Years ago, Marcia Shepherd decided to teach her two children about money — and not just about saving for a rainy day. Newly divorced, with her ex-husband living out of state, Shepherd figured that someone needed to show her teenage daughter and elementary-school-age son the realities of spending, financial obligations and the difference between what you want and what you need.
Today, Shepherd’s 16-year-old son knows how to comparison shop, what car insurance costs, why credit cards can be dangerous and, being a teenager, how many hours he’ll have to work at his part-time job to fix his broken iPhone. Most of these lessons, Shepherd explains, stemmed from “teachable moment” opportunities — dissecting a bill that arrived in the mail, discussing prices and consumption during a stop for gas — and continue as her son sets aside money for college.
“I don’t want my kids to become adults and say, ‘No one ever told me,’” Shepherd says.
Not every parent is so diligent. But financial planners and educators say teens — and even young children — need a firm foundation in personal finance in order to navigate everyday life. The sooner these current (and future) consumers understand how to spend, save and invest wisely, the greater chance they will have of becoming financially stable adults. To that end, this fall the state of Washington adopted financial education standards for grades K–12, in an effort to cover at school what may not be covered at home.
But when it comes to money, experts say, parents should be the first responders.
“Don’t be afraid to talk to your kids about money,” says Lyn Peters, spokesperson for the state Department of Financial Institutions. “Parents are hugely influential. No one is a perfect money person. Work with your kids on how to be financially capable so that they can stand on their own two feet.”
Needs versus wants
Learning how to manage money is a life skill. And sometimes, it takes a big mistake to come to terms with reality. The biggest lessons for teens? Controlling spending, understanding the consequences of borrowing — especially student loans — and protecting themselves against identity theft.
Today’s digital generation is more accustomed to debit and gift cards, and to mobile technology, than cash, explains Laura Levine, president and CEO of the Jump$tart Coalition for Personal Financial Literacy, a Washington, D.C.–based nonprofit that has created teaching standards for states to use as a resource.
When everything is electronic, there is a distance in the transaction, making it even more important that teens know how much money they have and where it’s going. To kids, buying is simple, says Levine: “You swipe that card and you get stuff.”
For the most part, protecting against identity theft requires the same precautions, no matter the consumer’s age: watching bank statements for unfamiliar charges; avoiding online or mobile purchases on public wireless connections, which are often not secure; and signing up for account alerts, which many banks provide.
Teens, however, are especially prone to another identity-theft risk: sharing passwords. The honest roommate may not give anything away, Levine offers, yet the roommate’s shady friend might get ahold of a password. The solution: Keep all account passwords private and change them often.
“We want to make students more aware of the world in which they’re living,” Levine says. “Parents need to put more emphasis on keeping track of money, because we make it so easy for kids to spend it.”
A variety of online guides and lessons are available, both for the individual child and for the whole family. But these should accompany, not replace, conversations between kids and parents.
The first step, says Dana Twight, a financial planner in Seattle, is to define needs and wants — which leads to a discussion about opportunity cost. Money spent on snacks and movies, for instance, is money that isn’t available to buy the shirt, shoes or gadget you also want. (Another real-world lesson: Put your older teen in charge of the grocery shopping for a week, with a set amount of money and some guidelines for meals.)
Establish a formula for saving and spending, especially when a teen has a job, Twight says. One option is to set aside 50 percent for long-term savings, reserve 25 percent for a month and keep 25 percent available for immediate spending. Offering a “parent match” (think 401(k) matching) can be further incentive to save.
Be sure to explain the purpose and results of saving, Twight adds; otherwise, it becomes an almost esoteric concept. For young people, the idea of an “emergency fund” doesn’t ring true. Instead, give the savings account a name that’s relevant to the child, whether a study abroad fund, a college fund or a new cell phone fund.
James Anderson, a Tennessee-based financial planner, explains: “It’s natural for young people to live largely in the present. Sometimes the notion of preparing for the future can be more abstract for them. A financial adviser accepts the idea that one should start saving as soon as possible, but young workers feel that they can easily make it up later on.”
A father of three, Anderson says teaching about money is like any other basic concept of being a happy and healthy person, with the same importance as being empathetic, eating vegetables or studying hard.
Beware when borrowing
Borrowing money also carries lifetime lessons. Although laws now limit the marketing of credit cards to young people, plenty of college students have credit and misuse it. Teaching the repercussions of late or missed payments — and the lasting role of the credit report — is key.
“If you learn credit by trial and error, it’s an expensive and long-term lesson,” Levine says.
In other words, whatever you buy, you still have to have the money to pay for it. And that goes for college, too.
Even before a teen or family researches student loan options, they should talk about career choices, says Pam Whalley, director and president of the Center for Economic and Financial Education at Western Washington University. That doesn’t mean kids should seek out only lucrative careers, she points out, but they should have a clear idea of what their chosen profession will yield, and what college or trade school will cost them. That way, they can either start preparing for substantial debt or make decisions that will mitigate that debt. Running Start or school-district-affiliated skills centers, for example, allow high school students to earn college credit or begin training before graduation. (Learn more about whether Running Start is right for your child).
A lot of teens aren’t set on a career, Whalley notes. But talking about their interests and where they see themselves in the future is a start. Several websites, such as those of the College Board and the federal Bureau of Labor Statistics, provide information about the costs of undergraduate and graduate degrees, and the expected salaries from those degrees.
And if a teen intent on a doctorate in sociology researches the costs and benefits and still wants to press ahead?
“If that is what is going to make them happy, then look at what colleges will be able to deliver that, without making [that teen] go into massive amounts of debt,” she says.
That’s how Rob Mathewson sorted through college options with his twin sons, starting when they were high school sophomores. It was a daunting prospect, Mathewson says, so they broke it down first by academic interests and career goals. They researched average salaries and, when college acceptance letters and financial aid packages arrived, made some projections.
“We were able to put all these pieces together as to what they might be making when they got out of school, what their loan burden might be and what their living budget might be,” he says.
And that’s when a couple of dream schools fell off the list, Mathewson says. It was a conversation, in a way, about opportunity cost.
“This is what you’re taking on,” he recalls telling one son. “Ultimately, he decided it wasn’t worth it.”
The boys, who left for college this fall, are attending universities that are right for them. And the debt? Manageable.
Coming to the classroom
Personal finance lessons are available in schools in all 50 states, but few states make financial literacy a graduation requirement. In many cases, financial education is included in high school economics classes or as a specific course in career and technical programs.
Here in Washington, a nearly decade-long effort to adopt financial education standards is expected to culminate this fall, when state Superintendent of Public Instruction Randy Dorn signs them into effect. The standards for grades K–12 are considered guidelines for curriculum development and are meant to help teachers incorporate personal finance into, for example, math or social studies lessons, says Pam Whalley, director and president of the Center for Economic Education at Western Washington University and a member of the state’s Financial Education Standards Committee.
“Studies show that, nationwide, the presence of standards means more personal finance is taught in schools. Otherwise, it ends up on the back burner,” Whalley says. “Standards provide legitimacy to teaching personal finance in schools.”
The committee used Jump$tart’s national standards as a foundation for creating Washington’s own standards, she says, focusing on 21st-century skills.
Standards are also meant to be age appropriate, Whalley adds. Why teach a kindergartner about credit? Because it’s not all about the cards: If children learn what it means to borrow a book from the library, they’re starting to learn the concept of credit.