In the winning essay of the 16-17 age group in our Young Financial Journalist competition, Eliza Stevenson-Hamilton looks at why financial resilience is important and how young people can improve their financial resilience.
Why is financial resilience important?
As a young person preparing to go out into the real world, the concept of managing my own finances seems daunting.
Particularly for young people now, living through Covid-19, we have learnt the effects of a recession not only in our textbooks, but also through watching our parents and siblings worry about losing their jobs or being able to pay the rent.
The term financial resilience is one I have come across before – teachers or parents pointing out the importance of having money to fall back on or being able to overcome unforeseen circumstances. Despite this, I have yet to come across an adult who has explained to me how I should go about becoming financially resilient.
Before I discuss that, however, I want to first talk about why I think financial resilience is so important.
Defined as the ability to cope financially when faced with a sudden fall in income or unavoidable rise in expenditure, financial resilience is a skill the importance of which has become obvious.
Take a sudden fall in income, for example. Unemployment in the UK has recently hit 5.1%, the highest in almost 5 years, and it is young people who have been hit hardest.
The impact of unemployment on young people
Sudden unemployment, paired with low average savings, has caused young people to be forced to move back with their parents.
This seemingly short-term arrangement can actually have long-term consequences. According to a research report in 2019 by the Urban Institute, those who lived with their parents between the ages of 25-35 were significantly less likely to be homeowners 10 years later.
I would argue that a contributing factor towards this outcome is that, by moving into their parent’s house, young people maintain what Metro referred to as their “financial virginity”. They miss out on learning first-hand important life skills such as managing household bills, food budgets and rent.
While we have seen clearly in recent times the importance of financial resilience to cope with unexpected falls in income, I also find myself considering the other part of the definition of financial resilience- to overcome unavoidable rises in expenditure.
Reading stories about sky-rocketing house prices and enormous student debt, I can see why the marginal propensity to consume is so high in under 30s.
The reason I find this so interesting is that it depicts how hard financial resilience is becoming.
How can young people support themselves financially?
In such uncertain times, what is the best way to allow students and young people to go out into the world without having to fall back on their parents? In my opinion, the secret lies with investment.
It is through safe investments, like in mutual funds or REITs, that young people can take hold of their finances. This is why I think we need more education about investment aimed at young people.
It might be easy to shrug this off, saying that young people don’t want to learn how to invest their money, or they wouldn’t be able to compete with the more experienced investors.
This is simply untrue. I conducted a survey of students aged 11-17 at my school and found that 91% of respondents said that they planned on or wanted to invest their money in the future, and 88% said that they would like to learn how. This eagerness to invest can be seen in the real world too.
Take the GameStop story that was so prevalent in the news only a few weeks ago. We can see that young people are looking for opportunities to invest and will seize the chances they can find. We are not lazy or unmotivated, we just have not been taught how.
Investment also needs young people. Our risk-loving nature allows young people to make decisions that more risk averse investors may not take.
Further to this, we have time on our side. By starting to invest young, people have the opportunity to make mistakes early on, allowing a development of the resilience necessary to succeed at investment, as well as the time to let compound interest build returns.
So, how can young people improve their financial resilience? Predictably, my answer is education. It seems crazy that we are expected to go out into the world and show financial resilience, without being given the knowledge of how.
By introducing investment to young people, teachers could pave the way for their students to become both financially independent and equipped with the resources to overcome all of the unexpected problems we are sure to face in our future.
Find out more about our Young Financial Journalist competition