While many parents give advice to their teenage children about school, clothing and social activities, very few educate their teens about finances. Many parents may be surprised to learn that personal finance is a life skill often left out of the high school curriculum. So, who is teaching teens about money?
The truth is, teens might not be learning the basics of personal finance such as how to save, keep a budget or use a credit card, which could put them at risk for making money mistakes in the future. Here are a few talking points and strategies.
Working for money
From an early age, it’s important to teach children and teens that money doesn’t grow on trees and isn’t magically dispensed from the ATM machine. One of the best ways to exemplify this is to encourage your teen to earn their own money. This could take the form of working a part-time job, baby-sitting or mowing lawns for neighbours. Some parents advocate paying for chores or good grades in school and others disagree. It’s up to each family to decide what works for them.
The purpose of earning one’s own money is to understand the value of a dollar: what it takes to be earned and how quickly it can disappear. Teens might think twice about spending haphazardly if they consider the time and effort it takes to replace the spent dollars.
Teens might not have the earning potential they will have as adults, but they have something else: time. Getting in the habit of saving at an early age can pay big dividends in future years due to compounded returns.
For example, if a 15-year-old saves $1,000 per year for 5 years and earns 5 per cent compounded annually, they will have almost $41,000 by age 60, on an investment of only $5,000. If a 40-year-old does the same, they will end up with only $12,000 at age 60.
Kids who work for their money should be expected to save a certain percentage of every paycheck, even if it is a very small amount, as instructed by their parents. 20 per cent is a good place to start. Even if your teen just receives an allowance they should get in the habit of putting some aside. They may not like it or see the point at first, but watching it grow and compound should help change their minds. They will thank you for it later.
One of the more difficult lessons teens should learn while they are young and have fewer financial responsibilities is how to budget properly. Even if their expenses consist of eating out, gasoline and buying clothing, these financial decisions should be cognizant. If teens don’t work, parents should consider giving them an allowance rather than giving them money when they ask for it. If parents stick to this strategy, it will force kids to budget their money. When the money runs out, it’s gone.
The good news is that North American teenagers can’t access credit cards without a parental co-signer. The bad news is, according to a 2012 survey by Tangerine (formerly ING Direct), 25 per cent of American teens didn’t know the difference between a debit and credit card. Further, a 2018 study by debt.com revealed that 50 per cent of college students have four or more credit cards, and 30 per cent of students have maxed those cards out.
From an early age, teens should be taught that debit and credit cards are not a ticket to spend, and when using credit, compound interest works against them. Learning about the cost of using credit from a young age can help teens make better financial decisions when they are older.
A recent survey by Fidelity Investments found that 33 per cent of millennials view their parents as their top financial role models. To ensure the right example is set, talk openly with your teens about money, including budgeting, saving and the importance of a good credit score. Your positive influence will pay off.