7 reasons to teach your teen about personal finance
17 November 2021
In just a few short years, your teen will live on their own, most likely in university outside the UAE, armed only with their own judgements and whatever lessons you managed to teach them. One of the most valuable resources you can give them is a basic education in personal finance.
Your teenager is likely to have their first job and will be heading off to college or university soon to claim their independence. And while there are many important things to discuss before these milestones are reached, the tricky subject of personal finances should be a priority.
If you consider that teens in the United Arab Emirates receive an average allowance of about AED 600 per month (Cashee Survey, UAE, 2021), the likelihood that they are already making some mistakes with spending and money management is big. Luckily, many financial problems faced later in life can be avoided if teenagers are offered proper personal finance solutions from their early years.
Think about the jump start your teenager could get if they were already budgeting, saving, and spending wisely before they graduate. Being financially literate at an early age will also help your child to avoid some scary financial pitfalls in the future.
But what exactly does it mean to be ‘financially literate’?
Financial literacy is the ability to manage your finances effectively to accomplish long-term financial goals, such as investing in education or buying a house. Being financially literate provides teenagers with knowledge and skills that allow them to strategically manage their money to increase productivity.
But today, teaching teenagers how to manage money is quite different. As technology evolves around payments and financial management, transactions are no longer tangible. Cash is not as common anymore and learning to become financially savvy is starting to look a lot different than in the past.
Why you should teach your teen about personal finance
Whether your teenager is earning money on their own or thinking about their future independent spending, you can help them grow into a financially responsible adult. Let's explore why this is important:
1. It's necessary to distinguish between needs and wants.
Healthy financial habits start by distinguishing between what is essential and what is “nice to have”. In today’s world of extreme consumerism, the need for instant gratification and the media bombardment of new products, you can’t always blame people for their spending habits. But by teaching your teenager how to differentiate between needs and wants, they become more aware of their decisions and over time, become conscious consumers.
2. Budgeting teaches awareness and responsibility.
Budgeting teaches you self-discipline, how to save money, and how to take control of spending. Teaching your teenager how to budget is also important to help them make educated financial decisions that will benefit their long-term goals.
3. It's easier to avoid money scams.
Today, financial scams and fraud are prevalent. And criminals are becoming more clever. It's becoming harder to distinguish between what is real and what is a trap. If your teenager is not educated about too-good-to-be-true money opportunities, they can easily fall victim to scams. That's why teaching your teenager about looking out for red flags is so important.
4. They can avoid bad debt.
Bad debt involves borrowing to purchase a depreciating asset or expensive debts that drag down your financial situation. High-interest credit cards, personal loans for discretionary purchases and payday loans can all turn into bad debt. It is essential to talk to your teenager about the dangers of bad debt. Remember that any type of debt can quickly turn into bad debt, so it is important to consider ways on how to effectively manage debts and how to avoid pitfalls.
5. They can prepare for emergencies.
Life is full of unexpected twists and turns. Unfortunately, many of these events require us to have access to extra funds available. An emergency fund is money that’s been put aside to cover life’s unforeseen events. It is essential to teach your teenager about the importance of having an emergency fund. This money should allow them to live for some months should they lose their job or pay for something unexpected without going into debt.
6. They can enjoy many years of financial independence.
When teenagers grow up learning about healthy financial practices from an early age, they will make good financial choices as an adult. They will also be more willing to make positive choices without feeling intimidated. This can result in a life of independence from excessive spending and unnecessary debt. Healthy financial habits can last a lifetime.
How to talk to your teen about money
In a study conducted by Cashee in 2021, involving over 250 parents across nationalities in the United Arab Emirates, parents cited that the top challenges they faced teaching their kids about money were not having enough time, not having the right tools and not knowing how to teach. There’s no need to schedule a six-hour lecture on bank account balances and retirement plans. You can start by simply answering your teen's money questions and discussing practical examples.
Remember to also be honest with your child. If you regret not saving for college, tell your teenager. Instead of hiding your financial failures, tell your child the truth. They can handle it and will, in most cases, learn from your financial mistakes.
How to teach your teen about personal finances
So, what exactly are you supposed to be doing to make sure your teenager manages their money and actually learn some vital money management skills? Let's explore:
1. Budget, budget, budget
According to a Mint survey conducted in the US, young consumers are the least likely to know how much they spend. Only 23% of individuals aged 18 to 24 knew how much they'd spent last month. This percentage decreases drastically between the ages of 16 to 18. The earlier you can teach your child about the value of budgeting, the better. Luckily, there are many mobile apps available today that can help your teen track their spending - and we all know how teenagers love spending time on their phones! A basic monthly budget managed through a mobile app will help them keep track of spending, build better financial habits and set goals.
2. Use practical examples
The smart way to educate your teenager about personal finance is by using working examples which matter to them. Following a practical hands-on approach and constant guidance are important while imparting personal finance knowledge to your child.
3. Allow them to earn money - when they're ready!
Earning your first money was a big deal to you. In the same way, it will be a major milestone for your teen. But instead of just handing out a weekly or monthly allowance, let your teen do a few odd jobs around the house and reward them for it. This will help them to see the relationship between hard work and money earned.
4. Set up a bank account
Having a bank account is a major responsibility. But it's also a great way to teach your child about managing money. For the best balance between supervision and independence, you can open an account for your teenager that offers you joint account holder status, while also allowing your teen to manage the account with a mobile app.
5. Foster a savings mindset
Whenever your child receives money, encourage them to put money away in their savings first. If they have a big purchase in mind, you can help them to set a goal for how much money they need and when they need it. You can then work with your teen to figure out how they should go about in order to hit their target.
6. Help them to make smart spending decisions
If your teen is earning some money already, you know how tricky it can be to control their spending. But this shouldn't be your job anyway. You want to simply guide your child into making smart spending decisions. If they come to you for advice, be open and honest. But don't always say no. This will just foster a rebellious nature in your teenager. Instead, help them to see what smart purchases are and what is not.
7. Don't bail them out immediately
We all make mistakes. And the easiest way to help your teen to learn about not repeating financial blunders is to help them learn what they did wrong. Trying to bail them out of money mistakes every time will just lead to more errors in the future.
The bottom line
Your teen will learn about money in one way or another. Don’t let it be from an out-of-control spender on Instagram or TikTok. You have the opportunity to be the positive example and the guiding voice they need. It's important to always set the example first before guiding them to do the same. With the right steps in place, you can help your child make wise money decisions and become financially independent sooner.