Money Guide for Teens: Essential Money Lessons You Should Learn in High School

7 Money Lessons Everyone Should Learn by the End of High School

A recent study from the University of Michigan’s Institute for Social Research showed that most high school seniors spent their pocket money on clothes, music, movies, eating out, and other personal expenses.

While this type of spending may not be a problem in high school when you’re safely under a parent or guardian’s roof, poor spending habits can make college and adulthood significantly harder than they have to be.

According to Long Island financial advisor Joseph Carbone, young people would be a lot better off if they learned a handful of financial lessons early. While they may not be able to implement these lessons when they’re young, teenagers can benefit from having the basic financial education many of their peers do not.

If you’re a teenager who wants a leg up in life, here are some of the most important financial lessons you need to learn:

• #1: Learn how to balance a checkbook.

  

  While many people now consider written checks the dinosaurs of personal finance, you still have to learn how to write one. More importantly though, you need to learn how to balance your checkbook or financial register. This is true whether you pay most of your expenses with a personal check – or if you use your debit card.

  Fortunately, balancing a checkbook is only a matter of basic math. You add amounts that you’ve deposited to your balance and subtract purchases you’ve made.

  The key to successfully balancing a checkbook is making sure you’re not forgetting to deduct purchases you make. If you fail to track debit card purchases, lose your receipts, or mess up your math somehow, you could easily overdraw your account and face big fees for doing so.

  So, how do you balance a checkbook? It’s all about inputs and outputs. Let’s say you have $500 in your account and you make three purchases – a $16.83 meal at Chipotle, a $39.00 purchase at a movie theatre, and a $21.67 purchase at your favorite clothing store. Ideally, you would keep track of your receipts then deduct them from your balance in your check register. Once you do, you would have $422.50 left.

  

  Keep in mind, it’s important to know how to balance a checkbook whether you use online banking or not. A lot of people – and especially young people – avoid using a check register in favor of watching their balances closely online instead.

  While online banking can work well if you never write an actual check, things can go sour quickly if you’re making online purchases and writing checks. While an online purchase made with your debit card may post to your account right away, a check can take days or weeks to clear. If you forget about it in the meantime, you may accidently spend money you don’t have and overdraw your account.

  When you overdraw your account, your bank will charge overdraft fees until you bring your account back to good standing. According to Nerdwallet, the average overdraft fee was $34 last year. If you want to avoid overdraft fees and the hassle of spending more than you have, your best bet is to monitor your accounts and charges closely and keep track of all purchases in a check register.

• #2: Discover the world of budgeting.

  

  While budgeting is commonly referred to as the “dirty b-word,” it’s important to understand why it’s important and what it can do to your life. It’s easy to see budgeting as a restrictive set of rules that stand between you and what you want, but that couldn’t be further from the truth. If you budget the right way, your budget is actually the ticket to getting what you want out of life.

  But, how does budgeting work? Similar to how you balance a checkbook, budgeting is the act of making sure you’re keeping track of your spending and matching up the inputs with the outputs. A good budget will cover your bills and expenses while also leaving money for fun and savings.

  Here’s an example of how budgeting could work during your teenage years: Let’s say you have a part-time job and earn around $300 every two weeks. That’s $600 per month, and that money is all yours.

  But it’s not really all yours because you have a few different bills to pay. You have to cover your own auto insurance, and that sets you back around $100 per month. You also have to put gas in your car, and usually spend around $50 per month. Last but not least, you pay for your own guitar lessons at a rate of $20 per week or $80 per month.

  If you were creating a budget, it might look like this:

  Expenses:

  Auto Insurance:

  $100

  Gas:

  $50

  Guitar:

  $80

  Total Expenses:

  $230

  Monthly Income:

  $600

  Money Leftover:

  $370

  

  In this case, you may decide to spend the $370 you have leftover on regular teenage stuff – movies, food, and clothing. But a budget might force you to look at things a little differently. What if you saved $100 per month instead?

  If you did, you would add $100 monthly savings to your budget and leave yourself with $270 in monthly spending money. Not only would this be the responsible thing to do, but it might even be fun to watch your savings grow over time.

