Four money lessons to teach your spending teenager

20 May 2013

By Shadforth Financial Group

I was quite fortunate when I was growing up to have a father who taught me about the value of money. I would never admit to taking all of his advice on board, because as a teenager at the time I knew everything; however I was fortunate as it gave me a sound footing for my financial understanding.

I think it is vitally important that the right money lessons or messages are taught to our children and it baffles me that the current school curriculum does not involve some sort of compulsory 'money 101' subject.

Lessons on money should be taught to kids of all ages, but in this blog post I will focus on four important tips for those in the teenage years.

1. Never use money as a reward.

I remember at school friends used to say that their parents would give them a certain amount of money depending on the grade they got in their exams. I don't like this; I think it distracts teenagers from the actual pleasure in doing well at school. It also emphasises that money is the only reward that matters, which we all know is not the case.

2. Teach them the power of compound interest and regular savings.

Compound interest is one of the most powerful tools to teach at an early age. An example of this is two brothers, Tim and Michael. Tim got a job when he was 15 and immediately started saving $20 a week, just over $1,000 per annum. He did this for ten years.

Michael on the other hand didn't start saving until he was 25. He focused on studying, university and travelling before getting a job at 25. He then started the same saving routine as his brother Tim but saved for the next 30 years.

At 60 years of age, would you believe that Tim, although contributing only a third of the amount as his brother, has used the power of compound interest to end up with a portfolio worth more than his brother's. A value of over $120,000.

By starting early you can let the power of compound interest do its thing. An important lesson to learn early on.

3. Learn about tax

As they say, there are only two certainties in life - death and taxes. As soon as your children get their first pay packet, they should have already learnt the difference between gross and net pay. There are a number of online tax calculators which they can play around with (including one on the Shadforth website). Remember if they are going to study at university and take out a HECS-HELP loan, there are additional taxation requirements to learn about there also.

4. Educate them about the pitfalls of credit cards and mobile phones

My first piece of advice would be that a teenager should use a credit card and mobile phone responsibly. They are fraught with danger and I have seen too many times how even adults mishandle a credit card and mobile and end up in serious financial difficulties.

According to a Schwab 2011 Teens and Money Survey, only 39% of surveyed 18-year-olds knew how to manage a credit card, this is clear evidence that it is critical that your children are aware of and educated about how interest is charged and how that can compound over time against their favour. Your children should look at and compare interest rates and annual fees, and set the maximum spending limit at a manageable amount.

My biggest tip here would be to just use it for small purchases or emergencies, and know that savings have been set aside to clear it as soon as payment is required. A good credit history can be critical when it comes time for your child to buy their first house.

This is by no means an exhaustive list. I could write about this subject matter for hours, but it is somewhere to get started. If your teenagers can understand these basic principles they should be well on the way to understanding a bit more about money. I look forward to having these conversations with my boys in ten years time!

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