The level of youth indebtedness is reaching alarming levels. Every day more young people are trapped in consumer debt that they cannot pay.
According to an Injuv survey, more than half of Chilean youth between 15 and 29 years old have debts. 57% of them are behind on payments. We are talking about the generation that will lead our nation in a few more years. They are educated, studious, and financially ignorant. What can we do about it?
Did you know that more than half of young people between 15 and 29 years have debts?
It is an alarming news that came out in one of the main newspapers in Chile a few days ago:
The results of the Sixth National Youth Survey - Injuv 2009, reveal a high level of indebtedness in this age group.
The survey conducted by Injuv (National Youth Institute) also reveals that the highest level of indebtedness is held by women, youth from middle socioeconomic sectors, urban sectors, and young people with technical educational level.
In addition, almost 60% of young people with debts are behind in payments; and of them, more than 30% owes in commercial houses. (El Mercurio, Santiago de Chile, September 2, 2010).
Next, the article recounts the situation of a 23-year-old student, who received a credit card from a well-known multi-store just by presenting his student certificate. In a short time he was so indebted that he could no longer pay the minimum monthly payment. When he went to the store to solve his problem, it referred him to a collection house, which collected the debt, the commission and a lot of interest.
This account is only a small sample of an alarming reality. Beyond questioning the ethics of business houses and financial institutions, which seem to have found a promising target in the younger segments of the population, I would like to go straight to the root of the problem: the lack of financial education among young people today.
The fact that more than 50% of young people are in debt tells me that something went wrong with their education. It is not enough to fill the heads of our young people with knowledge that will give them the possibility of generating an income as adults, it is also necessary to teach them what to do with that money once it is in their hands.
There are different options:
Option A: Spending money seems to be, for many, the primary option.
Option B: Once the money is spent, the next step is to get into debt.
Most people, both young and old, manage their finances according to these two options: spend and borrow.
Why would a young person, who is just beginning his adult life, want to put the tremendous burden of debt on himself?
That debt is going to delay your chances of succeeding tremendously. Not only for the interest you will have to pay, but rather for the interest you will stop earning for not having your money wisely invested.
Here is option C: That of harnessing the tremendous power of compound interest, even with a minimum amount of own money.
Most young people don't even know this option. Compound interest, one of the best inventions of man according to A. Einstein, is a concept totally unknown to them.
They ignore, due to their lack of financial education, that they can accumulate a considerable sum of money through the power of compound interest. A young person has a great advantage over older people: their age. Their youth provides them with many years of life during which compound interest can work for them.
What exactly is compound interest?
According to Wikipedia:
Compound interest represents the cost of money, profit or utility of an initial capital (PV) or principal at an interest rate (i) during a period (t), in which the interest obtained at the end of each period of Investments are not withdrawn but rather reinvested or added to the initial capital, that is, they are capitalized.
In other words, compound interest allows money to multiply and have children, grandchildren, great-grandchildren, etc.
In practice it works like this:
In the hypothetical case that a young person has a debt for which he has to pay US $ 200 per month, if he took that same money and invested it 12% in a mutual fund, in 25 years he would have more than a million dollars.
US $ 200 per month is US $ 50 per week. It is not a tremendous sum of money for a determined young person who makes the decision to earn some extra money in her spare time. I personally know several young students who generate income as DJs (disk jockeys), selling snacks, working as waiters, doing assistantships, etc.
It is not impossible to achieve. Support and instruction may come from home. Parents could set a goal for their children to leave home with an investment portfolio under their arms.
Compound interest is widely applied in the financial system. In all the credits that the banks make, regardless of their modality, compound interest is used. Why do we keep our youth ignorant of a system that could be of tremendous help to their age, instead of exploiting and financially drowning them?
According to El Mercurio:
The economist and academic from the University of Santiago de Chile (Usach) Francisco Castañeda raises the need for "minimal regulation" in this area, because they are drowning financially without having any income. "It cannot be that they are getting into debt when they still do not have income, there is a market failure there," he said. (El Mercurio, Santiago de Chile, September 2, 2010).
I would like to add that, apart from regulating the market in the financial field, it would be very useful to prepare our children for the future with a solid financial education that will protect them from making unwise financial decisions.
