Just like your child takes math, history, science, and language arts classes at school, there are essential concepts your teen needs to master about money. The following is an excerpt from Vicki Cook and Amy Blacklock who identified 10 great money lessons every teen should learn.
Ten Money Lessons for Teens
1. Needs vs. Wants. While your teen may have some good reasons to call something a need, make sure you are firm and give examples when discussing the difference between needs and wants.
A smartphone might be a need, but the latest smartphone is a want.
Without a new video game, they might miss playing with their friends online, but it's still a want, not a need.
It might help everyone if your teen can drive to school or work, but in many cases, an extra car is wanted more than it's needed.
We don't want to send a message to our children that their wants don't matter, though. If they budget for their needs and have an emergency fund in case something unexpected happens, they can set up savings accounts (also known as "sinking funds") for their wants. Practicing delayed gratification by resisting the urge to buy things on a whim will help prevent them from going into debt in the future.
2. Spend Less Than You Earn, Save The Difference. Your teen understands negative numbers from math class, so it shouldn't be hard to transfer that to money. When you consistently spend more than you make, you will end up with a negative account balance.
When you spend less than you earn, you can pay your bills, avoid credit card debt, save for the things you want, and even invest for your future. The bigger the difference between what they earn and what they spend, the faster their savings will grow.
3. Track Expenses and Start a Budget. Whether your teen has a job, gets an allowance, or has money from gifts in an account, they should track what they spend and set up a simple budget. In the budget, your teen should consider setting aside money to save, spend, and give.
4. Save, But Start Investing Early. When your teen starts budgeting and works to grow the gap between earning and spending, they'll have more money to save. Consider introducing your teen to high-interest savings accounts for funding short-term financial goals.
Once teens have accumulated some savings, they should consider investing too. The longer their money is invested, the more wealth they will build over time - even if they deposit tiny amounts. At this point, you want them to use the "set it and forget it" investing strategy knowing that this is money for long-term goals in the very distant future.
5. Use the Power of Compound Interest. Your teen now understands why they should use a high-interest savings account. Now it's time to show them the power of compound interest. When they invest money, and it starts making money, they'll keep earning interest on top of interest. If they leave the money invested over several decades, they'll see the "magic" or power of compounding - even if they never add more money to the initial investment.
An example of this is the growth of a $10,000 investment at 4% interest compounded monthly over 30 years. Without adding any more money to the investment, the $10,000 grows to almost $34,000.
6. Understand Gross vs. Net Pay. When your teen gets a job, they'll count the days until their first paycheck. But the excitement of getting paid can turn to disappointment real fast.
When your teen calculates what their paycheck should be, they'll likely multiply the hours worked by their hourly rate. But kids don't realize, or they forget there are withholdings and deductions taken from earnings.
If you want to prevent your teen from being shocked by their first paycheck, make sure they understand gross vs. net pay.
Money will be withheld for federal income tax, Social Security tax, Medicare tax, and any applicable state or local income taxes. There may also be deductions for any retirement plans your teen may be eligible for through their employer.
Your teen should know they may receive a refund after filing a tax return if too much money has been withheld from their paychecks during the year. But they should get used to planning their budget on their net pay instead of the higher gross pay they anticipated.
7. Good vs. Bad Debt. Teens need to learn about different kinds of debt. While all liabilities need to be repaid as a part of every budget, one type of debt can move you forward while the other holds you back.
"Good debt" is money you borrow that helps you reach your goals. Student loans can be considered good debt if they help your child earn a degree leading to employment. But the amount of good debt someone takes on can also be a real problem. The average student loan debt per person in 2019 is over $30,000.
Teens should consider all of their options before taking out massive student loans to fund their education. Is community college for two years an option? What about living at home or graduating from college in three years instead of four?
You want them to avoid "bad debt" at all costs. Bad debt usually carries high-interest rates and is often used to purchase our wants instead of needs. Swiping a credit card too often can put teens in a cycle of debt that's hard to recover from.
8. Your Credit Score Matters. As young adults age, they may be able to open up credit cards. Even with small lines of credit, your teen can make mistakes such as making late payments, k