10 Steps to Raising Financially Literate Youth
One of the most important skills we can instill in teenagers is financial wisdom. If we want them to develop into successful adults, our youth need to learn fundamental concepts, such as saving, compound interest, credit, budgeting, and consumer rights. Not all high schools cover this material, and even if they do, they don’t always make it relevant to teens so that they retain the information. Taking time to offer financial instruction can help your teen become self-sufficient, self-reliant, and independent.
Following are 10 tips to raise a financially literate teen:
Set the example.
Take a moment to consider what your financial habits demonstrate to your teenagers. How do you spend, borrow, save, invest, and share your money? Credit card debt and impulse buys do not go unnoticed by teenagers and can promote the false concept that there is an endless supply of money. You are an important role model, and your teenagers learn a lot just through observation. It’s a great idea to discuss your financial decisions as you shop and pay bills, because you are providing concrete, real-world examples for your teens.
Discuss financial values and priorities.
Everyone has their own values and priorities for how they allocate their resources. Perhaps you value eating out with friends or family so you prioritize a restaurant line item in your budget. Perhaps taking a big vacation every year is important to you so you prioritize a savings account for that purpose. Having open conversations with your children about these ideas can encourage teens to think about the meaning of money, the challenge of balancing priorities, and the importance of saving for what they truly value.
Discuss needs versus wants.
One of the most common mistakes Americans make financially is mistaking “wants” for “needs.” It’s a great idea to talk to your teen about common items youth love and ask them to categorize them into wants vs. needs. Your teen may think they need the latest smartphone, but in reality, while a cell phone could be a need, the most advanced smartphone is a want. Your teen might think they need a car, but in reality, they only need access to a car on occasion and owning a car is a want. Discuss how it’s a good idea to meet needs before you consider spending on wants. Teaching this concept will introduce the idea of delayed gratification – where you purchase needs now and save up for wants later. By teaching them to resist the urge to buy things on a whim, you will help prevent them from going into debt in the future.
Have open conversations about large expenses.
If you never discuss the cost of important living expenses, teens will enter adulthood surprised at the cost of living, which increases the likelihood of them returning home to live with you! Teens need to know what big expenses they should expect, such as rent or mortgage payments, food costs, car payments, vacations and the less visible expenses, such as insurance, medical costs and utilities like gas and electricity. You can help them understand these concepts further by making them part of the conversation about different options in living costs. For example, you could discuss how much the basic package for cable TV costs versus premium, and how you’re balancing pros and cons and costs before making a decision. This can open up your teens’ eyes to the cost of things they may not know about.
Teach basic financial concepts.
Teens must have a good grasp of basic financial fundamentals in order to make good money decisions later in life. Here are key concepts to teach to your high schooler:
- Compound Interest. Explain to your teen that when interest is applied to money, that interest will also have interest applied to it. This means that your money can grow exponentially over time. Let your teen know that if they leave their money invested over several decades, they’ll keep earning interest on top of interest, which builds wealth through compounding. However, they need to know that compound interest also applies to debt. If you owe money on a credit card, for example, the compound interest applied to what you owe can quickly exceed the amount you originally borrowed. Finally, teens should be aware of the different type of investment vehicles available and how interest rates are lower for less risky investments and higher for riskier ones.
- Credit score. Explain to your teen that every time they borrow money, the lender records how well they pay it back. This record of their transactions creates their credit score, which basically tells other lenders how safe or risky you are when lending additional money. Even with small lines of credit, your teen can make mistakes such as making late payments, keeping high balances on their account, or only making minimum payments. This can prevent them from paying off their debt and negatively impact their credit score. Give your teen easy to understand examples, such as ‘when you miss the deadline on your credit card bill, it lowers your credit score, and when you consistently make your payment on time, it increases your credit score’. Explain the consequences of credit scores by explaining that, when your teens wants to purchase a house or car, future lenders will look at their credit score to help decide whether they’re a risk worth taking and determine how much interest to charge them. Let your teen know that building a high credit score can actually save them money because many lenders, such as utilities, cell phone providers, and car insurance will give discounts to low-risk customers.
