10 Important Financial Lessons For Teens
Just like math, history, business studies and chemistry classes at school, teenagers need to master certain essential concepts about money.
Here are ten essential money lessons every teen should learn. The sooner every teen understands this information, the greater their chances of becoming financially healthy adults.
1. Needs vs. Wants
As a teenager, you may think you need the latest smartphone, video game, or clothing, often for good reason. However, upon reflection, you would likely realign your priorities according to your actual needs rather than perceived ones.
For example, a smartphone might be a need, but the latest smartphone is a want.
Be that as it may, however, your wants do also matter. So, you can set up savings accounts for your wants from the leftovers from the budget for your needs.
Furthermore, delaying gratification and refusing to buy things on an impulse will prevent you from going into debt in the future.
2. Spend Less Than You Earn, Save The Difference
You already understand negative numbers from math class, so it shouldn’t be hard to transfer that to money. When you consistently spend more than you make, you will end up with a negative account balance.
At the same time, if you spend every naira coming in, you’ll never get ahead.
When you spend less than you earn, however, you can pay your bills, avoid credit card debt, and save. You can even invest in your future.
The goal should be to grow the gap. The bigger the difference between what you earn and you they spend, the faster your savings will grow.
3. Track Expenses and Start a Budget
Whether you have a job, get an allowance, or have money from gifts, track your spending and set up a simple budget.
Once you start tracking your spending, the facts of where your money goes will likely surprise you. If you have a smartphone, you can use a free app like Wally rather than saving receipts.
Once you know how much you spend and where, you can create a simple budget with money management apps.
In the budget, you should consider setting aside money to save, spend, and give. This helps you put cash in the bank while still allowing you to spend responsibly. Also, by creating a giving fund, you can donate to important causes without worrying about running out of money.
4. Save, But Start Investing Early
When you teen start budgeting and working toincrease your earnings, you’ll have more money to save.
Consider asking your parent, guardian or mentor to introduce you to high-interest savings accounts for funding short-term financial goals. Ask them to teach you how .01% and 2.0% annual percentage yield (APY) savings accounts compare.
For example, N100 will earn N20 in interest in a 2.0% APY savings account for a year. But the same N1,000 will only earn $.10 after a year in a .01% APY savings account. As a teen, learn this now: you always want your money to make more money!
Therefore, once you have accumulated some savings, consider investing too. The longer you invest your money, the more wealth you will build over time – even if you deposit tiny amounts.
Learn simple investing terms and help them open an investment account. At this point, you want to use the “set it and forget it” investment strategy. Keep in mind that this is money for long-term goals in the very distant future.
5. Use the Power of Compound Interest
Since you now see the need for a high-interest savings account, don’t settle for a local bank’s meagre interest. Online banks earn you much more.
Now is the time to learn and take advantage of the power of compound interest. When you invest money, and it starts making money, you’ll keep earning interest on top of interest. Leave the investment for decades, and see the “magic” of compounding – even if you never add to the initial investment.
Time is a critical factor in building wealth through compounding. The earlier you start investing money, the more you’ll earn in the long run.
You can try this calculator for yourself to see how different initial investments, interest rates, compounding frequency, and time affect how much your money will grow over time.
6. Understand Gross vs. Net Pay
When you get a job, you’ll count the days until your first paycheck. But you could snap out of that paycheck excitement real fast.
When you calculate what your paycheck should be, you’ll likely focus on the gross monthly, weekly, or daily earnings. However, you must also realize that the government and your employer will likely take withholdings and deductions from your earnings.
To avoid shock or disappointment when you get your first paycheck, understand gross vs. net pay.
Applicable federal, state or local income taxes will be deducted from your earnings. There may also be deductions for any retirement plans you may be eligible for through your employer. After taking out the witholdings and deductions, the remainder is your net income or net pay. Meanwhile, the total amount of your earnings before the witholdings and deductions, is your gross income or gross pay.
You may receive a refund after filing a tax return if authorities withold excess from you paychecks during the year. But plan your budget on your net pay rather than the higher gross pay.
7. Good vs. Bad Debt
You need to learn about different kinds of debt. Even though you must pay back all liabilities, good debts can move you forward while bad debts hold you back.
“Good debt” is money you borrow that helps you reach your goals. Student loans can be good debt if they help you earn a degree leading to employment.
All the same, the amount of good debt someone takes on can be a real problem. So, you should consider all of your options before running into debt, even if it is for a good cause.
Moving forward, you want to avoid “bad debt” at all costs. When you incur debt to spend it on your wants rather than your needs, you have incurred a bad debt. Interestingly, it usually carries high-interest rates.
8. Your Credit Score Matters
As you grow, you may mistakenly make late payments, keep high balances on your account, or only make minimum payments.
This can prevent them from paying off your debt and negatively impact your credit score. However, a cycle of financial problems is what you get when your debt keeps growing.
Building a high credit score can save you money on costs, including car insurance or cell phone contracts. High credit scores also increase your chances of approval on rental and loan agreements and saves you money on utilities.
If you spend irresponsibly, you can damage your credit score quickly. Also, consider reviewing your credit report each year to make sure no one has opened an account in your name.
9. Big Loans Can Really Affect Your Life
You may need to make adult-level decisions when it comes to taking out large sums of money for things like school or accomodation. Before you earn a steady paycheck, you could be hundreds of thousands or millions of naira in debt without understanding how long or difficult it could be to pay the money back. Don’t put yourself in a situation where you have to be paying back loans for decades – even if you have a good job.
Once long term calculations and considerations are put in view, even when it is for a good cause, the idea of taking out a big loan may not be such a smart decision.
10. You Can Be an Entrepreneur Without Taking on Much Debt
You might be one of the teens who are natural entrepreneurs and have terrific ideas for starting small businesses.
Be that as it may, you don’t want to take on too much debt before you know that you’ll stick with the business. And that it will be profitable.
Advisably with the help of a knowledgeable parent or mentor, you should figure out ways to market your business, get the equipment you need and find customers for as little money as possible, even before you start to spend money on te business. This will also help you make money faster because you won’t have a debt to pay off.
If your business takes off, you can plough your profits back into your company to help it grow. Or you can find other low-cost options to help scale their business.
For Parents & Mentors
Helping Your Teens Build A Bright Financial Future
Teaching your teens about money is a process. Some of the lessons work well with younger teens, while others won’t be appropriate until after they get their first job or graduate from secondary school.
The more you talk openly about money in your household (or meet ups), the easier it will be to talk to your teens about their financial future. Luckily, there are plenty of great resources availableto help your teens learn on their own, in case you aren’t confident with money yourself or you want to learn about money as a family.
FamZoo is an award-winning app acting as a private family banking system. It’s helps parents teach kids to earn, save, spend, and donate money wisely in a safe, friendly environment.
There are also some great books available for parents who want to help their kids learn to manage money and for teens to take control of their finances.
Financial Education Books for Teenagers
- Beth Kobliner’s, Make Your Kid A Money Genius (Even If You’re Not): A Parents’ Guide for Kids 3 to 23.
- What All Kids (and adults) Should Know About Savings and Investing by Rob Pivnick.
- Why Didn’t They Teach Me This in School?: 99 Personal Money Management Principles to Live By.
- Sarah Newcomb’s, Loaded: Money, Psychology, and How to Get Ahead without Leaving Your Values Behind.
- Kara McGuire’s, The Teen Money Manual.
We love our teens and look forward to helping them grow up and become financially independent adults. Therefore, one of the most important things you can do as a parent or mentor to help them meet those goals is encouraging them to learn valuable lessons about money.
One of the biggest favours a teenager can do his/her life is to learn valuable money lessons early.
