Personal Finance For Teens
Last summer, Kid Sense and I sat down for an hour each week to talk about one of my favorite topics– personal finance! I was blessed to grow up with parents who were open about their financial goals and opinions. While they didn’t share the numbers with us, my sisters and I knew where they stood on giving, debt, and budgeting. My daughter moved in with us as a teenager, and I wanted to make sure she had a strong financial knowledge base before adulthood. Over several weeks, we talked about budgeting, debt, saving, giving, and investing. I was pleasantly surprised to see Kid Sense take an interest in our family saving money on groceries and other items.
We started out with our most foundational beliefs about money: it all belongs to God, and our job is to be good stewards of it. I gave Kid a worksheet with questions about her own goals and values, and I filled one out as well. This led to a valuable conversation about how different people can reasonably pursue different financial goals. Of course, not all goals can work in tandem. Some jobs don’t pay enough for workers to buy Lamborghinis, or even Hondas. I explained that choosing an occupation just because it's highly compensated has benefits and drawbacks, and isn’t a one size fits all proposition. Kid Sense has expressed an interest in a career in social work, and we frankly discussed the required education, compensation, and broader impact of a career in that field.
Many parents wisely teach their children to distinguish between wants and needs. This is key, even for very young kids. For a teenager like Kid Sense, I went a step further and taught her about budgeting, where the skill of discerning wants from needs is essential. I assigned her a typical monthly “salary” for a college graduate in our area and had her develop a budget. We looked at apartments in the area, including reviewing rental application requirements. Kid’s first budget only allowed $120 per month for food, which I explained would be a beans-and-rice only diet. She didn’t allow much room for fun spending, so we discussed ways to enjoy life for less money, while also pointing to the potential for burnout from a too tight budget. Clearly, boxing yourself in through high fixed expenses, like rent and car payments, can lead to this mom’s biggest nightmare: out of control debt!
Any finance class taught by me would obviously involve a whole bunch of warnings about debt, and I made sure Kid Sense understood how debt accumulates and the true costs associated with not paying off a credit card right away. Compounding interest is one of the scariest forces when it works against you. After explaining the math, Kid calculated the total cost of several pretend balances based on different interest rates and terms. She was blown away by how easily a pair of shoes or a restaurant meal can double in cost, even when the advertised monthly payments seem reasonable. I explained how credit scores function and their impact on us, ranging from helping us buy dream houses to potentially barring us from jobs. Credit scores are built slowly through honoring our promises to repay debt on schedule, keeping balances low in comparison with available credit, not showing desperation through numerous attempts to borrow more and more money, and gradually demonstrating reliability to lenders over time. One common mistake that can destroy someone’s credit, even if she follows all these rules perfectly, is cosigning for someone who doesn’t value creditworthiness. Cosigning is such a dangerous financial move, I can’t think of a situation where I’d recommend it for any young person. Even established adults should avoid cosigning for anyone unless they would easily be able to pay the debt if necessary. And of course, married people should secure the approval of their spouses before entwining their financial security with anyone else. A few years after I graduated from college, a close friend asked me to cosign for an apartment for her. Her credit was limited and she was struggling to get approved for the place. I was torn, because this was a truly good friend. I asked her to send me a link to the apartment, and was surprised to see it was much nicer than the small house I was renting for myself. My friend disclosed that she was ineligible without a cosigner because her income was below the minimum requirement, but because I had a much higher income, she could qualify with my name attached. Immediately, flashing red lights exploded in my brain. I declined, offering to instead help search for a more affordable option. Unfortunately, she eventually found someone else to cosign, but was evicted from the apartment a few months later. If I had made the mistake of cosigning for the apartment, not only would I have suffered serious negative effects on my credit score (or on my bank account, from attempting to pay the rent myself), but an important friendship would doubtless have been destroyed over the matter.
No Christian personal finance discussion is complete without an acknowledgement of the importance of generosity. Outside of our church pledge, Mr. Sense and I involve Kid Sense in our charitable giving plans. We focus our efforts on local groups that help needy families and those involved with the social services system. We carefully research these groups, as well as larger ones, to make sure donations filter through to the people who need them most. Though it doesn’t have information for many smaller organizations, I’m a fan of CharityNavigator.org for checking into potential donation recipients. This site allows us to quickly evaluate the effectiveness and accountability of charitable organizations before we donate.
In our final session, Kid and I discussed different types of investments. Many young people have interest in investing, but don’t know how to get started. Others blindly follow bad advice without understanding the risks, putting their money at risk unnecessarily. Diversifying investments, avoiding fee-laden funds and managers, and practicing patience are all key to a successful investment strategy. I don’t expect Kid to start investing on her eighteenth birthday, but I don’t want her to wait too long just because she doesn’t know she can set up an account on Schwab.com as quickly and easily as an Instagram page.
Part of training kids to be fully functioning adults is teaching them about money. Parents should not shy away from talking to their kids about finances in an age appropriate way. This can’t be a one time conversation; we must fill in any gaps by talking about money issues as they arise. When our mortgage statement shows up in the mailbox, I remark to Kid how the percentage of the payment going to interest is slowly declining– how exciting! When we consider giving a larger donation to a charitable organization, we have Kid research it and determine how much of the money will go to help people, versus overhead expenses. And these days, when we go to Aldi and there are red 50% off stickers on a household staple, Kid is the first one to notice.
