The Importance of Financial Literacy for Teens

Think back to your first year of adulthood. Did you feel financially prepared? Did you know what it meant to be financially stable and well? Did you understand the importance of credit and how to manage it responsibly? For many of us the answer is likely no.  

Unfortunately, many young adults never received formal and consistent instruction on financial literacy throughout their childhood and teen years. This results in teens entering adulthood woefully unprepared to properly understand and manage their finances.

Why is financial literacy important for the future?

When an individual lacks an understanding of key financial literacy concepts, they may easily find themselves facing financial difficulties stemming from a combination of poor decision-making, lack of knowledge, and challenging circumstances. This can then lead to a cycle of financial stress as they remain unaware of how to improve their situation. In contrast, financially literate individuals are better equipped to avoid financial difficulties or, if problems arise, they have the knowledge to make the adjustments and decisions needed to rectify their situation.

What is financial literacy?

There are many concepts and skills that fall under the umbrella of financial literacy, but the basic concepts typically revolve around budgeting, saving, and smart spending habits. True financial literacy is more complex than a few definitions and concepts. Financial literacy is understanding that when you spend beyond what you earn, you accumulate debt. It’s understanding that saving a portion of your income is key to growing savings and assets over time. It’s understanding that you should examine the purpose of wanting a loan, weighing the pros and cons, and then being able to evaluate if the extra interest expense and debt load of a loan is justified by the benefit you think it brings. Financial literacy is being able to understand the concepts of budgeting, saving, investing, borrowing, debt management, and spending habits, and how the decisions in all these areas affect your life and wellbeing in both the short and long term.

When and how should we be teaching financial literacy?

The sooner the better. Strong foundations start from the bottom. Introduce money concepts to your children from a young age so they will have a strong foundation from which to build knowledge upon later.  

The best way to teach kids is to make things as practical and real world as possible. Use examples and hands-on activities – for example, practice setting budgets with you when shopping for school supplies. Do they have their own bank account? Have them make a purchase with their debit card and pull up their online banking to show the funds leaving their account in real time.  

Another great strategy to determine when to teach financial literacy concepts is to pay close attention to what they are already learning about in school. Are they learning about compound interest? That’s a great time to relate school lessons to real life savings and credit usage discussions. 

If your teen or tween wasn’t able to start learning financial literacy concepts yet, don’t fret. There is no time like the present! Schedule time weekly with your teen or tween to get them up to speed.

What should my teen know about at a minimum before they enter adulthood?

While one can never be too prepared, here is a basic outline of what they should understand before entering adulthood.

Banking and Accounts
Know the difference and purpose of different types of bank accounts, such as checking, savings, Certificates of Deposit (CDs), etc. Additionally, they should know how to manage and access their accounts and know how to read bank statements and use online banking tools.

Budgeting and Saving
Know the importance of not exceeding your income and how to create and stick to a budget. This includes tracking income and expenses, distinguishing between needs and wants, and adjusting spending to avoid debt accumulation. They should also know the importance of saving money regularly and the concept of an emergency fund.

Credit and Debt
Know that credit is not “free money.” Teens should understand what credit is, how it works, and the importance of maintaining a good credit score. They should also understand and learn about different types of credit; for example, the difference between a car loan and a credit card, along with how interest works and the pros and cons and proper use of each type of credit product.

Income and Employment
They should learn the difference between gross and net pay along with how to read a pay stub and its various deductions. They should also know how to write a resume, search for a job, and how to prepare for a job interview.

Financial Decision Making
Teens should understand that in life we must make choices that are smart and that set us up for stability and success. This means thinking critically about what is truly in our best interest and making the conscious decision to possibly forgo an impulse or fun purchase in favor of our financial health.  

While you will never be able to prepare your children for every single possible life event, what you can do is give them the foundational knowledge from which they can build and grow upon.