How To Make Sure Your Teen Will Have Money For Life.
Using money properly, and saving appropriate amounts, are critical skills. These are not skills that kids can typically learn on their own if you just do nothing and leave it to chance. If you want to increase the chances that your kids will not struggle with overspending or having insufficient savings in their future, and if you want to enhance your kids’ ability to provide stability, comfort and security for the people around them when they grow up – there are few basic things you need to teach them about money.
Teaching kids to know how to properly spend and save is a critical skill. Too many teens become adults today without having the slightest clue about personal finances. Most teens don’t know how to budget themselves, the importance of paying bills in a timely manner, or any of the other money basics that will be needed during their lives. They don’t really grasp how money is made, and how it can grow with wise and thoughtful savings and investing.
The time to have a map is before you enter the woods, not after. Start teaching your kids about money and how to manage it from a young age. Increase the sophistication of what you teach them as they grow and as they have the capacity to understand. Keep testing the waters to see what they understand. Don’t be afraid to talk about taxes, investment, what it costs to actually buy things (taking taxes into account), minimum wage, housing expenses, etc. You don’t need to be specific about your financial situation. But they need to understand the value of money and to put things into perspective. And they need to understand why it is important to save. And they must understand what a credit card is, the high rate of interest credit card companies may charge, the deep hole that can be created if you spend beyond your means using credit card debt, teaser rates, and so many other things.
Making the right decisions when it comes to money is not something intuitive; teens need to be taught these principles early on so they can succeed when they get out on their own. A study by ING Direct showed that approximately 83% of teens have no idea how to manage their finances properly or create a household budget. This leads to problems when these teens become adults and have families of their own. Other studies show that roughly 80% of adults do not realize what they need to do in order to avoid going into debt, and bankruptcy cases are near record levels as a result. Teaching teens how to manage their finances is a parents’ job. This is an absolute must for your children’s well being.
Thomas Stanley and William Danko, who co-wrote the The Millionaire Next Door: The Surprising Secrets of America’s Wealthy – mention in their research that an average millionaire lifestyle is far from what the majority thinks about them. Many tend to think that being a millionaire is flying on private jets, throwing money around, driving super expensive cars, and living the vacation lifestyle.
What happens in reality is that the majority of the America’s millionaires are self made, they did not inherit their wealth. Most of them work or own a business, drive cars that are few years old, and are living in average neighborhoods.
Here is what we learn from Thomas Stanley and William Danko, and what you should teach your children.
4 Easy things to teach your kids about money for lifelong success with money:
1. The problem: Inflation
Explain inflation to your teens with a simple example. Explain that money is worth less each year just because new money is being printed continuously. What this means is that if you have $100 today, and the inflation rate is 3%, next year your $100 is worth $97. This happens every year, and if money just sits in your pocket it is worth less by the end of that year. Teach them that it is important to put money to work for you. If your money is not working – you are getting penalized for not putting it to work.
The solution: Open a savings account / get financial advice on how you can grow your and your kids money. Be sure they understand the differences between risky ways of putting their money to work, and more conservative ways.
2. The problem: No money track
Humans are not very good at estimating things, especially with money. Most people have more credit card debt than they want, and most keep getting into debt more and more, making the same miscalculations that brought them into debt time and time again. Researchers show that when 12-18 year old teens are asked today – “What’s your favorite activity?” – they reply – “Shopping!”
Most of us miscalculate in our head what we actually spend, making us go over budget.
The solution: Teach your teen the basics like keeping track of their spending. Give them $100 and ask them to keep a record of exactly what they spent the money on. Or ask them to write down every time they open the wallet – to write down what the money is for. And at the end of the week see how much they spent (and what they spent it on).
It is amazing that we tend to think that we spend one amount, and when we go look in the records – we discover that we spent way more than we remembered. This technique teaches your teens that it is vital to keep a record of their money at least monthly. Teach them to learn from their record keeping to spend less than they have, and how to work within a budget. Teach them that it is important to understand that this budget does not have to stay the same – once they learn how to make more money – they can afford to spend a little more (but not all of the additional money that they earn).
3. The problem: Zero savings
The solution: Encourage them to save as much as 15% of your income no matter what. Every time they get money, work with them to take 15% of that money, and put it away immediately so they are not tempted to spend it. Things happen in life when you may not expect them – and if you teach your kids to place this safety measure of having the savings available when it is needed, it can make all the difference in the future between a bounce back and a total disaster.
4. The problem: Credit card debt
Credit card debt and poor personal credit history can be very costly to your children’s finances.
If they start spending beyond their means – it can damage their financial success and future growth options. This is particularly important when your children reach college-age. Many of the credit companies lure the teenagers into getting a card with very low entry rates and fees. They know that most kids don’t do the math when it comes to money, and they will eventually (very soon) be in debt they cannot afford. And when kids cannot pay – they will go to their parents to ask for money.
The solution: Get a credit card statement and show your teens how the extremely high interest is paid first, and that they still owe the original principal after paying the interest. And paying the minimum monthly payment that the statement is showing – will get you out of this debt only after many, many years. If your kids understand this, this will be a huge help to them. Your children need to understand that a $600 PlayStation they bought – may cost them $2,000 by the time they are done paying for it with an interest.
Explain that if your teen cannot afford to pay cash, then they are better off waiting until they can, rather than accruing debt at a young age. And show that a little planing goes a long way when it comes to money.
Thanks for reading this, and please use the tips for your benefit. This information is only great if it is applied, so please – start a conversation with your child about money today. They will thank you for it later when they will realize that they are living a less stressful life when they grow up because of the money lessons that you gave them when they were younger.
Oh, and these lessons need to be given year after year. Each year your child will grow more sophisticated in terms of concepts that they can grasp. So as they grow more sophisticated, you should tackle more lessons with them so that they continue to learn from you, and let them learn from your mistakes too! We all make them, and thats the secret to getting better in anything in life – learn from past experiences so that whatever comes next will be easy.
Please share your personal money lessons with us.
We really want to know.