Record numbers of mortgage foreclosures and a dimming employment situation nationally have shone a light on family financial struggles. Often, it is the loss of a job or other hardship that causes a sudden financial upheaval. For others, the financial struggle is constant.

Individuals and families at any income level can have financial problems, and they are often caused, or exacerbated, by poor money management skills. Every independent adult needs money management skills, also known as financial literacy, particularly those who manage a family budget. But these skills are not taught in most schools, and parents and caregivers differ in how they teach them their children, if at all. Many of us learn to manage money for the first time as young adults, and some learn it the hard way – through costly mistakes and damage to credit history.

"A big problem is living within your means," said Debra Pankow, family economics specialist at North Dakota State University Extension. Pankow has written numerous financial planning curricula for consumers and for educators. "It's socially acceptable to live beyond your means and it's very difficult for families to have self control." She added that this is most common among the post-baby boom generation, those who are two generations removed from the Great Depression. Depression-era parents taught their children to be frugal, but that attitude has not been passed on to the succeeding generation, today's heads of households. They borrow more and save less than previous generations did, and they are modeling these behaviors for their own children. Today’s students may or may not learn money management skills in school, because there is disagreement about where money management belongs in the curriculum, if at all.

Some states mandate the money management teaching in public schools – it can appear in math or economics classes, and sometimes as part of family consumer sciences – and in 2007 President George Bush commissioned a White House Advisory Council on Financial Literacy that acts through programs such as Jump Start. But children and youth usually take on the habits and values of their parents or caregivers, regardless of formal training.

Needed skills

Pankow enumerated a list of a few basic money-management skills all adults should have, starting with awareness. "You need to understand your own values and attitudes about money. If you’re having problems or conflicts about money in your family, that's where the problem might lie," Pankow said. For example, a husband might feel comfortable with making payments toward a new refrigerator, while his wife might rather save for a few months before replacing the old one.

Number two: Set financial goals. Write them down and refer to them. Pankow said studies have shown that families that had written goals saved twice as much as families who don't.

Number three: Set a spending plan, also known as a budget. "A budget is not a girdle, it's very freeing. It helps you make decisions, so that you're spending on the things you really want, not spending a little bit on everything," Pankow said.

For low-income families, additional skills may be needed. Ironically, a group of researchers at the University of Illinois at Urbana-Campaign has published several articles indicating that low-income earners tend to have lower levels of financial literacy than the rest of the population. There are many financial advisors offering their services to middle- and high-income earners. But conventional financial advisors tend not to market their services to lower income earners. Instead, people in this group are often the target market of predatory lenders whose goal is not to educate their customers, but to encourage repeat business.

As many as nine percent of Americans have no savings or checking accounts, according to 2004 data. Studies since then show that the most common reason for being "unbanked" is that having a bank account costs too much or is too risky. "Low cost" checking accounts can require high minimum balances and have heavy penalties for overdrafts, a risk some cannot afford. For these people, it is sensible to cash their paychecks at banks or retailers, and use money orders when they want to send money. But without a bank account it is nearly impossible to build up credit, which is needed to buy property or start a business, effectively tying them to their low wages as their only resource.

Although they do not have a credit history, many of the unbanked do have debt. Payday lenders offer short-term loans, which carry much higher interest than conventional longer-term loans. For example, a 7-14 day cash advance of $500 cost $93.10 from one online payday lender – nearly one-fifth of the amount lent, and the equivalent of an annual percentage rate of 484 percent.  Many get into a cycle of constantly borrowing against their next paychecks, paying much more than they can afford to service their constant debt. Some states regulate the amount that payday lenders can charge, and the Center for Responsible Lending of Durham, North Carolina, asserts that "Only enforcement of a comprehensive interest rate cap at or around 36% for small loans has solved the debt trap problem" in the states where the laws

Another source of debt is "tax refund anticipation loans" offered by income tax return preparers marketing their services to low-income clientele, then offering high-interest rate loans in the amount of their expected refunds. Once again, the lending period is short but the annual percentage rate (APR) is high. Then there are the rent-to-own furniture stores, with low weekly or monthly payments that turn out to be much more expensive than conventional financing.

The team at University of Illinois at Urbana-Champaign, Steven G. Anderson, Min Zhan and Jeff Scott, have found that financial management training programs do help low-income participants, encouraging them to open bank accounts and increasing awareness of the cost of credit. Employers can also be valuable advisors, particularly when it comes to retirement savings.

Training Wheels

"A lot of parents don't feel confident teaching financial literacy to their children," Pankow said. "People ask me 'When should I start teaching money management to my kids?' I tell them 'You already are.'" Just as children absorb their parents speech patterns and eating habits, they learn about money management by watching and listening, during trips to the grocery store and conversations at home. They may also be learning about money at school or at work, if they have a job. The worst teacher, Pankow said, is the media, which unfortunately is omnipresent and aimed at selling goods, not encouraging savings.

She advises that teenagers are old enough to understand abstract concepts, and that parents may consider issuing an allowance and getting credit cards and opening checking accounts for high schoolers, to be used while parents can still supervise the process. "The problem is that students often think all income is discretionary," Pankow said, not realizing the budget must also include necessities and savings. "But they can learn it," she said, adding that she knows that allowances are a touchy issue for many families. "It goes back to your values," she said.

Teenagers can learn about investing – passbooks and CDs, the return on them. "When kids get invested, they can see money as a tool to get what they want," Pankow said. This "training wheels" approach could help avoid the problems that sometimes arise in college. During the college years, young people begin to pay for their own necessities, many of them get credit cards, and most take on student loans totaling tens of thousands of dollars. Repayment of these loans will begin during the graduate's first job, which may not pay enough to cover the student loan payments, starting the vicious cycle of monthly debt payments that many continue throughout their lives.

You may wish to consult:

Danes, Sharon M. & Haberman, Heather R. (2007) Teen Financial Knowledge, Self-Efficacy and Behavior: A Gendered View, Financial Counseling and Planning, Vol. 18, Issue 2.

Lyons, Angela C & Scherpf, Erik (2006) Moving from Unbanked to Banked: Evidence From the Money Smart Program, Financial Services Review 13, 215-231.

Zhan, M; Anderson, Steven G. & Scott, Jeff (2006) Financial Knowledge of the Low-income Population: Effects of a Financial Education Program, Journal of Sociology and Social Welfare, Volume XXXIII, Number 1.