Personal finance: where is education for Gen-Z?
Illustration Credit: Phoebe Bradbury

Personal finance is a dreaded topic for Americans. Most of this dread comes from the fact that the current economic outlook is extremely negative. With the student loan crisis reaching new heights of $1.5 trillion dollars in 2019, the COVID-19 pandemic resulting in over 40 million jobs lost (roughly 12% of America’s total population) in May 2020, and the federal minimum wage of $7.25 per hour being unsustainably low, it is safe to say that the current situation seems extremely grim for young people. 

The established wisdom is that the elderly are usually the worst off. Some retired people receive only $17,000 per year in retirement income. That mere $17,000 is responsible for a person’s rent, groceries, gasoline for their car, a mortgage, and all their other living expenses, including healthcare. To say that this is unsustainable in the long term would be an understatement. 

But it is not just those on retirement incomes who are struggling for basics. Someone working 40-hour weeks for minimum wage should be paid enough to cover all of their basic expenses and have an emergency savings fund of at least three to six months. They should therefore retain their ability to pay rent, or avoid the threat of eviction in the midst of a crisis, personal or otherwise. However, the minimum wage in America only comes out to $15,080 in one year. This excludes the fact that people who earn such a wage may work second jobs to help boost the expenses, but those extra jobs may now also be in danger and put people at further risk of eviction.  With student debt rising and the current crisis torpedoing the economy, it calls into question how exactly young people are expected to be financially healthy, without education on personal finance.

Many jobs that exist before will not come back…

Even ignoring the immediate problems looming over the American economy in the wake of over 130,000 deaths from COVID-19, the dent in the workforce will permanently alter the economy. Many jobs that existed before may not come back, resulting in stunted wages for future high school and college graduates looking for jobs. Many companies are going bankrupt, such as JCPenny’s and Chuck E. Cheese, making future job losses imminent unless someone buys those companies out.

The country has not updated the taxation process to make life easier for those who earn less money, exacerbating problems faced by those on lower incomes. There are credits designated to people who earn little, but those limits are so low that even the hypothetical example of the single person working federal minimum wage would be disqualified (with the maximum being $15,570 for a single person trying to claim the Earned Income Credit for low-income persons without children in 2019, as shown in figure 1).

Figure 1: income allowances for the Earned Income Credit that helps provide tax relief for low-income persons. Source: official IRS documentation 4012.

The United States tax industry is reliant on people paying corporations to file taxes out of concern that taxes are too hard or too time-consuming, taking financial knowledge and personal responsibility right out of an individual’s hands. Accountants can earn up to $457 per client depending on the type of return they file, and tax software companies also earn significant profits from people buying their software to file on their own.

Earning money, taxation, and emergency funds are essential aspects of the lives of all Americans who work. However, many of these issues simply are not discussed enough in the public sphere, especially regarding personal finance. The repercussions of that are becoming clearer as time goes on, especially for Gen-Z. Financial literacy, despite its importance, is an issue that has not been adopted by many universities or even high schools despite growing demand for this information to secure financial freedom and retirement. So, what is the financial literacy that is so widely coveted? 

Personal finance videos and books are not as elusive as they once were

The simplest definition is that it is education regarding various sectors of money, including budgeting and investing. Personal finance videos and books are not as elusive as they once were; they are everywhere. The authors claim that they have unlocked the secret to financial freedom, which is typically the ultimate goal for those who wish to learn more about finance. Having no debts, no obligations, and the freedom to spend as one pleases are among the captivating images that financial freedom produces. 

However, there is a substantial difference between becoming financially free if one has money versus becoming free if one does not. Financial literacy can have a similar effect. This problem is what plagues Generation Z students living in the United States in particular, especially since the job market is extremely weak at the moment.

Those who try to look online for financial literacy classes are greeted with clickbait titles for videos that wind up being unhelpful. Sometimes these “gurus” even shame their consumers into thinking that all of their problems are caused by buying coffee from Starbucks and simply not making 20-cent iced coffee at home. For those who are looking for objective advice, this may be hard to stomach. It also tends to ignore the fact that the people looking for financial help more than likely do not have the money to pay for basically any of the recommendations, such as investing in the stock market or contributing to 401K retirement accounts.

