Whilst the debate about financial education in schools continues, parents need not wait to teach their kids about money. Here are 7 things that every teen should know about money.
1. Manage your money - Show your money who's boss by putting a money management system in place. Divide your income into separate jars, money boxes or bank accounts. Take a proportion and save it. Take another and allocate that for investing. Then work out how much you need to spend on essentials. From the remainder you can put some aside for fun and leisure.
This simple system has several powerful principles, paying yourself first, creating a savings habit, being organised with your money and to spend less than you earn and invest the rest.
2. Know the true cost of buying on credit. The availability of easy credit has become a part of society. Don't be tricked however into taking the short term view that the headline monthly payments are all matters. Buying an average car for example at 10% APR over 3 years could mean paying over $5000 extra. If that was the sticker price of the car then you may not be so keen to buy. Also consider that your circumstances may change, would you still want to be saddled with monthly debt repayments if you lost your job?
3. Take control of your outgoings. The simple process of checking bank statements and credit card bills can ensure that you know where your money is going and can check for mistakes and anything suspicious. You may have unwanted direct debits which relate to cancelled agreements, such as gym memberships or cell phone insurance. If you track and classify your outgoings, you may find that you are spending hundreds of dollars on lunch and coffee which you could bring from home.
4. Understand the financial realities of home ownership. For the majority buying a home is the biggest financial purchase of their lives. Many young people however are poorly equipped to understand the process or the numbers involved. It can be explained by imagining a dream home and then working backwards. With many lenders looking for a deposit of 20%, the prospective home owners need to first consider where they can obtain this and how long that might take. Then they can consider the amount of borrowing they can obtain, be that 3 or 4 times salary for example. Thirdly include the additional costs of insurance, utilities and council tax.
For many young people this will be an important wake up call, which can have a dramatic effect on career and education choices.
5. Develop multiple streams of income. All is not doom and gloom however, for the entrepreneurial minded there are an abundance of opportunities to make money either alongside or instead of a traditional career. A hobby or passionate interest can be translated into an income earning blog or website. Existing skills and talents can be taught to others at a fee, or new products and ideas brought to market. Long term, investments in the stock market or property have historically yielded good returns. All of which can combine to supplement or replace traditional earned income.
6. Invest in your own education. For many, learning stops once they leave school, if not before! By continuing to learn whether its job related or developing new skills you become capable of bringing more value to the market and subsequently will receive more reward.
7. Expect the best but prepare for the worst. When jobs are secure and house prices are rising it is easy to be lulled into a false sense of security. Many people released equity from the homes to cover consumer debt, secure in the knowledge that they could meet the monthly payments and maybe even reduce their outgoings in the short term. When the economic climate changed however there was a new reality.
In uncertain times it is better to expect the best but prepare for the worst, by saving an emergency fund which could support you for several months if you lost your job. So too is insurance important, covering sickness or unemployment. Developing multiple streams of income as outlined about is another way of spreading the risk and not being over reliant on one source.