If money makes our world go round, then a fundamental component of any child’s education should be how to manage his or her money. Without an understanding of basic finance concepts like budgeting, debt, investing, credit scores, and the enormous responsibility that comes hand-in-hand with taking the reins of one’s money matters, you may be setting your teenagers up for failure (or some seriously hard-learned lessons). Here are the five essential money skills you should teach your teens before setting them loose in the “real world”.
Setting up a budget
Learning how to set up a realistic budget is the key to financial success. It teaches you to;
- Always ensure that your income is greater than your accumulated expenses.
- Keep a finger on the pulse of your expenses so that you never spend money unnecessarily.
- Set aside money each month for savings.
Creating a budget is the most effective tool for managing your finances, so it’s a valuable starting point for your teenagers who are probably just beginning to experience the exhilaration of making their own money.
The cost of “real life”
As a parent, it’s your job to cover the needs (and occasional wants) of your children. However, as they enter their teenage years, this responsibility should begin to fall away, little by little, so that by the time they’re ready to move out of the family house, they have a full appreciation for the cost of real life and what they need to do in order to afford it.
One way you can do this is by acquainting your teens with the cost of food and the effort that goes into shopping, cooking, and feeding a family. How you do this is up to you: you can take them shopping with you, they can be tasked with going to the grocery store themselves, and/or you can teach them to cook, etc. Without this exposure, they are going to be in for a shock when they move out.
The same applies to other key expenses, such as rent, utilities, clothing, cell phone bills and more. The earlier you start teaching your teens about the cost of real life, the sooner they can become mentally and financially prepared for it.
The basics of investing
Many teenagers tend to think of investing as an “adult” concept – or as something people with a lot of money do. In fact, you don’t need much money at all to invest, and with most long-term investment options offering compound interest, the earlier you start, the better! Buying your teens a book on the basics of investing or signing them up for an introductory course will equip them with the familiarity and knowledge they need to create and grow their wealth, which will be an invaluable gift to them in the long run.
Using credit cards responsibly and building a credit score
Leading a financially virtuous life typically involves staying out of debt and, therefore, away from temptations like credit cards. However, herein lies the Catch 22 – and it’s one you’ll have to teach your teens about. If they don’t use a credit card, they won’t build a credit score and without that, they’ll struggle to qualify for a good mortgage when they’re ready to buy their first home. Ergo, another fundamental component of a sound financial education for teens is how to use a credit card responsibly (if possible, load it with money before you spend and always pay your bills on time).
How to shop around
You can save an incredible amount of money simply by making thrifty choices and leveraging the deals, specials, and promotions offered by certain retail outlets. Your job will be to discourage your teens’ tendency towards “instant gratification” shopping and to shop around for deals, rather than buying the first product they see and like. Remember, managing your money successfully is as much about refraining from spending as it is about spending wisely!