15 Financial Lessons to Teach Teens Before They Graduate High School
A growing number of school districts are adding financial literacy to the high school curriculum with the goal of increasing teen’s financial skills. Do you remember learning about money? Some of us learned about money and money management at the dinner table, or after depositing our first paycheck from our first real job. Others may have learned about money without any formal guidance, sometimes through painful trial and error. Learning about money while you’re young is much better than learning about it later in life. We’ve gathered 15 of the most important financial lessons every teen should have committed to memory before graduation day.
1. How to Set Up an Emergency Fund
Let’s face it, life is unpredictable. And with 46% of emergency expenses now averaging roughly $1,400—planning for the unexpected is an essential part of learning how to manage money. That’s why it’s key to help your teen learn the importance of setting up an emergency fund. From meeting the deductible on an auto insurance policy to periods of unemployment, having an emergency fund and a well thought out plan of action can reduce stress and teach your teen the importance of being prepared, financially.
Emergency funds are simple to set up and it’s never too early to start. You can begin instilling the idea of building emergency savings as soon as your teen begins working a part-time job after school or on weekends. Show them how to set up a savings account they can use as an emergency fund. You can also help them look into savings apps that drip money into a savings account (they will need a checking account for this). And if you’re already a pro at saving, share with your teen what specific steps you’ve taken to build your own emergency fund.
2. How to Build a Great Credit Score
Credit scores deeply influence the lifetime cost of a car, home, or other major purchases financed through loans or lines of credit. Helping your high school student understand how credit scores work, what negatively and positively influences a credit score, and how the consequences of certain financial and borrowing decisions have the potential to save them a significant amount of money throughout their lifetimes.
Building a great credit score is straightforward:
Pay bills on time;
Comply with the terms of a loan or credit contract;
Be careful about how much available credit is used;
Start early to build and maintain a solid credit history.
Helping your teen understand what else influences credit scores, such as how long they’ve had a loan or credit card and their credit mix, is important as well. Explain how borrowers with good credit have more borrowing options and can save thousands thanks to lower interest rates and fees. Sharing your personal, real-world experience with having good or bad credit can also be a practical way to show your high school student the importance of maintaining a good credit score.
3. Understanding Credit Utilization
Once you’ve started talking with your high schooler about credit scores, they’re ready to learn about credit utilization—the portion of available credit in use at any given time.
For example, if you have a credit card with a credit limit of $5,000 and a credit balance is
$2,500, your utilization on that card is 50%. If you have a second card with a borrowing limit of $3,000 and a balance of $750, its utilization is 25%. Your total credit utilization, assuming those are your only credit cards, is $3,250/$8,000, or about 41%. Most young people (and some adults) don’t know that utilization rates greater than about 30%—on a single card, or on all your credit cards combined, can negatively impact your credit scores.
While your teen won’t be able to enter into a credit card agreement until the age of 18, getting one before they’ve turned 21 isn’t easy. But once they do qualify and start adding new credit products into the mix, their credit utilization will change. When did you learn about credit utilization? Providing your personal real-world experience with credit and credit utilization can help make this financial lesson more relatable to your teen.
4. How to Spot a Money Scam
Teens today must learn how to recognize a money scam to be able to protect themselves online and offline. Failure to take in this critical financial skill could bring hard lessons in the form of stolen money, threat to privacy and identity, and time required to fix problems that arise after being scammed. Help your teen by teaching them the four common signs of a scam:
Scammers pretend to be from an organization you’re familiar with, (e.g., utility company, charity, Internal
Revenue Service, Social Security Administration).
Scammers say there’s a problem to be solved or a prize you can win (but you must pay a fee to get it).
Scammers pressure you to act before you have time to think (and may threaten immediate utility service shut off, deportation, revocation of driver’s license, etc).
Scammers want you to pay in a certain way (gift card, money transfer company).
Have you ever been swindled out of money? Sharing your personal story with your teen could help prevent them from having a similar financial experience in the future.
