Is financial literacy on your teen’s schedule? Here are the skills they need to know
If you’re the parent of a teen, you probably remember back “in the day” when life skills, including financial literacy, were part of the high school curriculum. Many parents are surprised to learn this vital topic is not even on the schedule anymore in most schools; in fact, the advocacy organization Next Gen Personal Finance finds that fewer than 20% of high school students are required to take even one semester of personal finance. That number falls to 1 in 22 in schools with a population of 50% or more Black and Brown students.
That’s why it’s imperative for parents to step in to cover some basic concepts. The good news is there are lots of opportunities to weave financial wellness topics into everyday conversations, even sharing some of your own hard-earned lessons. Becoming familiar with these concepts and why they are important can help nurture a positive and fruitful relationship with money that will help put kids on the road to financial freedom.
Here are four discussions to have with your teens that are just as important as other life skills, such as teaching them how to drive or do the laundry:
1. How to budget
Start with teaching them this important rule of budgeting: You have to have more coming in than going out. That means the first thing they need to do is know how much income they have before they decide how to spend it. Just for fun, help them put together a hypothetical life; they can pick where they want to live and their profession and salary (browse career sites to find salary ranges for different jobs).
Then help them “find” an apartment so they can see what rent runs in an area where they would like to live, followed up by all the not-so-fun but necessary bills, like health insurance, car insurance, cellphone, groceries, utilities, etc. One helpful tool is Voya's budget calculator, which is based on the concept of the “50/30/20” budgeting method. In this formula, you allocate 50% of your income to “needs,” 30% to “wants” (entertainment, clothing, travel, etc.) and 20% to savings. They soon realize that a dollar certainly doesn’t go as far as they wish. If they have a job of their own, you can do the same with their current paycheck, itemizing “needs” such as their car insurance and family birthday gifts, “wants” like weekend fun money, and savings for short-term and long-term goals.
If you’re feeling brave, you can even show them your budget, which will probably make them finally understand why you don’t buy them every cool pair of sneakers they see.
2. How interest works
Interest is an important concept because it can either work for them when they’re saving or against them if they’re running up credit card debt. Give them a simple definition of “compound interest,” which is when the money you’ve invested gains interest, and then that new sum combines with additional contributions to earn even more interest. Over time that money can accumulate impressively, which is why it’s important to start saving early.
On the other hand, the same principle is at work on credit card interest, meaning that a $50 purchase you don’t pay off in full could grow to end up costing you far more. That’s because each month the “new” interest is added onto the balance, which already accounts for interest. So essentially you’ll end up paying interest on interest.
If you are comfortable, you can show them how their college savings account (if you have opened one) or your own retirement savings have grown over the years. You also could describe the damage credit card interest can do if you’ve been working hard to pay down your own credit card debt.
3. How and why to build and maintain strong credit
Many people don’t learn until it’s too late what a credit score is and why it matters. In a nutshell, your credit score is a single number that shows lenders how likely you are to pay your bills based on your past performance. A higher score will qualify them for more appealing interest rates and terms for car loans or eventually a mortgage. In some cases, a potential employer or a landlord may check the score as a way to assess how responsible they are with money.
Even if they haven’t had an active financial life, they probably still have a credit score, and it’s smart to check it occasionally (anyone can get a free credit check on AnnualCreditReport.com) to make sure that there are no fraudulent reports and keep an eye on how their money habits are affecting it. Then talk to them about easy ways to build and protect their credit score, such as always paying bills on time (always!) and avoiding opening up too many credit cards or running them up—even if they plan to pay them off.
4. How money can influence their long-term goals
All of these lessons taken together can give your teen a solid foundation for the difference smart financial habits can make. The budgeting exercise, for example, might have them rethinking their potential career as it sinks into how expensive life can be. This is a great time to talk about their college plans and how stellar high school grades can help them qualify for scholarships to fund their higher education to meet those professional aspirations.
Invite them to shadow you or friends at work so they can get an inside look at different careers. You even might suggest they build a side hustle, such as making jewelry or tutoring, to practice skills like buying materials, marketing, selling and saving.
But most of all, use these lessons as a catalyst for conversations that are designed to encourage a positive mindset toward acquiring, saving and spending money.
The good news is that it’s never too late or too early to start this discussion with your teen. Encourage them to set goals and map out a plan to achieve them, even if money wasn’t previously a common conversation in your own household. Giving them the confidence to see that their opportunities are endless is the best gift you can give them.