  Budgeting in adulthood is similar to this, but the bills and income are different. Here’s what an adult budget could look like considering take-home pay of $3,000 per month:

  Expenses:

  Rent:

  $1,100

  Car Payment:

  $300

  Auto Insurance:

  $100

  Utility Bills:

  $100

  Food:

  $500

  Cable Television:

  $100

  Phone Bill:

  $75

  Gas:

  $100

  Total Expenses:

  $2,375

  Monthly Income:

  $3,000

  Money Leftover:

  $625

  

  In this case, the adult budgeter would want to set aside some money for savings and some money for fun. Perhaps they could save $300 per month in a high interest savings account and use the rest for entertainment and incidental costs.

  Remember, these are just examples. Your budget might look different as a teenager, different again in college, then entirely different once you become an adult. The point is, you need to monitor how much you earn, allocate cash for your bills, leave some money for fun, and save the rest.

• #3: Your credit score actually matters.

  

  While you may not have a credit history as a teenager, building credit becomes increasingly more important as you get older. If you ever want to buy a home, finance a car, or borrow money to start a business, you’ll need a good credit score and an active credit history.

  But, how can you build credit from scratch? If you don’t have any sort of credit history, there are several ways to get started. As a teenager, one of the best first steps to take is to have a trusted adult (parent or guardian) add you as an authorized user on their credit card account. Doing so will make it so the activities on that specific card will be reported to your credit report. Provided the adult is using credit responsibly, the positive reporting they create will benefit your credit report – or at least give you a good start.

  Once you’re eighteen, you can also consider applying for a secured credit card or a student credit card. A secured credit card is a type of credit card that requires a small deposit (usually $300 - $500) as collateral. Your deposit is usually equal to your credit limit, meaning that if you put down $300, you’ll have $300 to spend on your card. While this strategy doesn’t really let you borrow any money since you’re borrowing against your own deposit, it does let you get used to using a credit card. Better yet, your credit activities will be reported to the three credit reporting agencies – Experian, Equifax, and TransUnion. Once your credit report is beefy enough, you can upgrade your secured credit card and get your deposit back.

  Another option for teenagers over eighteen is getting a student credit card. These credit cards tend to offer lower limits and better terms for young people just starting to build credit.

  No matter which type of card you ultimately get, it’s important to know how to use credit cards to your advantage – and to use it to build your credit score. According to myFICO.com, the following credit score ranges exist:

  Exceptional:

  800+

  Very Good:

  740 – 799

  Good:

  670 – 739

  Fair:

  580 – 669

  Poor:

  579 and lower

  

  Using a credit card is similar to borrowing money. When you swipe or insert your card to make a purchase, you start building a credit card balance. That’s money you have to pay back no matter what. And if you don’t pay it back in full, you’ll start accruing interest on your balance (more on that in a minute).

  Fortunately, myFICO makes it fairly plain which factors make up your credit score:

  Payment History:

  35 %

  Amounts Owed:

  30 %

  Length of Credit History:

  15 %

  New Credit:

  10 %

  Credit Mix:

  10 %

  

  As you can see, your payment history makes up the bulk of your FICO score. If you pay your bills on time, you’ll have a leg up when it comes to working toward excellent credit. The amounts you owe follow behind, making up 30 percent of your FICO score. Generally speaking, lenders prefer you owe less than 30 percent of your credit limit – or $300 out of every $1,000 you’re able to borrow.

  The length of your credit history – or the amount of time you’ve been using credit and have various accounts open - is also important, although this issue will take care of itself the longer you use credit responsibly. New credit is the amount of new credit you’ve applied for, and your credit mix is generally considered good when you have more than one type of credit account open (credit cards, loan from a bank, car loan, etc.).

• #4: Know how credit card interest works.

  

  Now that we’ve talked about credit cards, it’s crucial to cover what happens when you don’t pay your bill in full. Of course, this same concept applies with car loans, home loans, and personal loans, too. Any time you borrow money, you’ll pay interest on your balance until it’s paid off.

  With credit cards especially, it’s important to understand how this interest works. This is especially true since the average interest rate for credit cards is over 15 percent, which can be much higher than other types of loans.

