When I was in high school I learned about math, English, the sciences and more than enough about being awkward around girls, but one thing I didn’t learn about from school was how to deal with my finances. It’s truly shocking how little education our teenagers receive about basic financial concepts like budgeting, savings, investing, and debt. When these teenagers graduate from high school and go off to college or start working they’re totally unprepared to navigate the financial landscape of adulthood. Luckily for me, my parents taught me early about money and how to manage a personal budget and I brought these lessons with me as I went to college and started at my first jobs. Since I bet your local high school is still failing to teach your teenagers about money, here are my top 7 things that every teenager should learn about money.
1. Making Money Is Hard!
Growing up I took for granted my allowance and being able to ask my parents for a new video game or some money to go to the movies. It wasn’t until I took my first job working at a local deli for minimum wage that it dawned on me that making money is way harder than I had imagined. The concept that money is valuable because you have to work hard for it was a revelation to me and I quickly learned to spend less on frivolous items. If your teenagers don’t have a job, you might want to encourage them to take some part time work or to work over the summers. If they earn a paycheck, teach them to live within that paycheck and when the money is gone, it’s gone. Learning that money is a finite resource at this stage will set your teen up with a basic foundation for the rest of the skills I’ll discuss below.
2. Set A Budget and Update Frequently
Now that your teen has been given the responsibility of living within their earnings from their job or their allowance from you, teach them about how to set a budget and stick to it. Sit down with them and discuss what they typically spend their money on each month. They may be surprised to see how much they spend on clothes or food. Once they know where their money is going you can help them set goals for their budget. The lesson here is that it’s okay to spend money on things you like, but to know when you can’t afford something and to walk away instead of splurging with money you don’t have. Help them update their budget periodically, maybe every 2-3 months, so that they can see how their spending habits are changing and adjust the way they save and spend their money. This habit is incredibly important to living responsibly as an adult so the earlier you can impress your teen with how a budget works the better prepared they’ll be.
3. Save Money
There are two buckets for savings I like to talk about in this topic. First, discuss savings for emergencies (like car repairs) and for luxuries with your teen. The core of a good budget is that you don’t spend everything you earn and are setting aside money in savings. When I first worked at that deli in high school my father sat down with me and helped me settle on a luxury savings goal, which for me was a mountain biking trip. He agreed that if I stuck with my budget and saved 75% of the price of my trip he would reward me for my responsibility by giving me the remaining 25%. You can do something similar with your teenager, whether it’s an expensive clothing item, a new car stereo, or something else, helping your teen learn to save for luxury items will help to instill in them that expensive items aren’t out of reach if you are responsible with your money and set goals.
The second bucket to discuss is the importance of saving for retirement. This is the point where most teens get that glossy eyed look and drift into boredom, but by showing your teenager what compound interest is and how it works you will be able to keep their interest. The core concept of compound interest is that the earlier you begin investing the longer your money can grow and as it grows your pool of investable money grows exponentially. A quick demonstration you can use that might grab their attention is to explain that using compound interest, if you save $500 per year starting at the age of 15 you will have over $113,000 when you retire, but if you saved that same $500 a year starting at 25 you’d only have $59,500. It’s very easy to open a Roth IRA for your child and if you help them to contribute the maximum to this account they can take advantage of many more years of compound growth that will put them way ahead of their peers who start saving later.
4. Spend Within Your Means
While most teenagers don’t have a credit card, many do have debit cards that act similarly and come as part of their checking account. With easy access to the swipe of a plastic card it can become tempting to buy something you can’t afford because you can’t see the cash changing hands. Helping your teenager to understand how debt works will help them immensely in the long run. Explain to your teen that the idea of compound interest works the same on how much debt you owe just like compound interest can work for you when you’re investing. With most cards carrying an APR of 15%, 20%, or even more than 30% that extra $200 item can quickly end up costing you hundreds more if you can’t pay your card off on time.
5. Cheap Reliable Cars Are Great!
Of course your teenager wants to look cool and would be thrilled to have a hot Mercedes or BMW but these cars are impractical and cost a lot of money. Whether you’re helping to purchase your teenager a car or they’re saving for one on their own, helping them to understand the long-term costs of owning a vehicle is very helpful. Run through the total maintenance costs of a few models of cars, some inexpensive used options and newer foreign or luxury cars. They might be surprised at how big of a difference the maintenance costs can be between a Honda that BMW they want. Between tires, oil changes, and random breakdowns a car can be extremely expensive if you have a car that costs a lot to maintain.
6. Getting and Keeping a Job is Hard
You’ve worked very hard to get to where you are in your career, and your teen may not understand just how difficult it can be to get and keep a good job. While I was lucky that I had a friend working at the deli already who put in a good word for me, I had already applied to dozens of jobs with no luck in high school. The application process can be somewhat daunting so it may be helpful to walk through an application with your teen and then help them to put together a resume that highlights whatever experience they have. Most teens have little or no work experiences so have them think about their strengths or something they’ve accomplished that required hard work. Have them do a mock interview with you before they have a real interview for a position. Ask them questions that an employer might ask and give them encouragement about what they’re doing right and help steer them from bad habits like saying “umm” or fidgeting. With a little morale boost from you they’ll be better set to get their first job.
7. Having Control of Your Finances Sets You Free
I know, the title to this bullet is a little hokey but the idea is true. When you have a good understanding of your finances and how to work, budget, save, and spend appropriately you have the ability to worry less about money and spend more time thinking and doing what you want. You’ve heard that money won’t buy happiness, but what money can do is allow you to spend more time doing things that make you happy. Setting goals and expectations when you are a teenager will help your child make good decisions as a young adult and prepare them to make more, save more, and be more financially sound.