Most of us didn’t learn practical financial lessons in school. While trigonometry is usually on the curriculum, everyday skills like balancing a checkbook typically aren’t. (We at Practical Financial Planning actually believe that advanced math classes teach important lessons in critical thinking. We just think that an education in basic personal finance would also be useful.) As we reflect on what we wish we’d known then, we’ve rounded up six money lessons that could have saved all of us a lot of time, headaches, and hassle if we learned them long ago. If you have a high-schooler or recent graduate of your own (or even a middle-aged friend who needs a bit of guidance), feel free to share these tips with them.
Lesson #1: How to Balance a Checkbook
While checkbooks are being used less and less in the financial world, the process of balancing one still applies to money management today. Learning to balance a checkbook provides the valuable skill of tracking income and expenses (think spending versus saving). This lesson needs to be taught at an early age, whether it’s with a checkbook, in a money-tracking app, or through a bank’s budgeting software.
The idea is simply that you keep track of how much money goes in and out of your account. Make note of all of your withdrawals, checks, and payments, and make sure they are correct on your bank statement or website. If a check has not been cashed or a bill has not been paid, make sure you have enough in your account to cover the transaction.
Lesson #2: The Basics of Budgeting
Let’s be honest: budgets fail more often than they succeed. Ken’s own surveys indicate that only about 1 out of 4 people will report success with a budget (and only about 1 out of 20 enjoys budgeting).
But the basic principle is still important: have a plan to spend less than you earn.
Author Ramit Sethi proposes splitting available income into four categories:
- Fixed costs (housing, groceries, loans) making up about 50% to 60% of income.
- Investments (retirement savings and other investments), which we believe should be 10% of income or more.
- Savings (for nearer-term goals like vacations, or house or car down payments) accounting for perhaps 5% to 10% of income. Tax payments could also be in this category.
- Guilt-free spending, accounting for the rest, can be spent while knowing your other important responsibilities have been addressed.1
This approach may be more helpful than trying to decide between needs and wants (an exercise that falsely assumes such decisions are black and white).
While this and other models can suggest a good starting point, you may need to adapt to address your unique circumstances, such as high student loan or credit card debt.
Lesson #3: How to Use a Credit Card
Teenagers should learn early how credit cards work and, more importantly, how to avoid racking up high-interest debt. Credit card companies are notorious for soliciting to college-aged students and enticing them with attractive offers, and it’s our belief they do so with the intent of creating lifelong debtors. But understanding the hidden dangers of accruing interest can save thousands of dollars in unnecessary debt.
When it comes to using a credit card, always remember:
- You have to pay back what you charge
- Credit card interest accrues daily when you carry a balance
- Your interest rate can play a huge role in your monthly bill if you aren’t paying your charges in full each month
Lesson #4: How to Build Credit
Having a good credit score has a strong effect on your finances. Good credit makes it easier (and cheaper) to buy a house or car, qualify for an apartment, buy insurance, get a mobile phone, and more. A low credit score makes these tasks much more difficult, so it’s essential to understand how this works.
The single most important step to building good credit is to pay your bills on time. You’ll also want to keep your credit card balances low and limit the number of accounts you open or use.
Not all credit is bad, and borrowing can be a powerful servant. But unless it is handled wisely, borrowing can also be a ruthless taskmaster.
Lesson #5: How to Start a Business
Starting a business is probably not on most high schoolers’ radar, but why not introduce the idea early on? Getting an introduction to the basics of starting a business is an excellent way to at least get them thinking about it as a potential career path. If they decide to do this later in life, they’ll have a foundation of some basic business knowledge.
If your high schooler has a hobby they are passionate about, see if there’s a way to turn that into an income source for them. If your child is crafty (jewelry making, clothing mending, painting, etc.), encourage them to take commissions or sell their pieces. If they love a particular topic, see if they can offer tutoring sessions or perhaps consultant work (such as on a business’ social media strategy). Teens who enjoy the outdoors or physical activity could pursue simple landscaping work or dog walking.
Turning these hobbies into businesses will teach them a wide variety of skills as well as provide spending money. You may even want to encourage them to contribute to a Roth IRA. Yes, they’ll have to learn about income taxes, but it’s a great chance to teach them that a tax return is nothing to be afraid of (and the more they understand it, the more they’ll be prepared to save in taxes in later years).
Lesson #6: The Basics of Investing
There’s no getting around it—investments are confusing, complicated, and time-consuming. Many adults only have a basic understanding of the subject. Consider introducing your teenager to the basics of the stock market at an early age, giving them the foundation needed to comprehend the importance of investing in achieving larger financial goals. Even starting small now could yield large returns for your teenager later in life. Helping them understand long-term investments and how the market works now could be an impactful life lesson they’ll thank you for later.
At the very least you should teach them these three things:
- The difference between a stock and a bond. A stock is owning a piece of a company; a bond is lending money to a company.
- That risk and reward are inextricably bound together. To get a higher return, you cannot avoid taking on more risk.
- What a mutual fund is. A mutual fund is a pool of many different stocks or bonds. Buying a share of a mutual fund buys tiny bits of many different investments.
Kids learn a lot of things in high school, some more valuable than others, but these useful financial lessons are rarely taught. And they should be taught, because they can help the student understand vital financial decisions they will face in their adult lives.