What to Teach Teens About Money

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At the conclusion of my initial interview with most of my patients, I ask, “If you had one wish, what would you wish for?” The answer to this question often reveals my patients’ mindset. The most popular response is, “More wishes.” The second most popular response is some form of “a lot of money.”

Then I query, “What would you use the money for?” Some children respond that they would buy their family a new home, go on fancy trips, or buy all of a certain type of toy in the world, while others reply that they do not know what they would do with the money, but they didn’t want to worry about having to earn it. It has been clear to me from these interactions that most of these children have little understanding of money beyond knowing that it can be used for buying things.

As they approach adulthood and are thinking about college and its related expenses, some of my patients express anxiety about their insufficient knowledge about finances. Unfortunately, it seems that children don’t seem to learn much about these real-life concepts from their families or school. Therefore, often we will spend a session discussing basic financial concepts. Afterward, my patients usually express appreciation for their new knowledge and that they feel calmer.

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A Primer About Finances

Most kids know that adults need to earn money. Some kids are given money for whatever they desire, while others grow up in households where money is scarce. If possible, I suggest that children be given the opportunity to earn money, save it, and learn how to spend it wisely. I counsel parents that doling out money as needed does not give children an opportunity to learn skills related to effective financial management.

I believe children should have a working knowledge of the following financial concepts before they leave home:

Income. Once they complete school, young adults need to generate an income that will support their living expenses and savings for the future. We discuss that getting started with a menial job can be a stepping stone towards finding a job that best fits their abilities and fulfills their passions. I remind children that the average person changes jobs five times, and thus they should not worry too much about the exact nature of their first job.

Budget. A good way to learn how to save money is to budget expenses, including certain amounts that are saved regularly. By studying and sticking to a budget, children learn to prioritize what they need over what they want.

Savings. Accumulating money in a savings account can help save for a large purchase or help fund incidental college expenses. I recommend families investigate online savings accounts that pay much more interest than brick-and-mortar banks. To help children save for incidental college expenses, some families who can afford it offer to double the amount of money children save for that purpose.

Interest. Interest is extra money that is paid when a loan is repaid. For example, if you borrow $10,000 to buy a car and are charged 10 percent interest annually, the cost of repaying the loan after a year is $10,000 plus an additional $1,000 as interest for the privilege of having taken a loan. When your money is saved with a bank, in effect, the bank is being given a loan of the saved money. So, the bank pays you interest as long as the money remains in the bank.

Compound interest. When money is saved for a long time, the interest earned can be added to the savings, which produces even more interest. This process describes the compounding of interest. The longer the money and interest are saved, the more money is earned. The following example illustrates the power of compound interest: People will accumulate approximately the same amount of money by the age of 65 if they save $1000 every year for 10 years between the ages of 20 and 30 as compared to saving $1000 every year for 35 years between the ages of 30 and 65.

Impulse buys. Children should be cautioned about impulse buys that can use up saved money quickly. I suggest that if there is something they really desire that they wait a week and see if they still feel the same way. I suggest they consider what they could afford in the future if they ignore the impulse.

Credit cards. Credit cards are a convenient way of making purchases but should never be used as a way of borrowing money except under dire circumstances. The reason for this is that the interest rate charged on credit cards can be three to ten times higher than the interest on other kinds of loans. A good reason to use credit cards, if they are paid in full every month, is to receive rewards such as cashback or discounts on future purchases. Another reason is that responsible credit card use, including making payments on time and only partially using available credit, can help raise credit scores (see below).

Debit cards. When debit cards are used, money is immediately deducted from the attached bank account. With a debit card, expenditures cannot exceed what is in the bank account, which helps give protection against overspending. However, debit card rewards are usually not as high as credit cards.

Debt. It is a very good policy to always live within your means. However, going into debt in order to finance a major life investment/purchase, such as education, a home, or a car, can be an excellent choice as long as the repayment terms fit within your budget.

Credit score. Loaning agencies (and even some landlords) consider your credit score in determining whether to do business with you and how much interest they will charge you for loans. You can maintain a high credit score by always paying your bills on time and having some sources from which you have been approved to receive money (such as a credit card or a loan) as evidence that you can manage your finances well.

Money philosophy. Having sufficient money allows for a good quality of life for you and your loved ones. Accumulation of an excessive amount of money or new purchases can bring happiness for only short periods of time. Long-term happiness arises from a well-lived life, as First Lady Eleanor Roosevelt suggested. Further, I believe it is important to teach children to give some of their money to charity as an embodiment of the philosophy of helping to repair the world.

Takeaway

A comprehensive discussion with children about making responsible financial decisions can provide essential information that will pay dividends throughout life.



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