One fundamental rule of general financial health comes from the first rule of accounting: one’s equity is equivalent to assets minus liabilities. Equity is the value that determines what a person is financially worth. Assets are positive amounts of money or objects worth financial value within a person’s possession, and liabilities are what that person owes others. If a person takes out loans, they have to pay them back, which results in even more debt, and this can turn into an endless cycle of chasing liberty that may never come to fruition. But many young people lack even this basic knowledge.

While it is common enough knowledge that you should avoid debt, the consequences are not discussed enough.

As for this debt, sometimes it is a long-term loan that requires repayment over the course of several years, such as student loans. Other times, it has high interest rates and can build up very quickly, like credit card debt. While neither of these are good, both also require a lot of money to pay off in the short and long term. For many young people, this debt can hugely impact later opportunities. Being stuck with that has a huge impact on financial health, especially since late payments on credit cards (which often is what causes credit card debt in the first place) which is likely to reduce their credit score. While it is common enough knowledge that you should avoid debt, the consequences are not discussed enough.

Ironically, the worst form of debt comes in taxation debt. For those who owe over a certain amount of money to the Internal Revenue Service (IRS), they are also charged a penalty fee. The reason for owing or getting a refund in the first place is a handy form that employees are required to fill out at the beginning of their job called the W-4. Filling this out lets employers know how much to withhold from an employee’s paycheck to give to the federal government each year. If that tax withholding is too high, the employee gets it back during tax season, between January and April of the next year. If it is too low, they wind up owing money to the IRS and could potentially also be hit with the penalty payment.

Sudden changes to this system in the 2018 tax year resulted in more people owing the IRS money. There was no information spread to the general public in easy to understand terminology to explain how withholding practices would change despite the administration of President Donald Trump saying these tax breaks would be extremely beneficial and obvious. 

Filing taxes helps people see how much they pay in student loan interest…

Despite the negatives, filing your own taxes can be extremely beneficial, but many young people are unaware of how useful it can be. Filing taxes helps people see how much they pay in student loan interest at their current payment installments. They are essential in understanding your financial situation, and even popular personal finance advisors such as Ramit Sethi emphasize that the first step to financial freedom is actually knowing when all of your debts will be paid off. Of course, this is easier said than done.

According to the US Treasury, nine out of ten people failed exams documenting how to pay back student loans in 2018. They also implored universities to consider making financial literacy mandatory for all students in undergraduate institutions as of June 2019. This is a perfectly sound method of combating decreasing financial literacy. However, there is one problem.

What about the young people who do not go to college, or the ones who drop out before taking a financial literacy course? While they would not have the same student loan issues, they still need to be financially literate. Personal finance books exist, but they cost money that many people are unable to spend on books when they have to decide between groceries and rent that month. Ultimately, there is no good solution to these questions. With all of that taken into consideration, how can young people find advice that caters to them?

people need tangible advice that can actually be implemented

First, people need tangible advice that can actually be implemented. For most, that primary action is to look at their bank account and see what is actually there. Calculate assets and subtract debts from them to see what the situation is. Then factor in monthly spending to see what is essential and what is not. While it is an uncomfortable step for most people to analyze the flaws in their budget, it is necessary to understand spending habits and begin to fix things.

In addition, it is incredibly useful to read through documentation on the official IRS website about taxation and tax breaks. If possible, filing your own taxes is the easiest and most beneficial way to understand your situation. Taxes are an incredibly useful tool for seeing how much money per year goes into one’s paycheck, and how much is used for business expenses. While it will not give people a month-by-month overview of finances like budgeting will, the ability to have a year’s overview at hand is invaluable to teach someone how their money is being spent. 

While money cannot buy a person total happiness, financial freedom and literacy can make life less stressful, and allow people to enjoy hobbies they might otherwise not be able to afford. Kanye West put the struggle of not having money quite eloquently: “Having money isn’t everything. Not having it is.” The goal in financial freedom is not to be able to take a trip to Turks and Caicos out of nowhere and be covered by retirement funds, although those are nice perks. For most young people the ultimate goal is to be able to remove the stress of what could not be afforded before and to give a person some room to breathe. In order to achieve this, however, they need better financial knowledge.

Oh, and for the record, drinking Starbucks once in a while will not make anyone a poor person. If someone wants a hot coffee or an iced mocha, they should be able to treat themselves every so often. While you should be smart with money,  and ensure that you are not putting yourself in credit card debt over said cup, you should not deprive yourself of caffeinated joy.