When you scroll through social media, you see countless articles (not unlike this one) talking about all of the classes that you wish you’d had in high school. The real-world learning that you now realize is the really important stuff. Much more important than geometry or philosophy, unless of course, you’re working in those fields.
Being that you do see so many of these types of comments, it’s not surprising that only 17 states in the US require high school students to take a personal finance course, per www.money.usnews.com. So many students graduate from HS without even knowing the basics of finance and money management. And what do many do immediately upon graduation? They immediately take on a bunch of student loan debt. It definitely seems counterintuitive.
No matter if you are (or you have) a teen who is going to college, entering the workforce, or choosing the military route, they ALL should know these finance basics. I would also add that there are lots of other classes that would be a great addition to any teen’s repertoire. Topics such as home economics, shop, how to do laundry, change the oil on your car and many others. It seems there is only so many hours in the day for parents to teach them everything they need to know.
Track Your Spending
Have you ever asked yourself how you went through your paycheck so quickly? I think we’ve all been there at some point. Most people spend blindly every month if there is money in their account. Most people only develop pause when they realize that it’s going to be tight. Tracking and logging the expenses help you know and understand exactly where the money has gone. It also helps you identify in what areas you may be wasteful. If you’re overspending on going out to eat for lunch, you should modify your behavior and start packing your lunch more often.
Budget
Setting and following a budget follows right along with tracking your spending. The first thing is to be aware of where your money is going (the tracking part) and the next step is to direct it where you WANT it to go. Your budget is your guide to financial health. Would you drive across country without a map or GPS? No, of course not. You might eventually get there, but it will probably take you a lot longer and you’ll waste a lot of time. Spending freely without a budget is doing just that. The bottom line is if you make a basic budget and stick to it, then you won’t have to worry about having enough money at the end of the month.
For information on the best budgeting apps/software, check out the following post. https://www.facebook.com/photo?fbid=10158205855566733&set=gm.841282660064417
Compound Interest Can Make You Rich or Poor
Interest is present when you’re saving money, but also when you borrow money. So, it can be a blessing or a curse.
Savings
When you invest money, you earn interest. With each accumulation period, you then earn interest on your principal and interest. All you need is time. Have them set aside money starting very young, even from their allowance so they understand the importance of longer-term savings. A great teaching example is with $100 investment. If you put $100 in an investment account that earns a 5% interest rate (not that high), contribute $5 a month thereafter, you’ll have over $14,000 after 50 years. Even though 50 years is a long time, it illustrates the growth using compound interest. Doing the same thing for 20 years will yield over $2,000. Have them open an IRA (individual retirement account) as soon as they’re working.
Borrowing
Interest can be a blessing when you’re earning it, but a curse when you’re borrowing. Drawing your attention to the unsubsidized college loans that so many people deal with. The current maximum amount that students are offered are $5,500 as a freshman, $6,500 as a sophomore, and $7,500 as a junior/senior for a total of $27,000 over four years. Even though the loans are not required to be paid back until six months after graduation, the interest begins accruing immediately upon procurement. What does that mean? That means if you borrow $5,500 for the first year, by the end of the year, you owe more than you borrowed and it will continue for four more years until the payments begin. What’s even worse is that it is compounded DAILY. So, if you’re borrowing $2,271 (1/2 of $5,500 minus fees) and you have an interest rate of 2.75% (current federal loan APR), you pay .0075%/day. So, on day one, you pay 17.03 cents in interest. However, on day two, your interest is calculated on the new amount of $2,271.17 and on day three, you are charged 17.12 cents bringing your balance to $2,271.34. It may seem that it’s not growing very much, but think about that compounding over 4 1/2 years. It’s all working against you. If your student (or you) can keep up with paying the interest (perhaps monthly), then your student will actually come out owing the amount they borrowed versus a much higher amount. *Interest has been deferred since September 2020 due to Covid and is supposed to resume in September 2021, but it hasn’t been determined yet.
Money Can Make You Happy
What? We all know that statistically this isn’t true, so what am I talking about? Money is not bad in itself, but is a tool to help us get the things we want in life. When you use your money to buy experiences instead of “things”, THAT’s what makes you happier, according to Harvard Business School Professor Michael Norton. So, vacations and experiences yield much better return than just buying stuff. Of course, you will buy things, but the emphasis is to buy things you really want. If you want to buy a new pair a pants, don’t buy a mediocre pair just because they’re on sale. The likelihood that they’ll sit in the back of your closet is high. Instead, wait to find (and buy) something you really like.
Credit Cards Can Be Tricky
Research shows that paying with a credit card is psychologically easier than handing over cash. It doesn’t seem like you’re really spending money and it’s harder to know how much you’re actually spending. Credit cards are a great tool, if you can use them wisely. If your teen can’t payoff the cards every month, encourage them not to use it!
You’re Never Too Young to Save
If your teen has a job, they are able to start building up their short, mid, and long-term savings. All have a purpose in their financial life. Some examples include:
Short-Term: a prom dress, emergency fund, car, or video game console.
Mid-Term: college, wedding, or home.
Long-Term: Life Insurance, IRA or investments.
Even though teens probably don’t have a large amount of extra money available to set aside to save, drill it into them that small amounts are better than nothing. There might be several years where they’re not able to contribute while going to school, but it will continue to grow (thank you compound interest). If it’s for winter break or summer, make sure they pick right back up to putting money aside while working. Again, time is their very best friend on long-term savings. The younger they start, the easier it will be.
