College Countdown Part I: Financially Prep Your Teen
This is the first article in a three-part series we’ve put together for you called “College Countdown.” The series focuses on topics to think about and act on before your child heads off to university. In Part One, we take a look at schooling your teen financially and mentally for the choices they will face.
So much of child-rearing is wrapped up in preparing our kids for their future as adults. There is an emphasis on imparting good manners, good education, and good goals. However, it’s just as important to instruct them in personal financial literacy.
Financial Literacy and Why it’s Important
Being financially literate means understanding how to manage, budget, and invest money. Financial literacy is a foundational skill that is learned over time. When you instruct your teen, you are starting them off on a lifelong path of learning to manage their personal finances wisely.
There are several skills to be learned in becoming financially literate, including:
● Managing and paying off debt
● Building and maintaining a good credit score
● Understanding and using credit wisely
● Comprehending taxes and insurance
● Becoming familiar with investments and retirement planning
● Grasping basic financial concepts like interest rates, compound interest, and time value of money
You and I are aware, sometimes from personal experience, of the consequences of being illiterate in personal finance areas. A recent report revealed that 66% of financial survey respondents could not answer four out of five questions correctly regarding basic finances. This lack of knowledge is a stumbling block to long-term financial success.
Ways that being financially illiterate can hinder you include:
● Poor spending decisions
● Late payments
● Accumulation of unsustainable debt burdens
● Bad credit ratings
● Financial fraud by criminals or business partners
● Bankruptcy or foreclosure
● Negative tax consequences
● Lack of preparation for the future
Help your teen understand and apply good financial practices before they leave home. Doing so will help them transition a little more smoothly from dependent child to independent adult. That doesn’t mean they won’t make mistakes (don’t worry, they will!), but it does mean they will better understand how to bounce back from any missteps and not make them again.
So, what does the application of financial literacy look like? Depending on the state you live in and the local school curriculum, your student may already be receiving instruction. Several states are incorporating a financial literacy requirement for graduation.
Some students take a Consumer Math course while in high school, but financial literacy is different. For example, Consumer Math will teach a student how to understand a loan amortization schedule, but financial literacy means a student can discern whether or not taking out a certain loan is a good idea.
Here are four ways you can help your teen apply some principles of personal financial literacy right now:
Assist them in planning a budget. Teaching your teen the needs, savings, wants, investments, and charitable giving ratios early on will help them see how a household budget comes together. They can manage what funds they have through a monthly budget.
Split expenses with them. Many teens receive birthday money from relatives, earn money from a part-time job, or collect a monthly allowance. Have them start paying for their cell phone bill, auto insurance, or other routine expenses to learn how to pay bills on time.
Involve them in saving towards a goal. It can be more rewarding to set money aside when it is earmarked for a specific reason. Help them identify a short or medium-term goal they can save for, like a concert, a car, or a summer trip. If you are able, you can match their contributions to their savings, similar to how an employer-sponsored 401(k) does.
Help them identify and apply for scholarships. Many scholarships are awarded to teens starting as early as ninth grade. Researching and applying for scholarships early gives your student a chance to not only have the opportunity to earn money (and invest it) now for college, but also causes them to articulate their reasons and goals in higher education.
Applying the financial principles they are learning to their own limited amounts of money now will give your student some real life experience before heading off to college.
Keeping the Goal in Sight
With financial literacy declining in the nation and the financial environment constantly changing, helping your kids to become educated and competent with their personal finances is more important than ever. Looking ahead at the next few years of your teen’s life, they will soon be faced with multiple credit card offers, student loan options, and newfound freedoms. It’s crucial that they aren’t financially blindsided.
The end goal is to prepare your student, as best as you can, for what lies ahead. They are bound to make errors like we all have. However, preventing them from making larger mistakes with long-term consequences can be done with some education and effort.
If you aren’t sure where to start in training your teen, there are several free resources for student financial literacy available. These online resources offer practical guidance and pre-planned lessons that you can walk through with your child. They might not totally grasp all the concepts that are covered, but you will have established a foundation that they can build upon as they mature.
Don’t you wish we had all been taught financial literacy when we were teens? It would have saved us some financial heartaches over poor decisions and lost opportunities. But now, you have the chance to educate and prepare your teens for future financial stability and success. We are here to cheer you on!
Written by Matthew Delaney