  Here’s how credit card interest works: When you make a purchase on your credit card, you typically have a grace period of at least 25 days to pay it back. During this time, you won’t be charged interest on your purchase as long as you pay your entire balance in full.

  So, if your credit card balance is zero and you charge a $150 concert ticket, you won’t be charged any interest if you pay the full $150 on time once you get the bill in the mail.

  But, let’s say you don’t pay the $150 in full. Instead, you pay just the $20 minimum payment on your account. In that case, interest would start accruing on your remaining balance of $130 right away. While your credit card charges an APR, or annual percentage rate, credit card interest actually accrues daily. In other words, you’ll pay more and more for your purchase the longer it takes to repay your balance.

  Also keep in mind that, once you’re carrying a balance, your grace period goes away. So, if you continue using your credit card for purchases, you’ll start accruing interest on those purchases from day one.

  This is why so many people end up in a hole when it comes to credit cards. They start making purchases and can’t keep up with paying them off, so they begin carrying a balance. Once they do, the interest they begin accruing makes it harder and harder to pay it all off.

• #5: Create a life without debt.

  

  According to Carbone, most types of debt are just bad news. You may need to take out a mortgage to buy a house or a car loan to purchase a vehicle, he says, but other types of debt (credit card debt, personal loans, etc.) can make you build bad habits that carry through to the rest of your life.

  While a small amount of credit card debt and interest payments won’t ruin everything, keep in mind that problems often get bigger as you grow older and start earning more money. Once you’re an adult, you might have an expensive home loan, a pricey car loan, credit card debt, student loans, and other personal debts. In that case, the amount of interest and the monthly payments you have to make could begin spiraling out of control.

  That’s why the best thing you can do is start building a debt-free life as early as you can. You might have to borrow money at certain times in your life, but you’ll be better off if you minimize those instances as much as you can.

• #6: Investing early is important.

  

  When you’re a teenager, it might feel like retirement is forever away. However, you’ll have a distinct advantage if you start saving and investing early.

  “The younger you start you investing, the better you will be equipped to investing successfully for the rest of your life,” says Carbone. “It is astonishing the difference in wealth you can accumulate if you start investing young.”

  Here’s an example Carbone offers: Let’s say you start investing $2,000 per year into a Roth IRA at age 18 and you achieve a 6 percent average rate of return. By the time you are sixty years old, your Roth IRA would be worth $1,103,088!

  Now let’s say you didn’t start investing $2,000 per month until age 40. At age 60, your Roth IRA would only be worth $225,663.

  You’re probably wondering where the huge disparity comes from, but investing when you’re young is all about compound interest.

  Compound interest is a term used to describe the interest that compounds not only on your investment contributions but on your earnings. So, as your investment balance grows, interest starts accruing on money you’ve earned, and it all snowballs from there.

  Since compound interest needs time to work, you’re a lot better off if you start investing early – even if you can only invest small amounts at first.

  

  Carbone suggest opening a Roth IRA specifically because of the tax benefit. With a Roth IRA, you invest post-tax dollars and your money grows tax-free until you’re ready to retire. Then, when you start taking distributions, the money you take out of your account will also be tax-free.

  If you want to save on your tax bill, a Roth IRA is a great way to go. And keep in mind that, if you meet certain income requirements (less than $118,000 as an individual or $186,000 as a married couple), you can contribute a full $5,500 to a Roth IRA in addition to contributing to other pre-tax retirement accounts like a 401(k). If you earn more than that, the amount you can contribute starts phasing out until you reach $133,000 for individuals or $196,000 for married couples. At that point, you cannot contribute to a Roth IRA through traditional means

• #7: You need an emergency fund and a savings account.

  

  American’s history of saving is paltry, and it shows in the amount of debt most families carry. A GoBankingRates study from earlier this year showed that, out of those polled, less than half of Americans had at least $1,000 in savings in 2017. Worse, the average credit card debt worked out to $8,158 per indebted household earlier this year.

  Believe it or not, there is a correlation between having a lack of savings and more and more debt. When you don’t have money saved, it’s easy to fall behind on credit card balances or have to use credit to keep up with regular bills.

  That’s why many experts, including Carbone, suggest building a savings account and an emergency fund. With some savings stashed away, you’re less likely to have to rely on credit when times get tough.