5. How Compound Interest Works
If you’re unfamiliar with the concept of compound interest, know this: The earlier you begin saving, or investing in interest-bearing bonds or securities, the greater your opportunity to benefit from the power of compound interest. On the other hand, when you’re being charged compound interest, as is the case when you carry a credit card balance from month to month, compound interest can also make debt grow over time. Compound interest is so powerful that many adults say they wished they’d understood how it worked when they were much younger.
6. Insurance–and Why It’s Important
Insurance helps protect against the costs related to accidents and other unexpected life events. Exploring the common types of insurance people buy to protect themselves from risk, how and when they come into play, and what to consider when evaluating insurance providers will help them understand why it might be helpful to have it.
A good way to get the insurance conversation started is by asking your teen if they know what their automobile coverages, deductibles, and premiums are and how those work. Pull out the insurance summary page and review it together. Then move on to the benefit of comparing premiums from different carriers, and the consequences of letting coverage lapse. Another idea is to ask them about the insurance coverage they may have on their smart phone. Do they know the details of that coverage policy and what is/isn’t covered?Starting out by talking to your teen about insurance they can relate to will help them stay engaged in the conversation and keep it relatable.
7. How to Earn More Over Time
Learning how to improve earning power over time is usually a practice of trial and error. Career paths are not always linear or as clear cut as becoming a medical provider or attorney, and can often wind up being a series of stops and starts. At the outset, teaching your teen about how to earn more over time could simply mean supporting them in making choices about continuing their education past high school, and what certain jobs pay versus others.
For some kids, high school isn’t automatically followed by a four year college degree (which doesn’t always guarantee an income that can keep up with inflation). Learning trade skills like cosmetology, plumbing, culinary, welding, and electrical can offer fulfilling career paths that provide good pay plus work autonomy. As your young adult gains more experience in the work world, things like improving existing skills and adding new ones, or starting a side business can also help them earn extra cash, lessons they’ll start picking up on their own.In the meantime, one of the easiest ways to help your teen learn how to earn more is to talk about your own career path or set up time with a career counselor at their high school or local junior college. Knowing what career paths lead where and the salary expectations for every job within of a chosen field of study can go a long way in helping your teen recognize career opportunities and interests they might not have considered before. And simply spending a little time describing the circumstances and steps you took to earn more in your career could be just the relevant, real-world example to inspire your teen to make choices that will help them earn more (and find enjoyment) in whatever they choose to do for work over time.
8. Knowing the Difference Between Wants Versus Needs
The temptation to spend money is a constant in life. That’s why teaching your high school student to resist the instant “buy now” economy and knowing the difference between a “want” versus a “need” can be the foundation that sets them up for spending and saving wisely.
Shelter, food, clothing, reliable transportation, and internet access (teens will relate to this one) are all needs. Without these basic necessities covered, life can be difficult to navigate. On the other hand, wants are what make life more enjoyable—i.e., concert tickets, nightly take out dinner, brand new kayaking gear, a cute t-shirt for the dog, etc.Cultivating a habit of recognizing when a purchase is a want versus a need will help your teen prioritize saving over spending, making sure their needs are paid for first and delaying gratification by saving up for the things they want over time. This practice will help them avoid living beyond their means and racking up credit card debt on things they may want but can’t truly afford right now. A good rule of thumb to start them out with is this: Don’t put a “want” on a credit card unless they know they can pay the balance off in full at the end of the month.
9. How to Create and Manage a Budget
Budgeting is a lifelong money management skill that will help your teen stay in control of their spending, track where they can cut back on expenses, save money, and be financially prepared for the unexpected.
Discuss with your teen how budgets are a useful tool designed to help manage your monthly expenses, meet financial goals, as well as plan for the things they need and want. Keep in mind that the budget system that works for you may not be a good fit for your high school student. Start by talking about how to create a budget for their post-high school life or as they prepare to leave for college and what could go into it (e.g., books, entertainment, rent, food, transportation, etc.). Your teen may already have a budgeting app on their phone or a budgeting tool through their bank they can use to set up a simple budget in no time.
10. How to Determine Your Financial Values and Goals
If you can help your teen get an early start on identifying their financial values, it can help guide their decisions, behaviors, and goals across many, if not all, of the money-related matters they may face.
