The importance of financial literacy for teens cannot be overstated, especially since the average student leaves college owing $29,900 in student loans. Unfortunately, many teens don’t learn how to manage money in school. They are offered student loans for college but have little understanding of how to pay them back or follow a budget.
According to Youth.gov, a survey of 15-year-olds in the U.S. found that 18% of teens had not learned fundamental financial skills. And high school seniors scored an average of just 48% on a financial literacy exam.
Financial literacy for teens: 5 important lessons
Knowing how to manage money is essential for life after high school — especially if you plan on taking on debt to pay for college. If you’re not lucky enough to learn about personal finance from your school, here are five lessons you can master before graduation:
- Creating and following a budget
- Starting a savings habit
- Taking advantage of compound interest
- Understanding your financial aid package
- Picking the right student loan repayment plan
Even if you’re not making money yet, you should understand how to track spending and saving.
“Before heading off to college you should know that a budget will be a must since you then will have expenses of your own,” advises David Bakke, a personal finance expert at Money Crashers. “It’s a great way to understand where your money goes.”
Thanks to expense-tracking apps like Mint and YNAB, it’s easy to keep an eye on your cash flow. Even if you don’t have much money as a high schooler, you can still learn the fundamentals of budgeting. Plus, you’ll start exercising self-discipline when it comes to cash.
“For high schoolers, there are a lot of important lessons worth learning, but I would have to say one of the most important is understanding the difference between needs and wants,” says Bakke.
“This concept can be tough — even for adults — but it’s absolutely crucial because it lays the foundation for smart spending and saving habits, as well as pretty much any sort of budgeting.”
To get started, keep track of how much money you have coming in and going out. Set a goal for how much you want to spend and save on a weekly or monthly basis. If you’re having trouble with impulse shopping, try to wait 24 hours before making a purchase. You might realize that the item you thought you needed is not so important after all.
By learning this kind of self-control early, you’ll become skilled at managing money on your own.
Instead of living paycheck to paycheck, recognize how important it is to set aside money each month into a savings account.
“By high school, students should have a system for routine savings in place,” says Andrew Housser, co-CEO of Freedom Debt Relief. “They should allocate a percent — 10% (more if possible, less if necessary) — to save from every paycheck, whether the money comes from a part-time job or allowance from parents.”
Not only should you know how to build an emergency fund, but you can also practice saving for specific goals, such as a new laptop or spring break trip.
“It’s hard to be effective with finances without goals,” says Housser. “Write them down — ranging from buying a car to buying books to having time to participate in a sport. You’ll modify these goals throughout life, [but] keeping them front of mind will help guide finances in that first year in college and throughout life.”
To get started, set a goal for how much you want to save by a specific date. Write out the math so you can see how much you need to put aside each week to get there. Then, come up with some concrete ideas for how to achieve your goal.
Maybe you need to make extra money with a part-time job, or perhaps you can reduce your spending a little bit each week. By starting early, you will develop a savings habit that will help you for years to come.
It’s tough to think about retirement when you haven’t even started your career yet. But if you start saving early, you could build a big nest egg over time. Since the effects of compound interest only increase with time, the earlier you can start, the better.
Personal finance expert Sharon Marchisello doesn’t think high school is too early to begin saving for retirement. “Begin saving for retirement as soon as you have income,” Marchisello says. “The magic of compound interest will work in your favor. The longer you give your investments to grow, the less you will have to put aside.”
For example, let’s say you set aside $1,200 per year with a 7.00% rate of return until you were 65. If you started saving at 30, you’d end up with $165,884 in your account. But if you started saving 10 years earlier? You’d have $342,899 by the time you retired.
By understanding how powerful the effects of compound interest can be, you might be more motivated to start saving ASAP. If that’s the case, you can open an individual retirement account (IRA) online with a small minimum deposit (you’ll likely need to add a parent’s name to the account if you’re a minor).
Once you’ve opened an account, you can set up automatic deposits that will grow over time.
Perhaps one of the most confusing things about a financial aid package is that everything is called an “award.” Some parts really are an award, such as scholarships and grants. But loans are also called an award, giving the impression you don’t have to pay them back.
As any grad with student loans knows, you definitely do have to pay them back — with interest.
If nothing else, mastering financial literacy for teens must include how financial aid works. It should explain the differences between scholarships, grants, federal student loans (both subsidized and unsubsidized) and private student loans.
Plus, you need to know you’re not obligated to take out all the loans you’re offered. You could choose to take out less in student loans and pay the difference with savings or income from a part-time job.
As you apply to college, take time to learn about financial aid. When your offers come in, you’ll be able to choose the one that best suits your financial situation.
Finally, anyone planning to go to college needs to learn the ins and outs of student loan repayment. Before signing on the dotted line, learn about the different repayment plans for federal loans and private loans. Plus, you should estimate how big your monthly payment will be after graduation.
“If it looks like you or your child may need to borrow for school, understand how the loan works and look for ways to control the cost,” Joe DePaulo, co-founder of College Ave Student Loans, says. “Discuss interest rates with them, and how this affects the money you borrow.”
DePaulo also recommends talking about who is responsible for the debt. “It’s never too early to discuss how your family is paying for school, including who is responsible for paying back any student loans,” he says. “It can be an emotional conversation, but it’s important for students to understand how the bills for school are being paid.”
It’s all too easy to take out more than you need and end up in debt for decades. By understanding what repayment will look like, you’ll be more prepared to deal with it. Plus, you can search for ways to minimize student loans, whether by applying for scholarships or choosing a low-cost college.
Teaching financial literacy for teens
Along with Math and English, financial literacy for teens should be a priority. Without understanding how to manage money, you could have trouble taking care of yourself after graduation.
Plus, you could end up with massive student loan debt and no clear sense of how to pay it back. But by learning financial lessons early, you’ll set yourself up for success in the years to come.
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