The United States may be one of the richest nations in the world, but only a little over half of U.S. adults are considered financially literate. Few states have mandatory classes in personal finances for high school students, which means it’s often up to parents to teach their teens about money and to give them a good foundation for financial literacy. Here are some pointers about financial literacy for teens to help prepare for financial independence.
Understanding How Bank Accounts Work
If you’re a teenager who doesn’t have a bank account yet, talk to your parents about opening one and using it as a tool for discussing personal finances. Teens should understand that a bank account is more than just a place to store money. There are often fees for using the account and, in the case of a savings account, interest paid to the account holder. A bank account can also lead towards getting a secured credit card once there’s a sufficient account balance.
Understanding Compound Interest
Having a good grasp of compound interest is fundamental to financial literacy, yet one third of adults in the United States have a poor understanding of it. Simply put, whether you’re talking about a savings account or a credit card, when interest is applied to money, that interest will also have interest applied to it. Over time, the value of the money can grow exponentially.
Understanding the Cost of Debt
However, compound interest also applies to debt. If you owe money on a credit card, for example, the compound interest applied to what you owe can quickly exceed the amount you originally borrowed.
Understanding Why Credit Scores Are Important
Any high school student who has taken an exam or brought a report card home realizes that our society uses scores to measure merit. So even if you don’t benefit from having a good credit score today, you can understand it will be important in the future when you want to buy a house or a car.
Every time you borrow money, the lender records how well you have paid it back, which counts toward your credit score. When you want to borrow more money, the lender will look at your credit score to help decide whether you’re a risk worth taking. The lender can also use your score to determine how much interest to charge you.
Learning to Balance a Limited Budget
Sooner or later, everyone learns to live within their means. As a teen, learning to live within a limited budget now can avoid the transition that often accompanies going out into the world. A good way to do this is to create a budget from an allowance or summer job. If you don’t have a source of income yet, ask your parents about giving an allowance for specific items, like clothing and cell phone bills, rather than paying for those items themselves. Using a budget will teach you that any purchase, such as a new phone, will most likely require a sacrifice in other spending to make up for it.
Learning to Pay Yourself First
The importance of saving money for the future is a lesson that will pay off for decades to come. If you have an allowance or a part-time job, talk to your parents about starting a savings account specifically for saving towards a long-term goal, like going to college or buying a first car. Then, at each payday, put a percentage of that money into the account. Your parents might even consider illustrating that saving money makes money by matching any contributions you make to that savings account.
Regardless of how you approach the topic of personal finance, discuss any decisions or issues with your parents first before making financial decisions.
Any recommendations or analysis performed or provided on the website is not intended to represent financial advice or guarantee future results. Prior to making any investment or financing decisions, please consult a qualified attorney or financial advisor.