- Gross vs. Net Pay. Teens should know that there are many withholdings and deductions taken from earnings, such as federal and state income tax, or they will have quite the disappointing shock when they get their first paycheck. They should know ahead of time that the salary or hourly rate they are offered is not the amount they will have in their bank account!
- Good vs. Bad Debt. Your teen should be aware that there are different forms of debt, and it’s not all created equal. “Good debt” is money they borrow at low interest rates that helps them achieve a goal. For example, student loans can be considered good debt because they lead to quality employment. (Though, experts agree that the total debt at graduation should be less than the annual starting salary of the career your teen wants. Otherwise the debt burden becomes overwhelming.) “Bad debt” tends to have high interest rates and finances a want rather than a need. Credit card debt is a form of bad debt.
We need to teach our teens that if they spend every dollar coming in, they will never get ahead. Let your teen know that when they spend less than they earn, they will be able to pay their bills, avoid credit card debt, save for the things they want, and even invest for their future. The bigger the difference between what they earn and what they spend, the faster their savings will grow. Role model this behavior. For example, if you want a new couch or a vacation to the Caribbean, explain to your teen what you are doing to save for that dream. You should make it clear what you are sacrificing to achieve your financial goal and explain your choice to pay for it instead of using a credit card to charge it. This helps teenagers understand the time and effort required to save, the joy of achieving the goal, and the importance of avoiding debt.
Open banking accounts.
Your teenager may already have a savings account, but teens also need to learn to manage a checking account. Using a debit card, making deposits, and monitoring balances are all key skills your teenager will need once off at college or employed. Opening banking accounts now, while your child is still at home, gives you plenty of opportunity to teach those skills.
Show your teen how to write a plan with money goals. They need to learn the process of figuring out how much income they will receive, what their ongoing expenses are, and saving the remaining amount. Developing a budget isn’t a skill that adolescents will just understand – it must be taught, and budgeting is not a subject at school. Most teens are surprised to see where their money goes when they start tracking all of their spending. If your teen has a smartphone, there are multiple apps available for free that will help them record a budget and track their expenses.
If you’re comfortable, share your own family budget with your teen and have them pay the bills with you. This will help teenagers understand how much mortgages, car loans, utilities, and insurance cost. They will also learn how to write checks, use online payments, and pay bills responsibly in an organized fashion.
Give hands-on experience.
It’s important for teens to have hands-on experience managing money before they leave home. Ideally they will receive a monthly allowance and also earn some money from a part-time job, such as babysitting or mowing lawns. You might want to consider also giving them an allowance for bigger-ticket items, such as clothing or club dues, that you normally would have managed. When teens are given control of the money that is used for their expenses, they learn financial responsibility. Make sure the amount is enough to cover basic expenses plus a few fun things, but not so much that your kids can frivolously spend. Allow them to set up their budget (as explained above), pay their expenses when bills are duce, and track their spending. Teens need the benefit of making their own decisions and living with the consequences. Nothing is a better teacher than real-life experience!
No matter how painful it is for a parent to watch, do not bail your teen out when they screw up. If they blow their allowance at the beginning of the month, then they can’t go out with friends at the end of the month. It’s a great life lesson! This is the time that teens can make small mistakes with parental support to learn these important skills before they’re out on their own and make huge mistakes that could have life altering affects. Blowing their allowance one month teaches a teenager some significant lessons about financial planning; whereas, not understanding money management when they’re on their own could lead to bankruptcy.
Sometimes parents don’t feel comfortable discussing their incomes or expenses with their kids, but talking about your own budget can be one of the best ways for teens to learn about real-life expenses. Of course, it’s also important to have conversations with your teen about privacy and keeping financial matters private. If you really don’t want to share your own financial information, then at least create an example to discuss with your teen. You could ask them what city they might like to live in after graduation and research cost of living in that area to mock up a budget.