“An investment in knowledge pays the best interest.” – Benjamin Franklin
Whenever I do education sessions, I always make a point to remind the under 25s in the room that they are the most powerful wealth builders because they have time on their side. The magic of compound interest means that, even a small amount has the ability to grow into a significant amount by the time they reach retirement. It’s a message that I wish someone had explained to me when I was a teenager. While I know that hindsight is 20/20, I’d like to think that, armed with that knowledge, I might have made some different choices.
Related article: The power of compound interest
Nowadays, with our society placing such an emphasis on accumulating “stuff” and with so many different financing options available, it’s even more important that our teens develop a positive relationship with money and learn how to handle it effectively. Here’s my list of 5 things, I believe that every teenager should understand about money:
Managing Money Isn’t Hard
Too often, we equate money with math. We assume that if math isn’t something we’re good at or something we enjoy then it means that we’re not capable of taking good care of our money. This just isn’t true. Managing your money well doesn’t require great math skills; it just requires an understanding of three basic principles: pay yourself first, spend less than you earn and track your spending. If teens can understand (and apply) those three principles, they'll have a better handle on their money than most people! Additionally, today’s tech-savvy teens can find plenty of great resources online, as well as some useful apps, which make setting up and managing a basic money management system even easier.
Money Needs a Purpose
Every dollar that you earn needs a purpose; if you don’t; give it one, it will find one of its own! Teenagers tend to have low expenses which means that, once they start working, they often find themselves with plenty of discretionary income Without a savings goal, there’s a risk that money will just drift away. Setting money goals helps teens develop and stick to a savings plan. It also helps to develop a savings habit which will hopefully continue for a lifetime. Setting a combination of short term and long term savings goals, lets teens enjoy their money without spending everything they make and helps to make the short term pain of saving instead of spending more bearable.
Related article: Knowing the purpose of money
Money Needs Direction
In the same way that money needs a purpose, it also needs direction. Taking control of your money means deciding how much you’re going to save, how much you’re going to spend and what you’re going to spend it on.
Related article: A disciplined spending plan
It means setting up a simple money management system and a simple savings plan and sticking to them. Low expenses mean that many teens should easily be able to save 50% of their money and still have plenty left over for “stuff”. This 50:50 rule (50% for future spending, 50% for spending right now) is a habit that can help teens accumulate a decent amount in savings that can be used in their 20s towards the cost of education, a first car, a first home etc. Having savings also reduces the temptation to use credit to buy things you wouldn’t otherwise be able to afford.
Related article: Developing a money management system
Money Should Be Working For You
With a decent amount of discretionary income and plenty of time on their side, teens can harness the power of compound interest and, once they‘re old enough, they can put their money to work in an investment account. Most teens get pretty excited when you show them how money has the potential to grow over time and that knowledge can be a powerful incentive to save. Understanding the basics of investing and the different accounts that are available to them is important if they’re going to make informed decisions.
Related article: Investing basics – how to get started with investing?
Money Should Not Be Working for Anyone Else
In the same way that compound interest is a powerful tool for you when you apply it to your savings, it’s also a powerful tool for your creditors when they apply it to your debt. Understanding how debt works, how to build (and maintain) good credit and how taking on too much debt can choke you financially is critical for teens. With credit being such an acceptable part of our society and so easy to access, it’s important that young people understand what they’re signing up for before they’re tempted to fill out an application to get that extra 10% discount or 18 months interest free on their retail purchase. As my dad used to tell me: “If it sounds too good to be true, it probably is!”
Related article: Strategies to manage your debt
While there are obviously lots of things that teens need to understand about money, when I thought about what I wish I had known at 16 and what I want my own niece and nephew to know, these were the top five things that came to mind Do you agree? What would you include on your own top 5 list?