In a previous post What makes an adult I have explained that today, some basic financial literacy is necessary in order to function as an adult in a typical western capitalist society.
Because in our economy driven society, knowing about money is so important, I have come up with a list of key skills/know-how this basic financial literacy entails. Some of the points are developed further in the notes under the list.
To be a financially savvy adult in today’s world, you need to :
- know what things cost (1) – this of course does not mean knowing exactly the price of every single item on the supermarket shelves, but to be able to tell if something is expensive or cheap and know how much would a weekly shopping cost you. Not to end up like François Copé, a would be candidate for a french presidency, who was recently unable to realistically give a price of a chocolate bun “pain au chocolat” – otherwise a staple of the french breakfast… for him, the result was just ridicule – for any of us, not knowing how much things cost makes us unable to estimate the income/budget we need to live…
- know how to earn money (2) – meaning : being able to do something that has real economic/monetary value (that people will be willing to pay you for – hopefully not involving the sale or rent of any of your body parts) – or at least having had that experience in the past during a summer job for example;
- know how to manage your money (3) – have a savings account, a financial reserve or at least knowing that they exist and how they work;
- be able to understand a contract (4) and legal consequences of not respecting it;
- know what to do when your card gets stolen/lost/damaged/swallowed by the ATM (and I don’t mean – call mom and dad);
- understand how bills work – why do you have to pay them, when and what to do if you forget and get a threatening letter… this way you will not panic and end up in tears like I did when I first lived alone and got a scary looking letter because I forgot to pay my electricity bill in the middle of winter (situation that deflated rapidly, when I just paid it late and no more threatening letters came);
- taxes – basic knowledge (such as: “do I have to pay any, and if yes, how much/when/to whom?”);
- have at least some understanding how credit works – including credit cards or consumer credit… in today’s society this knowledge is so lacking, that advertisements for loaning institutions have to expressly state that “borrowing money also costs money”;
- have a basic understanding of how insurance works – oh yes, just as an example, I heard this conversation recently – most life insurance does not pay out in case of suicide and it is useless to insure the same apartment twice because two people live in it. And yes, the information you give the insurance needs to be correct (like, the address) for the insurance to be valid. Apparently, most people have too many insurance policies, and often pay for the same thing twice or even more times… It pays to read the contracts. Also, insurance does not cover all cases of damage – so for example some things that can happen to your car may not be covered by the insurance – it pays to read the fine print.
- and finally, for those who move around like I do, know that there are more and more rules about moving your money around – do you know that there is now a limit in most of the EU that prevents you from making larger transactions in cash (a measure linked to the fight against money laundering) and that you are not allowed to cross borders of an EU member state with more that 10000€ in cash on you? Also, if you deposit a larger amount of cash in your account, the bank is now obliged to report it and you may/should be asked about its origin.
(1) Knowing what things cost is what some people call making a basic budget. That is: know in broad terms how much the minimum salary is or how much the main breadwinner at home earns, how much do you spend on shopping per week, how much is the rent in the flat you live in (or the one you like), how much is the electricity or water bill every month (and how can you save money be switching off the lights and not wasting water). Other “life necessities” have also cost, sometimes surprisingly high. Does your teenager know who much you pay for wi-fi, your annual holiday at the beach and the new iPhone he/she wants so much? By the way, along with the driving, it may be a good idea to brush up on speeding tickets and car insurance fees. This tends to come more easily to kids from poorer families – I wonder why?
(2) Earning money – some parents will say – but they are kids at 18! – yes, but at 18 they are also adults and even if they study to become doctors (so unlikely to being in a real wage before the age of 29 if they’re lucky), it is important for people to know that there is something that they can do (if all else fails) to earn money. It not only drives home the value of money, but also works as a great confidence boost, even if the job was just waitressing over the summer in a local restaurant…
(3) Manage one’s money – knowing how to “save up” for something you want – it is called pleasure delaying and is a basic self control skill taught to children. Actually, banks have easy and clever tools to make it easier for you to save – for example a “skimming off” rule – transferring to your savings account every month anything that is left over € XXX. It’s automatic. And it can add up to quite a round sum after a few months, with no conscious effort and no pain. Or the 10% rule, that was taught to me by my ex – who also happened to be an accountant – save AT LEAST 10% of everything you earn (even if it is only 10€ from grandma). 10% is little enough not to make a real difference on your amount (90€ is almost as good as 100€) but overtime the savings will build up.
(4) Understand a contract – at 18, you have the legal capacity to enter into contracts – including marriage. Unfortunately, it is my impression that not many people realise what constitutes a contract and the responsibilities that flow from it. As for me, at 35 and having started in a new job, I am for the first time in my life managing contracting procedures and am a bit overwhelmed at times at the complexity and the number of issues that have to be defined, covered, checked and double-checked in a contract. It is true, that I am dealing with public procurement and very high amounts, and in daily life most contracts are much simpler. You know that buying ice-cream is a verbal contract to exchange goods for money? Did you know for example, that under most legal systems, a contract, although agreed between two people, but being incompatible with the laws of the country is null and void ? This means for example, that in Germany, if two people make a contract saying that one can eat the other when he dies, this is still illegal and therefore the contract is null (does not apply). (And I know this because this case really happened a few years ago and it was in all the papers, not because I have attempted to conclude such a contract.) Another thing to understand about contracts is that they can be breached or terminated – but that there is often a penalty for the one party that does it… unless otherwise stipulated. Hopefully, an adult should have some idea about what a contract means before signing his/hers first (job) contract. So, have you read the Netflix terms and conditions before signing up?