Thinking back to when I was a teen, late 90s/early 2000s, I just wanted to be free. I wanted to do what I liked without queries. I felt I knew it all and didn’t want to be bothered. Most teens feel this way. They think they have it all figured out. They understand you get paid to work, but you’ll agree with me that there is more to financial literacy/personal finance than earning from a job. Even though our teens think they know it all, the onus lies with us parents to shed more light on things.
It is common knowledge that good personal finance skills are an essential part of an individual’s success. Just like academic subjects are learned in school, it is important our kids understand the concept of effective money management to become financially responsible.
Here are a few money concepts your teenager should be familiar with:
Needs and Wants
They already have a basic understanding of this from what they were taught in economics, but it is necessary that you help them bring it to life by relating it to their daily needs and wants. For example, having a shoe is a need, but the latest Nike is a want. A smartphone may be a need, but the latest iPhone is definitely a want. They should be able to clearly differentiate between their needs from their wants. Make them understand this doesn’t mean their wants don’t matter. It just means their needs are more important, so needs take priority. If their ‘want’ is really important to them, they should make an effort to get it either by saving, or exploring other means of earning extra income.
Your teenager should be able to account for how his/her funds are spent. They should be aware of their sources of income and what their expenses are. The most important part of budgeting is making sure your income exceeds your expenses, and the excess should be saved/invested. In a situation where expenses exceed income, it means some of their expenses are being funded with debt, or some income that is unaccounted for. Teenagers need to understand that wealth doesn’t come from spending every penny you earn, so there’s the need to track your income and expenses, and ensure your income exceeds your spending so as to have something to save/invest. There are a number of apps that can help track their expenses.
Bank Accounts and ATMs
Even if they don’t have one yet, your teenager should know what a bank account is and the different types of bank accounts. They should understand that the interest earned and the fees charged for different bank accounts. A 13-year-old should know what a debit card is and be able to operate an ATM – that is, withdrawing or depositing money with an ATM card. Given the prevalence of internet fraud and phishing, it is important that you take out time to properly educate your teenager on how to avoid being victims. Also let them know that they are not to share important details like PINs, debit card numbers, etc., with anyone.
Savings, Investment, and Compound Interest
Your teenager should know that wealth doesn’t come from spending everything you earn. Wealth comes from owning assets and assets come from investing. By saving some of their income, they can invest in assets that don’t just yield returns but also determine their net worth. Given that they are young, starting to invest and buy assets gives them the opportunity to become financially independent at an early age. Compound interest is the returns earned from reinvesting the interest earned on an investment, hence it multiplies the earnings from the investment. You can share examples of how compound interest works over a long period of time to drive this point home.
Teenagers should know what debt is. They should know debt is good if it is used to generate more income or if there is a means of paying it back, and it is bad when it is used lavishly or if there is no means of repayment. They should know when it is okay to borrow and when it isn’t. They should also know that borrowing is tied to their credibility and your ability to pay back a loan determines how credible you are. With how easily almost anyone can access loans these days, it is important that teenagers know the implications of taking loans they can’t pay for.
One advantage of having teenagers who are in control of their finances is that the sense of accountability and responsibility spills into other aspects of their lives. The sense of responsibility pulls them back from hanging out with the wrong crowd or being lazy with their academics. Financial responsibility gives them perspective and makes them feel like they are on the right track.
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