Like many other critical life skills, financial literacy and responsibility have to be taught. If you are parenting a teen, then you should know that their teenage years are ideal for teaching them about finances.
Time flies, and very soon, they will be adults who have to manage and make financial decisions on their own. Studies suggest that only one in ten teenagers in the US can be classified as financially literate.
If you don’t want your kid to end up with the rest of the 90% of the teen population, then read on. Let’s talk about financial literacy for teens and the 10 must-know basics.
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Financial Literacy for Teens: 10 Basics
Let’s look at financial literacy for teens and the teachings that you should impart to your young kids. These lessons will collectively help them in understanding the importance of money and financial planning.
If you succeed in improving the financial literacy of your teens with these measures, they will thank you for the rest of their lives.
1. Teach Money Management Through a Bank Account
Instead of giving them long boring talks on money management that rarely work, open a bank account in their name. Many banks offer special accounts for young people.
These accounts come with simple terms and conditions to ensure a teen can use it without needing anyone’s help. When you set a bank account for a young person, it trains them in two ways.
First, it teaches them all the essential banking jargon they will need to know later in life. After a couple of years, when they will be opening a proper bank account as an adult, they will know the procedure and the type of account they need.
The second lesson that a bank account gives to any teenager is money management. A monthly financial statement, transaction alerts, and profit profile— all of these seemingly small details make a huge impact on the money management skills of a teen.
Having teens practice these skills early on while you’re there to support will help them avoid making mistakes in the future.
2. Convince Them to Save for College
College brings financial troubles for students all across the US. A lot of it has to do with the overall economy. Nonetheless, the actions of an individual can make successfully navigating troubled financial waters during college days easily.
If they’re working a summer job, or have a part-time job, then persuade them to set aside some of their earnings in a college savings account. This activity will inculcate the habit of savings in them and help them realize the importance of money in college life. They’ll also save money on student loans by getting a head start.
3. Help Them Understand the Difference Between Wants and Needs
Teenagers are an impressionable lot, and their impressionability can have financial implications. Even though they may understand the difference between wants and needs, you need to explain this crucial dichotomy in terms of finances.
Teenagers are heavily influenced by what they see online and what their friends are doing. Many times these external factors make teenagers forget about this important difference. Therefore, you have to remind them time and again of this difference with hands-on examples.
For instance, you have to educate them that it is not a wise decision by any means to withdraw retirement savings just to recreate a lavish birthday theme that they saw on their Insta.
Your teen should understand the difference between what is a real asset that can produce value versus something that will not.
You need to explain to them that acquiring this important financial knowledge is an ongoing process, and they will have to determine what is a want and what is a need.
4. Teach Them How to Avoid Impulse Purchasing
Impulse buying is not a new phenomenon, and it affects everyone, not only teenagers. Since e-commerce has made buying entirely hassle-free, one has to be aware of their shopping/buying behavior to avoid overspending.
It is often seen that teenagers burn through their hard-earned savings in the blink of an eye due to impulse buying.
Again, you have to lead by example. If you are receiving a parcel on your name every other day that has some superfluous item in it, then you can’t tell your kids to not get into this bad habit.
5. Have a Session on the Perils of Credit Cards
Credit card operators start hounding teenagers as they turn 18. Many times credit card companies exploit their potential young clients who are already worried and desperate about their college finances.
As a parent and guardian, it is your responsibility to educate your young ones about the dangers of credit cards and how to properly utilize them. You have to tell them how relying on credit cards can create a vicious cycle of debts, but also how you can safely take advantage of using credit cards.
You need to practice what you preach and set an example for them by removing extra credit cards and cutting down the usage of the ones you are left with.
Remember that you can’t trick teenagers into believing something just by saying it. They will easily see through the hypocrisy in your pep talk. In many cases, these empty talks can also end up counterproductive.
6. Teach Them the Concept of Compound Interest
Compound interest lies at the core of our financial system. Whether it is loans or investments, compound interest is one factor that determines their values on the other side of the horizon. By making them understand its concept, we don’t mean only teaching them the calculations for compound interest.
You can help young kids understand compound interest with real examples and where they are involved directly or indirectly. For instance, if you have dividend stock in your portfolio, you can show them how reinvesting dividends in the investment pays off and makes the investment grow more quickly over time. And with credit card bills, you can show them the bitter side of compound interest by demonstrating how credit card interest will quickly increase their credit card debt.
7. Have Tax Talks
If your young kid is freelancing or running a side gig, they will have to pay taxes. Even if they are not tax-liable for now, they will become liable soon. Therefore, it is vital that you now start discussing taxes with them. Still, make sure your conversations remain casual and free of tax jargon.
Those occasional tax talks will help them understand the difference between different tax forms, and concepts such as tax refund vs tax liability. This gradual acquiring of tax knowledge will go a long way, especially when they have to file their first tax return.
8. Help Them Start Budgeting
Get your teenager involved in the budgeting of the household. The use of budgeting apps can make this process more interesting and immersive for them. Let them make the budget of the house for one month or help them create their own basic budget.
Try to steer clear of excessive input, and let them use their own financial judgments. Even if they are unable to take account of all the expenses within the available income, they will learn a thing or two about budgeting and how to strike a balance among expenses, income, and savings.
9. Advise Them on Making Money
It is good to have a mind oriented around moneymaking. However, many parents still don’t like this characteristic in their kids. If you also count yourself among such parents, you need to dispel this notion that striving to make it will make your child evil.
Most genuine moneymaking options are legitimate gigs. So, there is no harm in encouraging your kids to develop this tendency and act on it.
Young people get a lot of free time on their hands during various academic breaks, and the best utilization of this time is in learning about how to make money. Teens can make the most of their time by learning about different moneymaking avenues, like investing with stocks, bonds, micro investing, real estate, and other investment avenues.
Investing early and often is a key to accruing wealth, and that combined with an entrepreneurial mindset, will have your child well on their way early in life.
10. Let Them Fail
Last but not least, you have to teach your teens that it is okay to fail with any financial decision as long as they can make sense of the failure and review their future strategies to prevent it from happening again. In fact, failure will teach them an important lesson about finance that will stay with them and guide them for the rest of their lives.
Obviously, try to advise your kids the best you can, but sometimes experience is the best teacher. Let them fail, but make sure you don’t have an “I told you so” attitude or they may not be willing to listen to you in the future even if you are right.
As you can see, improving the financial literacy of your teens involves gradual learning with day-to-day activities and good modeling of key financial skills. It is not a crash course that is over after a couple of weeks, nor is it “do as I say not as I do.”
We hope that these financial literacy tips will help you in guiding your teens in the right direction and give them a solid financial foundation for their lives.