What US Schools Don’t Teach About Personal Finance

The Pros and Cons of Credit Cards

As a teenager in the public school system, it’s unlikely that your child will face questions about credit cards. Once they set foot on a college campus, they’re surrounded by offers that seem too good to be true. Many give in to these urges, only to find themselves with high-interest credit cards and mountains of debt down the road.

For the most part, kids should pay with whatever they want in cash. Borrowing for something you can’t afford can create bad habits and long-term credit and debt issues. As they become adults and a credit score becomes important, it’s time for them to learn about the pros and cons of credit.

Using credit like loans and credit cards can help to build credit. In most situations, bad credit is even better than good credit. As your child ages, they get better interest rates, higher credit limits, and better perks if they have a higher credit score. If they never borrow money, there’s no way to prove that they will pay it back. One way to manage this is to open a joint credit card with them and make sure it’s paid off every month.

The cons of credit cards are more serious. Most have high interest rates, so you can end up paying so much each month in fees that you can’t keep up. It’s easy to overspend with a credit card, and it can damage your credit if you borrow and don’t pay back. Overall, teenagers should stay away from any type of borrowing unless they’re working with a co-signer.

How to Budget

This is a concept that is hard for some adults to learn, and it will follow your child throughout their life. Some experts recommend that teens obey the 50-30-20 rule. This means that 50% of after-tax income goes to needs, 30% goes to things they want and 20% goes to savings.

Some parents start their kids young with allowance and chores, but we have some specific tips for teenagers. The five important elements of a budget are income, fixed expenses, debt, unplanned expenses, and savings. It’s important that your child knows their income, sets goals, and tracks their spending habits. If they have an unsteady income, it’s harder to manage but even more important. Encourage your child to set their own goals and track their habits, but to ask for help when it’s needed. Some kids spend money like it’s burning a hole in their pocket, whereas others refuse to let go of a penny. The trick is to find the middle ground.

All About Taxes

Taxes in the United States are unique. It’s hard to explain the process in a way that will translate for the future, but students should understand why they pay taxes, how to file them, and where they go. They should also know about state and federal taxes and why they are taken out of their paycheck.

Some teenagers don’t have to file taxes if they’re dependent on another taxpayer (like a parent). The exception to the rule is if they have unearned income over $1,100, or earned income more than $12,200.

Federal taxes go toward federal programs or reducing the debt. Some programs funded by taxes include health insurance plans like Medicaid and Medicare, Social Security, and defense. State taxes go toward education, health insurance, higher education, public assistance, corrections, and transportation. Explain to your students how they pay into these programs and benefit from them.

Establish an Emergency Fund

Kids often live paycheck to paycheck (and adults do, too). This works until there is any type of emergency that requires extra funds. It takes patience to establish an emergency fund because you can’t see the future. All your kids see is money that they could spend, but they’ll be happy they saved when they blow out a tire or crack their phone screen.

Some experts suggest that kids have an emergency fund that equals three months of wages. Even if they can’t reach this number, working toward it teaches good habits. If that number seems overwhelming, start them small or save a percentage of their income each month.

There are many reasons an emergency fund is essential. The most common for kids are tickets, accidents, increased insurance, or unemployment. Teenagers don’t often make enough to sustain themselves if they lose a job, so this is the time they’ll really feel it if they have an emergency and no money to cover it. In some families, kids help with their own expenses or with housing costs. If that’s your situation, help your kids understand what unexpected housing emergencies look like, and how they can quickly affect your budget.

Identifying Needs vs. Wants

This is an important skill to learn for every person. Do you really NEED that new iPhone, or do you just WANT it? These are important questions to ask your teen when they go to spend their hard-earned money. A need is something they can’t do without, like food or gas. A want is something they buy for enjoyment, like a video game.

There’s nothing wrong with buying things you want, but when there’s a choice to be made, students have to understand that needs must come before wants. This is a great concept that parents can model as they raise their kids because it’s an idea that most adults struggle with also.

The Non-Tangible Benefits of Working

There’s more to having a job than money. While a job is work, that doesn’t mean they have to be miserable the entire time they’re working. Help them identify and find a job they love. Consider retail, food service, and janitorial work as some options for teenagers.

A job is an ideal spot for a child to gain confidence. They talk to strangers and learn things they don’t learn at home. Many also realize how nice it is to have extra money on hand and commit harder to their job. While there’s so much emphasis on budgeting, credit scores, and income, don’t forget that a job can provide social interaction and confidence to teenagers.

Their Spending vs. Their Parent’s Spending

In today’s world, many teenagers graduate and expect to have the same things their parents have. They don’t realize the decades of effort that went into building your career and your home, and may find themselves in debt if they attempt to keep up with those around them. It’s important that your kids understand that just because you have some things, they don’t have the means for them yet.

Many kids buy a home that’s too large or take trips they can’t afford because that’s what they’re used to, but the reality is that mom and dad’s money looks much different than theirs. This is also a good time to talk about careers with them because their spending ability in the future relies heavily on the industry they choose. Remind your kids that it’s okay to start slow and build up. They can have the older phone or thrift their clothes until they have a good foundation of savings, emergency funds, and income.