6 Important Financial Fundamentals for Teens
It’s the season when graduating seniors fly the nest for college or work. While most leave home with rudimentary life skills like how to do their own laundry or boil an egg, far too many head out with little knowledge of financial basics like credit scores or compounding interest. Talking about money with our offspring, much like talking about sex, can be uncomfortable. However, a fundamental understanding of both goes a long way towards avoiding potentially life-altering consequences. Brian Siemens (briansiemens.com), a financial coach in Tulsa, has some suggestions for teens and for those starting their post-high school lives.
Make and Follow a Budget
Whether you’re going to college or your first job, it’s important to budget. It’s hard to make sound financial decisions when you don’t know what your money needs are. If you don’t know where to start, begin by tracking your income and expenses for a month or two. Write down your expenses, including food, gas, rent, phone bills and monthly utilities. Don’t forget items like car insurance and tuition.
Siemens suggests using tools such as Mint, which is a free app, or Quicken, which has an annual fee, to make the process easier.
“You can link your financial accounts to the software and then download the transactions to be categorized. You can then create a budget, and the software will track your spending against the budget,” Siemens explains. “I tell kids you really need to see the picture to make correct decisions. It’s not good enough just to try to do it in your head.”
Siemens suggests thinking of ways to save money, such as getting a roommate, when budgeting. Differentiating between a “need” and a “want” is also important.
“Transportation and a brand new car are two different things,” he says.
Credit: the Good, the Bad and the Ugly
Establishing a good credit score is helpful down the line, but credit can be tricky. Making prompt payments on car loans and rent increases your credit score. However, overspending with credit cards or failing to pay off your balance each month not only decreases your score, it can create a deep pit of debt from which it’s hard to escape.
While credit cards can be a useful tool if you never spend more than you’re able to repay, high interest rates and the temptation to spend beyond your means is a huge problem, especially for young people.
“Kids look at credit cards as a means to get what they want, instead of what it should really be used for at that age, which is actually building credit,” Siemens notes.
He speaks from experience.
“Credit cards are what got me,” he says. “I graduated from high school and applied for a couple of credit cards. By the time I was 19, I was $4500 in credit card debt.”
Siemens suggests using credit cards specifically designed for students, which usually come with a smaller line of credit. Children can also be added as a user on their parents’ credit card. Siemens says, however, that this has risk for both parties because the financial behavior of one (good or bad) can reflect on the other’s credit score.
Consider renters’ insurance.
“It can protect [a person’s] possessions for loss in case of theft or fire,” he says. “A landlord’s insurance will only protect the structure itself, not the renter’s possessions inside the structure.”
Renters insurance can also provide liability coverage if a friend or family member gets injured at the residence, as well as additional living expenses if the renter is displaced by an emergency or disaster.
For many students, school loans are unavoidable, but Siemens advises caution.
“Take the minimum and take only what you need for necessities like tuition and books,” he says. “Work to pay for the rest because it’s much better working and paying off what you can than accumulating more debt. I took more than I needed, and because of that, I spent money on things I didn’t need, like a television and a stereo. I’m still paying on that to this day, and I pay interest on it!”
When you’re 18, retirement just doesn’t cross your mind, but an early start makes all the difference. Compounding interest can make you rich if you let it. Money saved and invested earns interest. Starting early, even with small amounts, makes an enormous difference in what you can accumulate over a lifetime. When you get your first job, take advantage of vehicles such as IRAs and 401(k)s.
“You’ve been afforded a certain lifestyle by your parents, and whether you want to maintain it or improve on it, you’re going to have to make sacrifices and choices,” Siemens says.
Beyond the Dollar
Remember that money is simply a tool to help you get what you really want in life. Buying experiences, instead of things, makes us happier.
“Money isn’t the most important thing, but the way you manage your money is going to open all of your doors for everything else,” Siemens advises. “Focus on your quality of life and not just your lifestyle – how happy you are at work, how happy you are at home, with your spouse or children. Focus on the big picture, not just the day to day.”