Important lessons when teaching teens good money habits
EVERYONE knows the saying "It's easier to learn something when you're young". So what can you do to teach your kids good money habits?
If you've ever asked a teenager to clean their bedroom, you would know they can get fired up. In this case, it's a passionate defence of their right to anarchy in one room of the house.
But can you get them fired up about money? Or, more specifically, about making, saving and investing money?
According to a recent global study, Australian students rank fifth in the world for financial literacy. That's the good news.
The bad news is their overall scores have fallen in recent years. In the 2012 Programme for International Student Assessment financial literacy test, students scored an average 526, while the 2015 scores fell to 504.
Teaching kids about money is important at any age. However, teenage financial skills are even more crucial. They are often earning their own money from age 14, and then they are on the cusp of being given access to financial products such as credit cards, payday lending and mobile phone contracts as soon as they turn 18.
Not only do they need to avoid the pitfalls, such as racking up debt, they also need to know the positives, too: How to save, invest and grow their money.
There are lots of great resources already available to help them on this journey. The Federal Government's MoneySmart website is a good start, and there are also dedicated teaching resources you may find useful.
But our own life experience is sometimes the best teacher, so we've asked our own wealth experts about some of the important lessons they think teenagers need to learn.
Learn how to save
This sounds simple but it's a behaviour that often needs to be practised over time. Encourage your kids to have a dedicated savings account they don't access and keep separate from spending money. This is particularly important if they're earning an income.
Encourage your teenager to save for an item they are convinced they "have to have", rather than buying it for them. The satisfaction of setting a savings goal, and achieving it, is actually one of the best gifts you can give them.
Understand compound interest
Putting away a bit away, over a long time is the key to building wealth. Sit down with your teenager and show them the power of compounding - for example, saving $10 per week at 4% interest over 10 years = $6390, 20 years = $15,923, and 30 years = $30,141. (Of course, that's before any costs such as bank or investment fees.)
The key to compounding is that the earlier you start, the better it works. So why not paint the picture for them now, and they can start building wealth early. MoneySmart has a nifty little compound interest calculator that you can use for this purpose.
Read the fine print
Signing up for a new mobile phone might seem exciting and grown-up, but a post-paid plan with a handset is essentially a credit contract. You promise to pay a certain amount, and they give you a shiny new phone on the proviso you pay it off.
If you default on that contract, you can end up being chased by debt collectors and given a black mark against your credit file.
This might seem obvious to adults, but many young people can be drawn in by the excitement and blind to the fact that they are taking on a big responsibility.
This simple concept - that you must pay back debts - can be glossed over in an era of easy credit. One person can rack up multiple credit card debts for a long time, before the debt collectors come knocking.
And in an age of cashless tap-and-go, it's easy for money to lose some meaning when you can't see it and hold it.
Go through paperwork with your kids whenever they make a financial commitment, or you do it on their behalf. Talk about the terms and conditions in the contract, and be clear on what's required from them.
Another good idea, before they sign up to a credit card, is to talk about "minimum repayments". According to calculations by Fairfax, if the average Aussie credit card debt was paid off at the "minimum repayment" level, it would take more than 27 years!
The best way to pass on good money habits is by modelling them yourself.
If you feel like your own skills and knowledge could do with a boost, there are plenty of resources you can call on.
Visit MoneySmart.gov.au to get started, or speak to a financial adviser about how you can get your finances on track.
This information is general in nature and readers should seek professional advice specific to their circumstances.