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Parent teach financial literacy to child_Aspyre

This year, approximately 3.7 million students are expected to graduate from high school in the U.S. According to VisualCapitalist.com, only about 25% of U.S. high school students receive formal personal finance education by the time they graduate. This gap in financial literacy can lead to costly mistakes that may haunt them for years, such as accumulating debt or damaging their credit score.

Even if your student is one of the lucky ones who will have access to a personal finance course in school, help set them on a path of financial success by making sure they live what they learn. Here are seven essential money lessons everyone needs to understand.

  • Opportunity Cost:  Teach them that spending money on one thing means forgoing the chance to use it for something else. Understanding opportunity cost helps them make more informed decisions.
  • Money is Finite: Once money is spent, it’s gone. Help your teen recognize the trade-offs between immediate purchases and saving for future needs or wants.
  • Delayed Gratification: Instill the importance of waiting to make purchases. Encourage them to plan and save for desired items rather than buying impulsively. This will help them avoid the trap of excessive credit card debt.
  • Save at Least 10% of Earnings: Cultivate a habit of saving a portion of any income. Money can be used to enjoy life now but should also prepare for the future. Adults who save 10% to 20% of their income are better prepared for emergencies, live within their means, and have more financial flexibility. Savings can be short-term, like for a vacation, or long-term, such as for retirement.
  • The Power of Compound Interest: Explain that saving or investing money can lead to earning interest, which then earns additional interest. This concept of compound interest can significantly grow their savings over time. Consider helping them set up a Roth IRA and discuss basic investment principles to give them practical experience in growing their money.
  • Credit Cards – Tool or Danger: Make sure your teen understands that credit cards are loans. If not managed properly, they can lead to paying more for items due to interest charges. Since students can get a credit card at 18 without you knowing, discuss responsible use and the importance of paying off the balance each month.
  • Taxes are a Thing: Prepare them for the reality of taxes reducing their take-home pay. If they engage in gig or contract work, emphasize the need to plan for taxes throughout the year. Explain what taxes fund in their community to give them a broader perspective.
  • Emergency Fund Importance: Highlight the necessity of having an emergency fund to cover unexpected expenses. Without one, they might resort to debt, impacting their future finances. Stress that life is unpredictable, and being financially prepared is crucial.

Don’t Wait! Teach Financial Literacy, Now.

If your student has graduated this year and you are not confident in their financial acumen, get busy now! Better late than never to equip your teenager with these seven money concepts. Those who start out with a solid financial education are more likely to maintain financial independence. Data from a survey by the FINRA Investor Education Foundation shows people with low levels of financial literacy were five times more likely to be unable to cover one month of living expenses, when compared to people with high financial literacy.

If your children are still young and you feel you have plenty of time to start these lessons, think again. Children can grasp basic money concepts as early as ages 3 to 5. By ages 12 to 14, start giving them “real-world” money management experiences. Allocate a monthly amount for their entertainment, clothing, and other needs directly into their own checking account. This way, they can practice budgeting and understand the consequences of spending decisions.

Check out the book series by Jamie Bosse, CFP® written for young learners, Milton the Money Savvy Pup.