  While many experts suggest saving 3-6 months of expenses in an emergency fund, even having $1,000 saved is a good place to start. It all goes back to budgeting. If you can set aside some money every month, you will eventually build a savings account that will help you in hard times. Even if you can only save $50 or $100 per month – especially at first – it will be better than nothing and it will help you achieve your goals.

The Truth About Student Loan Debt

Choosing a college major and school is only part of the equation; once you make the decision, how will you pay?

The good news is, there are an array of federally-backed college loans that can help you finance school and let you pay monthly payments once you graduate. The bad news is, it’s easy to borrow too much and let it get out of hand.

Keep in mind that the average student loan debt for 2016 graduates worked out to $37,172. And all borrowers nationally owe a cumulative $1.3 trillion dollars on their student loans.

This kind of debt may be common, but that doesn’t make it easier to handle. Further, you’ll be a lot better off the less you can borrow since your monthly payments will be easier to manage with a lower total balance.

Before you borrow a huge sum of money for college, it’s important to know what that debt means. For many graduates, it means making large monthly payments for decades or longer. For some – and especially those in low wage careers, it can even mean struggling financially for a lifetime.

Borrowing some money may be inevitable, but you should try to keep your loan amounts as low as possible. Here are some ideas to consider as you approach your college years.

• Tip #1: Consider community college – at least for the first two years.

  

  As you get ready for college, don’t forget to consider quality community colleges in your area. If you’re able to live at home and attend community college for a few years, you could save big money over time.

  While the average tuition for a four-year school works out to $9,970 for the 2017-18 school year according to College Board, the average two-year school will set you back only $3,570 per year. And don’t forget the additional savings you could get by living and eating at home and avoiding the high costs of a college dorm.

  Also remember that community college doesn’t have to be forever. If you want a four-year degree, you can pursue your basic education at community college before transferring to a four-year school. Just make sure your credits will transfer before you pursue this strategy.

  If you make it work, you could save tens of thousands of dollars on school and still end up with the same degree.

• Tip #2: Consider technical education.

  

  While four-year degrees have been waning in popularity, technical education never goes out of style. If you can learn a trade, you may be able to work your way into a lucrative career that lasts a lifetime. Remember that, no matter how basic technical jobs might seem, people will always need plumbers, carpenters, and welders.

  In some cases, technical careers can pay more than professional jobs- and with a lot less education. If you search under “highest paying careers” on CareerOneStop, it’s easy to see how just lucrative technical education can be. Radiation therapists, for example, only need an Associate degree yet earn an annual mean wage of $80,200.

  

• Tip #3: Compare the price tag of different schools.

  

  Don’t assume that all schools cost the same – or even close. College tuition rates can vary dramatically from school to school and based on the type of institution.

  Remember how we said average college tuition at four-year schools worked out to $9,970 nationally for the 2017-18 school year? Many four-year schools cost 3-4 times as much. Private schools, on the other hand, charge an average of $34,740 PER YEAR according to College Board.

  The bottom line: Where you go to school matters. Make sure to compare actual tuition costs, including room and board, and you’ll be a lot better off.

• Tip #4: Apply for scholarships and financial aid.

  

  Scholarships and financial aid can make paying for college a lot easier to handle. There are numerous college scholarship programs to consider, many of which are easy to apply for. Scholarships.com is a great place to search for scholarships you could apply for, but you should also check with your high school and the financial aid office at your future college.

  To qualify for financial aid, you need to fill out a Federal Application for Federal Student Aid, or FAFSA form. This form helps schools, states, and national agencies figure out what type of aid you may be eligible for, if any. If your parents are low income, it’s fairly possible you’ll get some federal or state help with the costs of higher education.

• Tip #5: Don’t follow the crowd.

  

  Last but not least, don’t follow the crowd. Your friend Jeremy may be going to a prestigious four-year school, but you have no idea what his financial situation is like. Maybe his parents are paying for school. Or, maybe he’s racking up six figures in student loan debt when he doesn’t really have to.

  Regardless, your college experience should be based on what you want, what you can afford, and the amount of money you’re willing to pay back. Don’t compare yourself to others; instead, you should think long and hard about what you really want then create a plan to make it happen.