Have you noticed that most personal finance advice is written for people already in a financial mess? For example, one of the most popular personal finance books of all time is Dave Ramsey’s The Total Money Makeover. While that book has helped millions, it’s helped those who have made poor financial decisions.
But what about helping people avoid financial messes in the first place?
The best time to set individuals on the path to successful financial management is in high school and recent graduates. During these few years, most students manage small amounts of money, either allowance or income from a part-time job. They’re also on the verge of making some of the biggest financial choices of their lives: where to go to school, how to pay for school, what career to choose.
Luckily, many of the things high school students should know by the time they graduate are very basic. Here are 13 we suggest teaching your high school student before he or she leaves the nest.
1. You’re Never too Young to Save
Kids can and should have savings goals and even retirement accounts. Start by helping your teenager set short-term savings goals for things like a prom dress or a car.
Also, consider opening a Roth IRA to help your child begin saving for a lifetime. This Forbes article outlines why and how to open a Roth for a minor child. The money your high school student puts in a Roth could also be used as part of a down payment on a first home.
2. Compound Interest is a Beautiful Thing
Explaining compound interest can help a savings-resistant teenager find motivation to stash away cash. This calculator from Investor.gov can help you calculate how much interest that Roth could earn if your child starts saving right away.
For instance, start with $1,000 and add $25 a month for 40 years. If the investment earns 8 percent and is compounded annually, your high school student could have nearly $100,000 in savings well before retirement age.
3. Compound Interest Might Bury You
On the flip side, be sure to talk about how compound interest could bury a young spender in debt. This Federal Reserve calculator is helpful for illustrating how a small credit card debt can quickly snowball out of control.
The calculator shows that a $1,000 credit card charge with a 19 percent APR could take eight years to pay off and would cost $998 in interest. Just seeing these numbers on paper can help a student grasp the dangers of uncontrolled debt.
4. You Don’t Have to go into Debt to Pay for College
Contrary to popular belief, student loans are not required for a college degree. Some colleges, like Davidson College in Charlotte, N.C., work with students to ensure that they don’t go into debt for school. Others simply offer a great education at a fraction of the private school price.
Students have many options for going to college without debt: attend part time, work while in school, choose a cheaper school, graduate early, start at a community college.
5. College Degrees are not all Created Equal
Choosing the right school is important, but choosing the right degree may be even more so. Sure, high school students should follow their interests and talents when choosing a career path. But they should also become familiar with the current and probable future job market.
Just having a college degree is no longer enough to guarantee a decent job. This means that students need to do as much research as possible to ensure their degree will lead to excellent job opportunities.
6. Everyone Needs an Emergency Fund
As soon as a high school student leaves home, he or she needs an emergency fund, preferably one that doesn’t involve a line of credit. A line of credit can make a decent emergency fund for those of us with more maturity and money management experience. But for teens and twenty-somethings just beginning to manage their money, having cash to fall back on is essential.
In fact, it’s a good idea to help your high school student save a small emergency fund well before graduating from high school. This money can be used for emergency car repairs and other issues that might crop up during college.
7. A Car isn’t a Good Investment
Chances are that buying a car will be the first major financial decision that a high school student makes. And most high school students drool over high-end SUVs or fancy muscle cars.
But cars are (quickly) depreciating assets. Cars are not a good investment. High school students should strive to pay cash for cars, even if that means driving around a beater.
8. Keeping up with the Joneses Could Wreck Your Life
It’s human nature to want what your neighbors have and to want to be like others. And wanting to have nice things isn’t all bad. But allowing what others have to drive our financial choices, particularly when those choices involve spending beyond our means, is a slippery slope.
Teenagers are developmentally primed to fit in with their peers. (Which is why teenagers worry so much about what others think.) So this lesson can be a difficult one to teach. But if a teenager can step back from the drive to keep up with the Joneses now, he or she will make much better financial choices in the future.
9. Financial Institutions are There to Sell You Things
It’s easy for students — and the rest of us — to think that banks and lenders are our friends, especially when students are trying to finance a college education.
But the fact is that financial institutions exist to make money. And they make money by selling financial products. This doesn’t mean students should avoid dealing with financial institutions, it simply means they should be shrewd when doing so.
10. Budgeting Doesn’t Have to be a Drag
Most adults hate the word budget, and many teenagers have never even thought about living on a budget. If they do think about it, they probably assume that living on a budget means never buying a pair of jeans, going to a movie, or spending any money in general.
But living on a budget isn’t about never spending money. It’s about taking control of your money so you can meet financial goals. Students who understand this and who start budgeting while they’re in high school will be set up for a life of financial happiness and success.
11. Not All Debt is Bad Debt
Two or three generations ago, people didn’t go into debt. Many of our great-grandparents probably paid cash for their homes. These days, living debt free isn’t always possible, or even wise.
High school students need to understand how to stay out of the most expensive forms of debt: long-term student loans, depreciating car loans, high interest credit cards, etc. But they also need to understand when to use debt and how to manage it wisely.
12. Living Takes Money — a lot of it
Most teenagers have no concept of how much it takes to cover basic costs of living. Why should they? It’s not like they buy all your groceries, pay your mortgage or insurance premiums.
The problem is that this lack of awareness can leave young adults with sticker shock when they get out on their own. You can help prepare your high school student for the real cost of life by letting him in on your family budget, having her shop for groceries, or requiring that he pay for his own car insurance.
13. Money Isn’t Everything
It’s easy for high school students to get caught up in dreams of giant homes, luxury cars and tropical vacations when they land a high-paying job in the future. But remember to teach your student that money isn’t everything.
This comes into play when students choose a college major. Yes, high school students should choose a major that will help them become employable. But they shouldn’t choose a high-powered, high-paying job just because of the money. There’s a balance to be had, and you can teach this lesson best by demonstrating it in your own life.