It’s Laura here. This week, my 15 year old daughter joined Financielle on work experience and today the team set her a challenge: write an article on what a teenager should know about money before they leave high school.
Now let me tell you – I did wince a bit – what does the daughter of a so-called BBC money expert actually know about money? Has anything that I’ve said gone in? Has she watched her Dad and I manage money well? The anxiety!
Anyway, it turns out she knows a thing or two – naturally I’m impressed / relieved.
Ultimately, we want our children to be able to handle money well, especially when life hits. We actually talked about it in detail on this older episode of The Vault – check that out here.
Here’s 5 things your teenager should know about money before they leave high school:
Picture this: You’re 16 years old, just finished your GCSEs, going into college, and you have absolutely no idea how to manage your money. Let alone know what these “fancy finance terms” mean.
You don’t want to look stupid by asking what these actually mean, but you don’t want to blindly search the internet only to get bad or overcomplicated advice.
Well here are 5 things about money you should know about at this age:
1. Emergency Fund
It’s essential to have an emergency fund.
What actually is an emergency fund I hear you ask? An Emergency fund is a pool of readily accessible cash that you put aside in case of a sudden and unexpected emergency.
Whether it be for a medical emergency, a job loss, or car/home repairs, it’s a nice safety net to lean back on if anything bad happens.
Make sure you put some money in every opportunity you get. Every bit makes a huge difference.
2. Budgeting
Budgeting is really important.
Budgeting basically means making a financial game plan.
When budgeting, you account for your income. You then categorise your expenses into fixed expenses (costs that remain the same. e.g. rent/mortgage, car payments, subscriptions), sinking funds (pots of money you save for planned or expected larger expenses) and flexible expenses (costs that could change. e.g. groceries, entertainment, fuel).
Then you decide what your goal is. For example, you might want to save your emergency fund, pay off a loan or save for a holiday – so you use your Excess money in your budget to do this.
When you budget, you can make progress towards your goals, rather than hoping and praying they just come true.
3. Spending and Saving
The most important part of spending and saving is learning to balance them out.
Categorise where your money goes into what you specifically need and what you just want. This prevents overspending on things that you could live without and goes towards building your savings.
Setting aside a dedicated amount for savings once again creates a safety net for you to be able to lean back on in case of emergency.
However nice it is to treat yourself, try not to do it all the time. It’s all about balance.
4. Debt
Try to avoid debt wherever possible.
Debt is money you owe to a person or organisation.
Some people say there is good debt and bad debt.
Good debt can benefit you in the long run and help you financially, for example taking on student loans could help your earning potential; taking out a mortgage on a property can give you both housing security and the value of the house could go up.
Bad debt is used to purchase items like consumable goods that may make you feel better in the short term, but offer no long term financial return ( eg credit card debt for luxury items).
5. Compound interest
Understand the power of compound interest – time literally is money.
Compound interest is calculated on both the original principal amount and the accumulated interest from previous periods. This basically means the growth gets added, and then future growth compounds on that, and so on.
Time is such a big factor – the earlier you start investing, the better.
Here’s an example graph built using The Financial Times Investment Calculator.
In this graph, a 16 year old invests £100 a month across 50 years – the orange represents contributions, the yellow represents growth – aka free money!
If a teenager can understand they’ll be better prepared to battle through life (financially at least).
PS. Why not have a go at building a pretend budget with your teenager in the Financielle app?