How do you teach teens about finances and making good choices? How do you discuss their first credit cards? How do you talk about how to get cost effective student loans?
It’s important to keep things simple to hold their interest.
Finance can be difficult. There are many topics to discuss. You can talk about the dangers of debt. You can talk about the effects of poor credit ratings. And you can talk about money management.
But one way to keep things simple is to introduce basic ideas about money. These ideas are the rules of thumb about spending, earning, saving, and investing. Personal money management is just a commentary on these four aspects of money.
Spending
When talking to a teenager about money, you should focus on how spending works.
There is a distinct difference between three different ways of spending:
- Spending more than you earn.
- Spending as much as you earn.
- Spending less than you earn.
If you spend more than you earn, you will experience debt. This can spiral out of control. Debt, in turn, leads to self-doubt. Dwindling self-confidence soon becomes helplessness. Some people spend their entire lives stuck in this cycle of insufficiency. With credit cards, it is easy to spend more than you earn. You are under the impression that borrowed money can be paid off. Unfortunately, the amount borrowed keeps on growing. Rather than pay on the amount borrowed, you pay off the smallest balance on a credit card. This results in your interest adding up as the balance grows. Over time, you start falling farther behind. You should share stories of people who fell into bankruptcy following this track.
If you spend as much as you earn, then you are walking a tightrope. An unexpected expense can throw the delicate balance between income and expenses off balance. Talk about how living paycheck to paycheck creates a sense of quiet desperation.
If you spend less than you earn, then you have a chance of getting ahead. You can pay off unexpected bills. You can embrace new opportunities.
It sounds simple to spend less than you earn. It sounds simple to avoid the trap of living paycheck to paycheck. It sounds simple to avoid spending less than you earn. Yet, this is not easy. Even the government can’t figure out how to do it.
Additionally, we live in a world of constant temptation. Advertisers spend millions to persuade us to buy unessential things.
Earnings are flexible. There is no such thing as a fixed income. Earnings depend on proven ability—either through knowledge, skills, or diligence. We earn what we deserve. A lawyer will earn more than a retail store clerk for a reason. A lawyer has spent many years in law school while a clerk learns the basics of the job in a week. A lawyer will also provide a more valued social contribution.
When you bring this up, your teenager may point to exceptions. It is not always clear that income follows value. If someone is underpaid, then they have not demonstrated their value. If they have value, but are underpaid, then they have chosen to work for the wrong company.
This, leads to a new equation: increasing your value will increase your income.
You earn the value you deliver to the marketplace.
People do not get rich by accident. And, they don’t become poor because of bad luck. The law of earning and the law of causality are tied together.
Saving
If one gets good at earning, and one spends less than one earns, then there is a surplus. Save this surplus rather than spending it on big ticket items.
Savings can help in three instances:
- You might lose your job.
- You might have unexpected expenses.
- You might stumble upon an opportunity to invest.
Without savings, then reality has to stay exactly the same. If nothing changes, you will always have enough income. But life is about change, and most change is unpredictable.
Investing
You can invest in yourself or in an income opportunity.
You invest in yourself under the following conditions:
- You get more education.
- You increase your knowledge.
- You improve your skills.
These three things improve your value to the marketplace. You have increased your capacity to earn more.
Investing can also be investing in a new business or in the financial markets.
Investing is buying assets rather than liabilities. An asset puts more money into your pocket. A liability takes more money out of your pocket.
This is a simple definition, but an important one. Many salespeople try to convince you that their product is an investment. But since you have more money going out than coming in, it’s a liability.
The Basic Rules
Once your teens understand the rules of money, they will avoid making financial mistakes. They will learn to handle everything from student loans to credit cards with responsibility because they understand the rules about spending, earning, saving, and investing.
Citations:
Credit cards for teens: http://www.investopedia.com/articles/personal-finance/122214/find-best-credit-cards-teens.asp
Financial literacy for teens: http://www.dailyfinance.com/2013/03/05/financial-literacy-teen-money-education/
Student loans: http://www.simpletuition.com/student-loans/