Financial values are the monetary principles and beliefs that motivate us, guide our decisions, and shape our behaviors around money and the life goals we set for ourselves. Our financial values often reflect the motivation behind our spending on items such as material goods, education, travel, life experiences, health, family and relationships, or anything we feel strongly about. Often our financial values are directly tied to our core personal values such as security, freedom, work-life balance, charity, and living simply.
Look here for ways to help your teen get in touch with their financial values early on in life. It can help reveal what’s most important to them, what they’re willing to work hard for and save money for and support them in setting financial goals that are aligned with their core personal values.
11. How to Avoid Predatory Lenders
For most people, taking out a loan and repaying it over time is a viable means to car or home ownership. But it’s a valuable lesson for teens to learn that not all debt is good debt, and certain types of debt obligations have the potential to derail their financial goals.
Predatory lenders use aggressive tactics and unfair loan terms, most often in the form of high interest rates and fees, and unreasonably short repayment terms. One of the most cited examples of predatory lending is payday loans, however, it can also involve financial transactions with auto dealers, home improvement contractors, and mortgage brokers. Teach your high schooler to watch out for these common signs of predatory lending practices:
Offer seems too good to be true, e.g., low interest rates despite a blemished credit history, promises to mend damaged credit and/or settle debts for less than owed
Surprisingly easy to get approved, e.g., doesn’t ask for information about existing debt and income
Pushes you to take out a larger loan than you need
Only form of payment is auto-withdrawal
Help your teen understand the importance of doing research before agreeing to any debt obligation and, especially, to stay clear of any transaction that benefits the lender at the expense of the borrower or creates a cycle of debt.
12. How to Simplify Your Finances
Managing money shouldn’t be complicated. Take advantage of online banking resources, apps, and other tools that have been created to simplify everything from tracking investments to making automatic bill payments from checking accounts or monthly deposits into savings account. Automating as much as possible is often the easiest way to simplify and achieve financial goals.
13. Why Saving for Retirement Starting in Your Early 20s Is So Important
When you’re in your teens and early 20s, saving for retirement is a difficult concept to connect with at such a young age. Yet two of the biggest factors young people have going for them when it comes to saving and investing for retirement is time and the power of compound interest.
One of the best ways to develop a habit of saving for retirement is by learning early on to prioritize making contributions to either a Roth IRA or 401(k) by cutting back on expenses and/or by earning more money. Many part-time and entry-level jobs offer a retirement savings plan (sometimes with an employer match), but young people may not know about it or may not consider the pre-tax reduction in their take home pay worthwhile. Instilling the importance of saving and investing for when they no longer can or want to work is a valuable lesson, regardless of how much money they may be making right now. Starting small and increasing their savings rate over time is good way to make the process
14. How to Avoid Lifestyle Creep
As your student starts earning more, it can be just as easy to start spending more, too. Lifestyle creep happens when we can afford more but don’t notice how our increased spending is impacting our financial goals.
To help your teen learn how to avoid lifestyle creep, teach them to:
Recast their savings goals as they begin to earn more. For example, if they have a goal of saving $100 per month, encourage them to increase that amount accordingly if they receive a raise or a bonus.
Review their spending every 3 months to see how well they’re sticking to their budget goals. Show them how to use a spending or budget tracker app to quickly see where they may be overspending, make adjustments, and set reminders.
15. Knowing Important Financial Terms
When signing a loan, applying for credit, or requesting that first credit card, there are a multitude of important financial terms teens should know if not at least be somewhat familiar with before they begin to encounter them in real world situations. The Consumer Financial Protection Bureau’s glossary of financial terms is a great place to start.
You can also speak with financial professionals or attend financial workshops provided by nonprofits or local organizations interested in helping the public learn more about money.
The Bottom Line
Helping teens learn about money is a key part of preparing them for life after high school. Learning about money is a process of trial and error for most of us. Personal finance for high school students doesn’t have to be a huge project. You can deliver these lessons one at a time, as opportunities naturally arise.