Thursday, 9 August 2018

We all have a top 3 list of the things we wish we would've learned as teenagers.

Depending on what matters most to you, that list could include which fork to use when, how to change a tire, or how to gracefully handle conflict.

But chances are most people would've appreciated more money lessons in their teens.

Research shows that even if parents are good with money, their kids will grow up with wild misconceptions about finance – unless parents make a concerted effort to share their money smarts.

For example, a study out of the University of Texas and North Carolina State University showed that young children are curious about money and aware of the household emotional climate around it. When the topic is discussed, parents tend to talk more to boys than girls about money and debt.

“Even if parents don't want to discuss family finances with their children, it may be worthwhile to explain why they don't want to discuss that topic," said one of the lead researchers, Lindsey Romo, in an article in Science Daily.

Another research project showed that when teenagers are taught about money, they're better able to assess whether buying an old car or trendy designer shoes is a good investment and curb impulse purchases.

Common money mistakes for teens

Josh Burnette is the co-author of Adulting 101: #Wisdom4Life, a training manual for young adults entering the work world. He said that the most common kind of mistake teenagers make is overestimating how much they'll earn and underestimating how much something actually costs beyond its price tag.

He uses the example of buying a car: “It is often forgotten that insurance will typically go up, the car will need repairs, taxes will have to be paid, etc. The sticker price on a vehicle is just the beginning," he said.

He also said that many young adults get advice to build their credit by getting a credit card even though they don't always understand how credit card debt can grow and how much it costs in interest and fees. “Credit cards are a slippery slope when not paid off every month. Once behind it is very challenging to get caught up. And the interest payments alone begin a snowballing process on the cardholder."

Understanding money basics

There's one very basic rule about money that everyone needs to understand—including parents: Your income needs to be more than what you spend.

The larger your margin is on the income side, the more money you'll have to invest, save, and spend on the things you really want. “This margin allows us to have freedom and not have to live paycheck to paycheck," Burnette said.

He suggested teens allot money they receive this way: For every $10 you earn, give $1 away to a charity or person in need, save $1, and live off the other $8 .

“The earlier you become comfortable living off only 80 percent of your income, the better prepared you will be for the future," he said. “Never forget to give, then save, and then spend. Having a heart of giving will be a life-changing mindset that helps us see the world from an abundance mentality instead of a scarcity mentality."

It's also important teens understand the concept of investing and compounding interest. “Time is your friend. Starting small, earlier is much better than more later. Save from each paycheck and allow time to work for you. The actual selection of the investment is secondary to the act of saving money," Burnette said.

One simple tactic that will show a teenager the power of investing early is to show them the power of letting money compound interest over a number of years. Money guru Dave Ramsey uses a chart to show the difference between two people's investments. If Ben invests $2,000 every year from the age of 19 through 26, and then lets it ride through the age of 65, he'll end up with $2,288,996 from compounded interest alone. If Arthur invests nothing from 19-26, but $2,000 from 27 until he turns 65 (a full 38 years), he still comes out $700,000 behind Ben. 

How parents can help – even if they aren't experts

It's easier to pass along money knowledge and best practices if you've got a solid handle on it. But the topic of money is often fraught with negative associations – either from our own negative experiences as teens and young adults or what we've developed on our own as an adult. Burnette said it can be challenging, but not impossible.

“The best action is just being honest with your kids around what your mistakes have been and what you would do differently if you could do it over again," he said. “My encouragement is that it is never too late to become a good financial steward. Start today with a budget and better decision-making.

"Sell the expensive car or house and live within your means. And tell your children why you are making these life changes. As you grow in your own wisdom, share this with your kids. Show them what it looks like to pay the bills, make a budget, go grocery shopping, save for a vehicle, etc. The more you integrate your children into your life as an adult, the better equipped they will be to 'adult' later on."

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