Teach Your Teenager to Run from Debt with These 6 Tips
Teach Your Teenager to Run from Debt with These 6 Tips
Unfortunately, sound financial advice is not taught in school during one’s formative years. It is up to the parents to talk to their teenagers about how credit works, how to be smart about their money, how to save, and the importance of staying out of debt.
With the six tips below you can teach your teen how to run from debt and make smart financial decisions that will greatly impact their future and quality of life.
Debt Prevention and Financial Advice for Teens
1. Have them create a monthly expense report
To teach your teenager about the importance of budgeting their money, sit down with them and show them the value of understanding where their money is going and coming in from. Start with their income and the various sources they may be getting money from whether it be allowance, their job or another revenue source. Next, use their bank statement (or written list of monthly purchases) to get an idea of how much money they are spending.
Separate the items that are must-haves (needs) from the wants to determine where their money is going. Once they get an understanding of how much they make versus how much they spend they’ll have an eye-opening experience that can lead to further discussions about money. This will be particularly helpful for parents who provide their teens with a credit card.
2. Show them what compound interest can mean for savings
Compound interest is when the interest that accrues on an amount of money accrues interest itself. This concept can be somewhat confusing to teens until you show them how saving a little bit of money now and gaining interest on it can mean a huge difference between them waiting until later in life to save and putting a more substantial amount away each month.
The below graph by J.P. Morgan Chase shows the benefit of saving early and is taken from an article that showcases the power of compound interest that may also be of interest to your teen. It shows three individual examples of investors who put away $5,000 annually and provides your teenager a good representation of how starting early can lead to tremendous gains in the long run. Teens tend to be amazed by million dollar amounts, and this graph shows that contributing just $5,000 a year (only $416 a month), can result in the seven-figure savings they may be interested in.
There are two more graphs on the aforementioned article that further emphasize the importance of starting to save early. Bankrate also has an investment goals calculator that you can use to plug in real life examples.
Resource: http://www.businessinsider.com/amazing-power-of-compound-interest-2014-7
3. Teach them how electronics purchases using credit cards make no sense
Electronics. Teens are enamored by them and the latest-and-greatest devices seem to get more expensive each year. While there may not be an opportunity for you to discourage your teen from wanting the latest phone, you can teach them to be smart about their purchases.
Electronics, like smartphones, drop in price rapidly, so by putting cash away, their account balance will grow as the price for electronics goes down. When your teen uses their credit card to buy electronics up front (as the price is going down), the amount they are paying for them is increasing.
Show your teens what this means to their debt by using this credit calculator by Bankrate.com. For example, let’s take a common price for a new smartphone, $500. Assuming a credit card with 18 percent interest is used to pay for this device:
- with a minimum payment of $15
- your teen meets this minimum
- it would take your teen 47 months to pay off their debt
- accumulating another $200 in interest along the way
How’s that $700 phone going to be treating you in the four years it takes to pay it off, son?
4. Use the thermometer visual for younger teens to teach them about savings
If you have a younger teen who wants to buy something nominal, it’s never too early to teach them about savings. A good visual representation is a picture of a big thermometer that you can put on your refrigerator with dollar amounts along the side of it that represent their savings.
As your teen saves money, they can fill the thermometer with color to represent how close they are to reaching their financial goal. This process helps them realize that saving takes dedication but comes with rewards.
5. Show your teen the terms and conditions of credit card statements
Credit card companies’ terms and conditions are written by attorneys and are purposely worded in ways that are confusing and that protect the credit card companies. The word “may” is an important one in these documents and it basically translates to the credit card companies giving themselves permission to do anything they want whenever they want.
Communicate to your teen that these clauses mean that the credit card companies can keep their options open and can do things like change their credit card limit, cash advance limit and update their default rate to determine how much of a penalty they want to give them for being overdue on payments.
6. Teach them the mechanics of good credit and debt ratios
It is never too early to start helping your teen build their credit. To keep things simple, talk to your teen about the importance of paying down their balances each month. When they understand credit scores are basically an assessment of their risk, they’ll understand that having good credit means not using the full amount that is available to them each month.
This risk ratio, called the debt-to-credit ratio, is an important factor they should understand when building credit and being smart about avoiding debt. Financial professionals that tell you to use the 20%-30% of your debt are usually bankers that know by carrying a balance you will always be paying interest. The fact is that your score will be better by carrying less than 10% and your interest will be zero if you pay the cards in full.
Your Debt-free Teen
All parents want to set their kids up to be successful in life and one of the best ways they can do this is to teach them about debt. The average American has over $15,000 in credit card debt, meaning many of our neighbors have a financial burden looming over them each month. With smart planning, teens can avoid this downfall and lead more successful financial lives.
Author Byline: “Debthelper.com is an IRS Approved 501c3 Non-Profit Florida Corporation dedicated to our mission to educate, advise and empower youth to seniors to handle debt, credit and housing and to provide affordable housing opportunities through the acquisition and rehabilitation of residential properties.”
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Source: Bankruptcy blog