It’s never too early to teach kids how to be responsible for their finances. In fact, the earlier you teach them the better it will be for them. Giving them a foundation of a solid understanding of finances is going to set them up for life. They will be able to make good decisions throughout their life and always have this knowledge to fall back on. It’s easier to get through tough times when there is a background that is given to them early on.
There are a lot of things to understand so it’s best to start with the basics that will help them at least understand the principles that can guide them later on when they can take on the more complex ideas they will be faced with as adults. In this article, we will go over what it takes to teach a teenager financial literacy from a young age.
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1 – Start with savings
The most obvious lesson to learn is how to save money. The reason is that it takes a lot of discipline to be able to set money aside for a rainy day. This is a concept that takes time to instill in a teenager who often is impulsive and looks for instant gratification. Give them the lesson that it is better to wait until they have the money to make a purchase and still have money left in case of an emergency.
There are three concepts to understand when it comes to saving. It’s about the motivation to set money aside. One motivation is to have an emergency fund in case of an emergency. For instance, they should be putting aside a portion of their earnings every week in case they have a sudden and unexpected car repair.
The other reason is that it is a good way to avoid going into debt when you need to make a purchase. It is not a good idea to use a credit card to pay for things when you don’t have the cash since this sets you up in a debt cycle that can last decades. If you have the money saved then this is when you can make a purchase responsibly. There is the topic of using credit cards to accumulate points, but you should only charge what you already have saved so it can be paid off right away.
The last concept is the motivation to have your money make more money. Saving money didn’t usually gain you much interest so there wasn’t much motivation for saving for that reason in the past. CD rates appear to be on the rise so now there is a financial benefit that comes with putting money away for a while as there is decent interest paid on certificates of deposit.
Once a teenager has a solid understanding of the reasons to save money then it is time to move on to other topics.
2 – Help them budget
Having good money habits is essential to making sure they are responsible with money. This means that they have to know how to budget their money. When they budget, they will always have money saved and be able to use the extra money to invest. A proper budget gives them the discipline to be responsible as well as the roadmap to make it happen.
The most important step is to understand the money that is coming in and when it does. If they have a job or allowance then they need to calculate how much they earn per month.
After that, they need to add up what they payout every month. Their expenses might be insurance and gas for their car. Or, they could have some subscriptions they pay for. Even what they spend on entertainment needs to be figured out. Encourage them to save every receipt for purchases for an entire month to understand where their money goes.
Next, categorize every expense so it can be organized. When they spend money on eating out, then this goes into the “Food” category. Any expense for their car such as gas, repairs, or insurance goes into “Car”. Once you have every expense categorized, group them into “Essentials” and “Nonessentials”.
At this point, they need to understand how much is left at the end of the month. They should be encouraged to watch their spending and cut out needless expenses so they can hit their savings targets for the month.
3 – Understand investing
The concept of making your money work for you instead of vice versa is a powerful idea. Teenagers will definitely respond to it since it means they can end up with more money without having to work harder for it.
The first way to get the idea across is to use an investing app that rounds up their purchases and puts the change into a fund. They use a robo advisor to pick stocks and there is no effort involved really. They can then watch their account grow and see the fruits of putting even small amounts of money aside to get the idea of the power of investing.
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4 – Encourage hard work
Teenagers have a lot of energy and this extra energy can be used to help them get ahead financially. They can study hard and work harder to make more money that can be saved and invested. There are plenty of ways to make extra money in their free time. Mowing lawns and shoveling snowy driveways is a tried and true method to make money as a teenager.
In addition, they can always try some ways to make money online such as freelancing or even tutoring students. Whatever way they end up making money will reinforce the idea that hard work pays off and they can always have a cushion of money if they are willing to put in the work. This gives them a work ethic that will follow them for the rest of their life.
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