The Top 8 Things Every Teen Should Know About Personal Finance

By Myles Leva

-

Last Updated: December 27, 2021

Share

874
0

Parents decide when it’s the right time to start talking with their children about money.

Everyone has to learn a few hard lessons about money sooner or later. Simply talking won’t prepare a child for every financial struggle of the adult world. However, it may help them prepare and avoid shocks. 

The thing is that many financial surprises should be in the back of every teen’s mind. But with some key money lessons, they should have an easier time transitioning into financially responsible adults.

 

8 Things Teens Need to Know About Personal Finances

1. You Need A Budget

The first thing teens need to learn is the importance of budgeting.

Even young children hear the term “money doesn’t grow on trees”. But while you’re under the care of your parents, it might feel very much like money does grow on trees!

Teens should learn how financial constraints work in the real world. So, share your budgetary habits with your kids. Then, teach them about their consumption right now, and how budgeting makes it all possible. 

Experts typically extol the value of teaching kids how to track their money. This instills the understanding that money is finite; you can’t have everything you want until you’ve earned it.

 

2. Needs & Wants

The natural follow-up to budgeting is the establishment of priorities.

As a child under adult care, your children naturally don’t yet fully understand and appreciate the difference between wants and needs. All their needs have been taken care of. Most of the time, at least a few of their wants have been taken care of, all without a worry in the world for them.

Young children and teens, depending on their upbringing, may come to take certain items for granted.

They’re used to having a nice phone, a good pair of shoes, or whatever else you’ve given them. But when it comes to their spending (through a part-time job or allowance), they need to learn the difference between wants and needs.

A simple discussion and/or mental exercise can go a long way here. If your teen wants something, they should be prepared to explain why they want or need it. A phone may be a need in the modern world, but a completely new brand name smartphone is a want.

The point isn’t to make teens feel like their wants are meaningless. However, as they transition into adulthood, they need to be ready to budget starting with the most important priorities, down to the most frivolous expenses.

 

3. You Need To Respect The Value Transfer Of Spending

Money appears to grow on trees for children, and that’s not the child’s fault. It’s just the nature of childhood.

However, at some point, everyone needs to learn that spending is a value transfer. You are exchanging your time, labor, and so forth for something that you want or need.

This can be approached in many ways. Strict allowances in exchange for specific tasks, weekend jobs, and more can help a young teen understand the value of monetary exchange more easily.

 Read this next: 6 Awesome Opportunities to Teach Your Children About Money

 

4. How Credit Works

Understanding credit can be one of the hardest parts of teaching money management for teens.

Individual credit score is incredibly important in the debt-driven economy.

Credit and debt are certainly a step harder to explain than basic budgeting, but they are equally important. Either way, it’s a simple enough concept to teach a teen.

You can teach a teenager about credit and debt and allow them to practice with a card with a very low credit limit. Most credit card providers offer cards with $500 limits for students. They often come with a choice of rewards, including cash back on full, on-time payments.

Paying a credit card back on time monthly helps instill the value of building credit. You can instruct your teen to not spend more than they have the cash to pay back. That way, they can build credit and earn a little bit through cashback rewards.

For most teens, it’s difficult (and there is no need) to go further than that. However, they will have a credit history and be better mentally prepared when the time comes to take an auto loan, mortgage, or any other debt.

 

5. Don’t Take Bad Loans (Or Any Bad Debt)

The other end of the credit discussion should be centered on debt.

Both public (government) and private debt are tremendous in many countries around the world. 

Depending on where you live, an individual can put themselves in a position where the only way out of debt is a declaration of bankruptcy. This is more of a problem in the US where some loan APRs exceed 299%.

APRs can legally reach 60% in Canada, but payday loans are exempt from usury laws laid out in Section 347 of the Criminal Code. Payday loans are notoriously unaffordable, but even business loans have produced APRs that, with one missed payment, spell disaster.

Even when interest rates and other associated lending costs are not ridiculously high, debt can spiral out of control. Credit card interest rates normally hover around 19.99%, making them another trap for consumers.

This is one area where “learning by doing” is an extremely bad option. It’s a conversation that you need to have with your teen, though. They will likely face several debt challenges during their lifetime, so it’s better to be prepared.

 

6. Always Save…

Saving is critically important. It’s also an area where a great many adults aren’t doing too well.

A Fed survey revealed that 40% of Americans don’t have $400 saved for an emergency.

A savings barrier can help an adult deal with a large number of calamities. Bad things happen. Medical emergencies and sudden job loss are more common events that make savings important.

For teens, saving for expensive goals is a good practice. If they want something nice, they can be made to save money for it over time. Simply say “spend less than you get, save what’s left”.

If they get a level of patience and financial discipline from the practice, they will have received an important advantage for the transition to adulthood. 

 

7. …But Invest Early

Einstein is often associated with the phrase “Compound interest is the most powerful force in the universe”. Whether or not he said it, it is certainly true that compounding interest is a mathematical behemoth.

The only way to realize the full potential of compound interest is to start earning it sooner.

While saving is important and powerful, at some point it does little for your financial future. Of all investment assets, cash has the worst long-term performance. To save for a fruitful future, investing is key. This is the last step in the lesson of budgeting; leaving enough to invest in your future.

 

8. Bonus: Entrepreneurship

Entrepreneurship isn’t everyone’s calling.

In fact, it’s probably for very few people. But if your teen has displayed natural entrepreneurial tendencies, it’s never a bad idea to nurture them and teach entrepreneurial responsibility.

Entrepreneurship doesn’t have to mean debt and extreme risk. However, spending too much to get a business started can certainly be a problem. To start and strike a balance, you can help your teen acquire the basic resources they need or at least coach them to save up for them.

Starting small and with financial restraint can help set them on the path to responsible entrepreneurship.

 

Conclusions

Taking on greater financial responsibilities as you grow older is a part of life. There are many reasons why preparing a teen for financial independence early is important. With a few key lessons, they can be better prepared to do better financially in the future.

Photo by Karolina Grabowska from Pexels

YOU MIGHT ALSO LIKE

Leave a Reply

Your email address will not be published.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

LATEST

Subscribe for daily financial content

Daily articles, financial messages and affirmations to best help you navigate your financial future.