3 Steps to Achieving Financial Independence
3 Steps to Achieving Financial Independence
Introducing financial basics to teens can set them on the path to achieving financial independence at an early age. Establishing good habits now can pay off for years to come. It is never too early to begin the money conversation with your teens and here are some great tips to help get started.
1. Develop Fundamentals of Finance
In order to help teens grasp the fundamentals of finance, it is important to begin introducing the various concepts of money such as: spending, saving, credit, interest and budgeting so that they can understand the basics and start their own financial journey. Start by having the conversation with your teen about; how they feel about money, what they already know about money and how they think they can earn money. This will give you a general idea on how to facilitate the continued conversation and areas to focus on. You can then suggest and invite them to explore money-related books, online games, programs and webinars to expand their concept of money. Explain how parents work to make money, how they spend the money they earn, what things cost and what techniques they use to save their money. Make sure they understand the idea of “wants versus needs.” Explain to your teenager that just because they have money and not very many needs right now, that doesn’t mean they should spend all the income they earn or receive. Budgeting is an important concept to introduce at this age to teach teens savvy money savings tips and tricks to make their money last. Once you feel that they have grasped the basics, permit them to start a teen savings account to allow them to feel like they are in control of their own money under your supervision.
2. Work on Money Management
Once the basic money concepts have been established, learning how to manage that money is the next step. Whether you provide an allowance, help track spending with their teen bank accounts, open a joint credit card for them or help them handle their paycheck, teaching them how to manage their money is a very important lesson. Explain the difference between debit cards and credit cards. Debit is instant and money is pulled from your account right away while credit allows you to borrow money and obtain goods or services before a payment is made. With credit, it’s vital to understand that if the charged amount is not paid in full that month, you will be charged interest on the remaining balance thus costing you more over time. This will set the stage for discussions on creating a budget, tracking spending habits and setting money goals. Get creative with ideas on how to keep them on track by using; money/savings charts, money journals, reward charts, shared electronic documents for tracking or even creating a game. The goal is to place a portion of responsibility on your teen and how they are deciding to spend their money. An important question to embed in their minds when they consider making any purchase is, “Do I want it or do I need it?” This can help with various things like: patience, impulse purchases, buyer’s remorse, bulk purchases and identifying essential needs.
3. Establish Accountability
Establishing accountability can help and hold both the teen and parents responsible for keeping each other on track. This step is key to allow full transparency and honesty with your teen, and this portion can be known as “practice what you preach.” This is especially important where savings is concerned. We want our teens to have a car, their own place, college funds and an emergency account at the very least, as they enter adulthood. Establishing a smart savings plan now can create savings habits that will help them when making adult purchase decisions for when they are ready to buy a house, save for retirement or start a family. A good start would be to allocate a specific amount of their income towards their savings goals. For example, encourage them to put at least 20% of what they earn or receive into their savings account. Another great concept to introduce is compounding interest, which will allow your teen to start saving at a young age and let both the money they save and interest they build lead to a large amount earned over time.
The above tips will help you and your teen get the money talk started. Keep in mind what differences your financial path would have had if you were taught these important financial fundamentals as a teen. Remember it is never too early to involve them in your financial conversations and decision making to advance their understanding of future money responsibilities and help set them on the path towards financial independence.
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