Want to Give Your High Schoolers a Great Gift? Teach These Five Financial Skills
February 19, 2019 by Maggie Bonecutter
When it’s time for our cherubs to graduate from high school, we might start taking inventory of skills we’ve passed along for success: Look both ways before crossing the street? Please and thank you? Stranger danger? Laundry?
As we’ve mentioned before, it’s essential to talk with your kids about money. But when our high schoolers leave the nest, it’s important for these young hipsters to know several key elements about their finances. Understanding the fundamentals now can help dispel the taboo of managing finances and set them on a path of making smart money choices for a lifetime. Gift your kiddos with these five financial skills before they head out.
How to balance a checkbook
With debit cards, credit cards and various ways to transfer funds online, do young hipsters even know what a checkbook is these days? They most definitely should, as keeping one neat, tidy and accurate will help students know where their money is going, stick to a budget and avoid those nasty overdraft fees – funds that could be going for something much more exciting and important. Also, teach your high schooler how to write a check; some places still accept them.
How much it really costs to have a car
Lots of kids save for a car – and that’s outstanding! – but they need to know from the get-go that the expense of the car doesn’t stop when they drive off the sales lot. Ongoing operational costs include gas, periodic maintenance, unexpected repairs, insurance (which can be more or less, depending on the kind of car) and the unanticipated expense of a “high speed driving award” (our family’s term for a speeding ticket). Also talk with your students about new versus used cars. The value of a new car can plummet 20 percent in the first year of ownership – not the smartest investment.
The magic of compound interest
Because high schoolers have time on their side, saving even a smidge of funds now can pay mega dividends later, due to the magic of compound interest. It’s like this: Let’s say your high school senior starts saving $10 a month for four years. The principal (or amount he socked away) is $480, a tidy sum to be sure. But, if he places it in an account with an interest rate of three percent compounded monthly, his $480 is magically boosted to $509. That’s $29 in free money. What if he upped his monthly savings to $50 for 40 years in a financial product with a five percent interest rate? Now we’re talking. His total cash stash would be $24,000, but his compound interest (i.e. free money) would be – wait for it – more than double at $52,619. His original $50 per month magically turned into $76,619. Play around with this handy compound interest calculator from the U.S. Securities and Exchange Commission to run different scenarios and dream big. Understanding the math and magic of compound interest can help ignite a desire to making saving a lifelong priority.
The beauty of a budget
It’s so enticing. An invitation to go out with friends, which will no doubt include getting a bite to eat, admission to the movies or whatever featured activity and more. Evenings like that are all fun and games until there’s no money left for groceries, utilities or rent. How to avoid that? A beautiful document called a budget. Boring? Yes. Essential? Oh goodness, yes.
Budgeting isn’t too hard for young hipsters, as their expenses aren’t that complex yet. Just take a piece of paper and divide it down the middle. Funds coming in go on the left and on the right are fixed expenses (like utilities, rent, car payment and insurance) and variable expenses (like mocha lattes, groceries, clothes, anything fun). Do the expenses exceed the income? Scale back on the variable expenses until the amounts are even on both sides. Does income come out on the high side? Sock it away and watch it grow (see the compound interest section).
One method for putting the budget into action is to place cash in envelopes marked for each category. When the money is gone, it’s gone. Several apps can also help with keeping on track.
How credit cards and interest rates work
Ideally, it would be great for young hipsters to not use credit at all. If they’re sticking to a budget, they should have enough to cover expenses and have enough in savings to handle the unexpecteds. But, credit cards can be handy for emergencies and building a healthy credit profile if — and here’s the big “if” — they are paid off in full each and every month. Kids must understand that each and every dollar charged has to be repaid at some point — and sooner rather than later. Not paying the bill at all or not paying in full each month could result in nasty gremlins like late payment fees that are added to the balance and interest that accrues daily on that balance. Not fun. What’s more, not using credit properly can result in inflated interest rates, which digs that hole even deeper.
We know that young hipsters might not view these financial skills as gifts. (“Those super-mega-overpriced boots are a REAL gift, Mom!”) However, we’re confident that when they get older, they will realize the value of those skills and thank you for setting them on a solid path to smart financial planning.
Get Namu today to help with your finances!