Your Teens Absolutely Need an Emergency Fund
Review the video on helping your teens build an emergency fun, which falls into the short-term category above and should be done before saving for other items. Review Do You Have an Emergency Fund for Your Teen for tips. See attached video.
Don’t Overpay for a College Education
Contrary to popular thought, you don’t have to take out excessive loans to get a college education. There are a number of options for students. The smartest financial decision is to attend two years at your local community college, live at home, and work part time. Some states offer scholarships (lottery contribution) and your student may qualify for student grants (the free stuff). Even if the decision is to attend a more traditional 4-year institution, don’t rule out the small guys. Sometimes the smaller schools that come with a large price tag are willing to give more grant money than the larger state or well-known schools.
Joining a branch of the military or doing ROTC can cut down considerably with costs. Speak to your local recruiter to learn about more specifics. A teen who chooses a technical or trade school can be the smartest of all. Most that choose this route have little to no debt and you can begin making money immediately and start their savings several years earlier. Whatever path your teen decides to take, there are smart options.
Before deciding on a college or path, it’s important to look at more than the costs of the tuition and room & board. What do they plan on studying? What are employment opportunities? It’s not a good idea to go to a college that costs $75,000/year when the average starting salary in your field is $35,000. You’ll probably end up borrowing an incredible amount of money and will have difficulty in paying it back. A common thought is that you shouldn’t take out more loans than the average first years’ salary from those in your major at that specific school who have jobs within six months of graduation. So, if the average computer science grad makes $50,000 and 80% have jobs within six months of graduation, this suggests that you shouldn’t take out loans more than $40,000 to have a high chance of success at chipping away at them.
Even though the student loans may not begin repayment until six months after graduation, recommend that they start repaying them before they have to. This will reduce the amount of time spend in debt.
A Car ISN’T a Good Investment
Let’s talk about the difference between a depreciable and appreciable asset. Depreciable goes down in value and appreciable means that it increases in value over time. A car is a depreciable asset and loses about 30-40% of its value within the first year (from new). Of course, there are classic cars that are the exception, but teens are probably not the buyers for these types of items. I know that it can be fun and exciting to have a really cool car, but instead have them choose a more reasonable and reliable vehicle, preferably used. Students should strive to pay cash for a car (remember savings step 1). Our children paid for half of their car. We purchased the car outright and then they paid a down payment on it and “financed” the rest with us. I figured out how many months they would have until they graduated and then divided the financed amount by the time frame. We personally chose not to charge interest, but I think it’s reasonable if you choose to do that. You are teaching them life experiences and lessons here.
No Keeping up With the Jones’
Wanting what others have and letting that drive your financial decision making is a slippery slope and will likely get them into trouble. Encourage them to think outside the box. Hitting stores like Goodwill, TJMaxx, Ross, or Michaels is smart. If your teens can’t grasp this concept and don’t want to shop at those stores, give them the amount that you typically spend (back to school, etc) and have them get what they want. They will realize that the money doesn’t go as far as they think it will. Also, have them put some skin in the game and require them to pay for a portion of their stuff. It teaches them how much things cost and gives them perspective on when they want to purchase items.
Never Pay ATM Fees
There are plenty of options to avoid paying fees. You can obviously go to your bank, but there are a network of options when you’re out and about. A two-minute Google search to find the best options.
NEVER Carry Credit Card Debt
Teens can get into a pattern where they are only paying the minimum on their cards every month and continue charging. This can set them up for years of issues with debt and their credit. Drill it into their head that they shouldn’t charge their card unless they can pay it off every month. With them, review the blog Credit Card Mistakes You Might Be Making, 7/26/21 for amazing tips. https://realpamelaferguson.wixsite.com/website/post/credit-card-mistakes-you-might-be-making
Writing Checks and Balancing a Checkbook
In reality, people rarely write hard copy checks. However, there still may be instances that they need to use them. A quick tutorial with them can clear up the confusion. With the invention of online banking, why is it important for them to know how to balance a checkbook? For whatever reason, sometimes there a delay in the processing of some charges. If they rely on looking online for their balance and charges, they may overestimate how much they have in their account which could cause them to overdraw their account and leave then with overdraft fees. In addition, if they do sometimes have to write actual checks, they may forget the amount that’s still outstanding.
Be Aware of Your Credit Score
It is not uncommon for your credit report to have errors and wrong items. As a previous underwriter in the mortgage business, I saw many frustrated borrowers that were dismayed with wrong items that were keeping their score down. At a minimum, you can access your credit reports free annually. Avenues to do this are www.annualcreditreport.com and www.freecreditreport.com. Some credit cards will list your score on your monthly statements as well so you will notice any large increases or decreases. This is a perk that Disover It Card does. For more in-depth information on credit cards, go to Credit Score and How It Effects Your Finances, 6/1/21. https://realpamelaferguson.wixsite.com/website/post/credit-score-and-how-it-effects-your-finances
Set Financial Goals
You want your teen to control their finances instead of them being controlled by them. Having an outline of what their goals are is a good way to keep them focused. Having an outline is a great start that you can use to see what works best for them.
There are many items that you can discuss with your teens, but a main thing I want you to be aware of is that nothing should be off limits. Always try to give them age-appropriate financial information and tips. Whether you’re shopping at the grocery store when they’re three, paying bills, or saving for your retirement. Staying secretive and silent about these things does not set them up for success.
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