokingly calls me a “index hugger”, but even he recognizes the valuable role that index investing plays in saving individual investors hundreds of thousands of dollars in fees.
Dear reader, how can we help the young better understand the role of finances, and investing? What role can parents play here? Is it a good idea for parents to keep their kids isolated from the household finances, or can getting involved be a valuable lesson for them?