Four Strategies to Help Instill Good Financial Habits for the Next Generation

Still, there is work to be done. Generation Z (individuals born between 1997 and 2012) are negatively impacted by a lack of financial education. According to WalletHub, 7 in 10 college students feel overwhelmed by their financial responsibilities.¹ Furthermore, less than 20% of Gen Z and Gen Xers say they can manage their debt. This statistic is made worse by the fact that Gen Z as an age group has been disproportionately impacted by lingering inflation.

By learning key financial strategies like budgeting, saving, investing, and managing credit wisely, young adults can take steps to avoid common pitfalls and set themselves up for financial freedom. So, during this Financial Literacy Month, we felt it important to share a few strategies to help instill good financial habits in the next generation.

1. Teach budgeting basics

Introduce younger family members to simple budgeting frameworks. For example, there is a 50/30/20 rule that splits your monthly income among three main categories: needs (50%), wants (30%) and savings/investments (20%). You can encourage them to track their income and expenses using budgeting apps like NerdWallet or in spreadsheets to develop mindful spending habits. Of course, these frameworks become less valuable over time as situational complexity increases, but they are nonetheless helpful starting points for those just starting out on their personal financial journeys.

2. Encourage saving and investing early

Even though they may not have large assets or income yet, young people do have a powerful advantage - time. Starting to invest at a young age offers several advantages, primarily leveraging the power of compounding to grow wealth over a longer period.

Emphasis should be placed on the importance of paying themselves first by setting aside a portion of their income for savings. Explain how compound interest works and introduce basic investment strategies such as index funds and dividend-paying stocks, as well as different account types such as Roth IRAs and company retirement plans to show how small contributions can grow significantly over time.

3. Explain credit and debt management

According to a TransUnion study, Gen Z is tapping into credit at higher levels than older generations.² It’s easy for young people starting out to fall into the trap of overusing their credit cards or taking out personal loans to fulfil their lifestyle goals, or simply to keep up with the rapid rate of higher education inflation. Older family members can help educate those impacted by burdensome debt on the importance of credit scores, the impact of debt and the dangers of credit card mismanagement. Some important lessons to be learned are how to use credit responsibly, pay off balances on time and avoid high-interest debt.

4. Have an open discussion about your estate plan

As children grow older, it becomes easier for parents to provide more specifics about their own estate planning. Although these conversations can be challenging to initiate due to the nature of the subject matter, talking through your estate plan gives your children a chance to know important information such as who you’ve chosen as estate executor or administrator and who has power of attorney for financial and health care decisions. If your children will be executors, it’s even more important to discuss plan details with them. This knowledge will be key to their making informed financial choices when the time comes.

Conclusion

By implementing these strategies, young people can develop strong financial literacy skills that will serve them throughout their lives. Young people who are financially literate are more likely to feel confident about their ability to plan for long-term goals and to limit financial risk. If you have any questions about how to approach the next generation in your family about financial literacy, please feel free to reach out.

Thanks for reading.

¹ WalletHub financial literacy statistics https://wallethub.com/edu/b/financial-literacy-statistics/25534#:~:text=Gen%20Z%20is%20the%20least,stocks%20is%20a%20better%20option
² TransUnion https://newsroom.transunion.com/gen-z-using-credit-differently/