Last week I wrote about teaching basic money skills to young kids. That's important, but it's even more crucial for teens to understand things like budgeting, saving and making smart spending decisions. In an uncertain economic world, these kids are going to have to take care of themselves financially. Are they getting prepared? Read on for an eye-opening assessment of financial literacy in the U.S. -- and some ideas on how you can help your teen down the right path.
A recent financial literacy test administered by the Program for International Student Assessment (PISA) should be a wake-up call for American parents. In this first-of-its-kind international assessment released in July 2014 and given to 29,000 15-year-olds from 18 countries, U.S. teens fell below half of their peers.
We're not just talking about math skills, we're talking about practical everyday financial skills like understanding an invoice, reading a bank statement, calculating interest, or being aware of income taxes. It's rare for kids to learn these financial basics in school (no matter how advanced they are in math), so it's up to us parents to supplement our kids' educations with some important financial lessons.
Give teens real financial responsibilities
To really get teens' attention when talking about finances, you have to give them something real to work with. For instance, the concept of making smart spending choices only has teeth if teens have to cover some of their needs and wants with their own money.
An allowance is a great way to provide this experience as long as it's tied to specific expenses -- whether that's lunches, gas, clothing or entertainment. This helps kids learn to budget and prioritize. You might take it a step further by sharing your monthly budget and then helping your teens create their own budget with an online planner.
The same goes for saving. The best motivation is a concrete goal. As an example, a friend of mine was always willing to help her kids pay for something special provided they were willing to come up with half the cost. One way to help kids save is to suggest that saving be a line item on their budget.
And don't forget about college, probably the largest savings goal of all. Even if your son or daughter won't be contributing to their education, they should be aware of how much college costs and the tradeoffs you're making to pay for it.
Teach money management basics with checking and savings accounts
Managing a checking account is a basic skill you only learn by doing. As soon as teens have money to handle, help them open an account (preferably one without fees), and make sure they can write a check, use a debit card and balance their account. Show them how to use online banking tools to keep track of spending and account balances.
You might also suggest linking savings and checking accounts to make savings automatic. These are things we adults take for granted but that even the most advanced math student has to be taught.
Establish good credit habits early
Misuse of credit is a leading cause of financial problems for young adults, yet credit cards are a virtual necessity today. The answer? Teach your kids to use credit responsibly.
Teens under 18 can't get a credit card unless it's prepaid or they have a co-signer, so their first taste of using credit will be controlled. But it's crucial that they understand how credit works -- and how quickly interest and fees add up -- so that they make smart choices when they're on their own. An online cost-of-credit calculator can be an eye-opening lesson in how things can get out of control.
Stress the importance of paying the entire balance on time each month and make your teen responsible for paying it. Also, stress that bad credit habits lead to a bad credit report, which can follow you for years, making it difficult to borrow for more important things down the road.
Use a first job as an income tax lesson
A first paycheck can be exciting. It can also be a big shock when teens see how much is taken out by the government. You can forewarn them by explaining what's withheld: state and federal income taxes, Social Security withholding and Medicare taxes. Go over the Form W-4 at the start of your teen's job, then reinforce the lesson when the first paycheck arrives.
Come tax time, you can take it further by reviewing the W-2 or 1099 together, and helping your teen file a first tax return if necessary.
Introduce basic investing with a goal
As your kids learn more about managing their money, introduce them to investing.
Once again, make it real by suggesting that you invest together toward a long-term goal such as college or a post-graduation trip. Consider opening a Custodial account you control until your teen hits 21.
You could then each contribute to it and make investment choices together. Be sure to talk about ways to control risk, including diversification and appropriate asset allocation. As time goes on, you can review statements and discuss gains and losses and the importance of sticking to your investment plan.
Be a good example
As I said last week, personal finance isn't just about money -- it's about values. Good money management requires responsibility and resourcefulness. Share your own choices and challenges. Teens are old enough to understand how you manage money wisely and why you expect them to do the same. Because it's not only smart, it leads to more personal freedom. That's definitely speaking their language!
Looking for answers to your retirement questions? Check out Carrie's new book, "The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions."
Read more at http://www.schwab.com/book. You can e-mail Carrie at firstname.lastname@example.org. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.
COPYRIGHT 2014 CHARLES SCHWAB & CO., INC. MEMBER SIPC. (0814-5093)