Are your kids ready to control their own financial destinies? With total student loan debt reaching 1.5 trillion last year, it’s more important than ever to teach teens and young adults the basics of personal finance. From the importance of saving to build a credit history, understanding debt, paying for college, budgeting, and setting long-term financial goals, this article provides concrete tips for teaching financial literacy to the young adult(s) in your life.
Here in Bucks County, PA, The First has been helping generations of local families achieve their financial goals. We’re here to help young adults and their parents with youth and education savings accounts. If you have questions, our friendly employees have answers.
3 Money Tips for All Ages
Before we move into lessons for specific age ranges, here are a few things everyone should understand about money.
- It’s a finite resource. Just as there are only 24 hours in a day, you only have as much money as you can make and save. If you choose to spend an hour of your evening watching TV, you can’t use that hour for other activities. Likewise, when you choose to spend money, it’s gone and can’t be used for other things, including saving or investing.
- It’s a crucial part of your education. Some parents view a part-time job as a distraction from the more important business of academics and extracurriculars. However, learning how to earn and manage money with responsibility and purpose is a crucial part of a young adult’s education.
- Anyone can learn how to be a money master. Every parent wants their child to have a happy and successful adult life. Part of that is learning how to control your finances so they don’t control your life in a negative way.
Ages 13 – 18: Building the Foundation for Financial Success
As kids enter their teenage years, an exciting milestone awaits: your first job. Whether in retail, food service, or childcare, a part-time job teaches young adults the first financial literacy lesson: where money comes from and how to earn it.
Until now, money has primarily come from parents or guardians. Getting a job allows teens to experience the value of a dollar firsthand. If it takes you an hour to earn $10, for example, you might think twice the next time you consider stopping at the convenience store or coffee shop to spend the equivalent of your hourly wage on food and drinks.
In Pennsylvania, the legal working age is 14 (except for golf caddying and newspaper delivery). Minors must obtain a work permit from the school district in which they reside. Many employers set their minimum age at 16; however, teens of all ages can find “gig employment” in traditional pastimes like babysitting, lawn mowing, pet sitting, and more.
Now that you’re earning your own money, you’re ready for the next foundational lesson in financial literacy:
The Importance of Saving
Many teens look for a job because they want things – like a smartphone, car, expensive clothes – their parents won’t pay for. And there’s nothing wrong with spending the money you earn–it’s yours, after all. However, money masters learn early on that they can reap much greater benefits from saving than spending. It’s all because of a magical concept called compound interest.
The earlier you begin to save, the faster your balance will grow, resulting in larger earnings over your lifetime. This is because saving, whether in a regular interest-bearing deposit account or an investment vehicle, earns you interest on every cent you put in. That interest then becomes part of your principal balance and you earn even more interest. Picture a snowball rolling down a hill, gaining speed and mass as it rolls. That’s your savings account.
Parents and teens can have fun putting different figures into the Compound Interest Calculator on Investor.gov to see the results of compound interest in black and white.
- If your teenager doesn’t already have a savings account of their own or you’re unhappy with the terms of your current account, check out our Kids First Savings Account. With no minimum balance requirement or maintenance fees, it’s easy to put your money away and watch the principle of compound interest in action.
- For more savings tips, read our blog post on the Habits of Savers.
The Basics of Debt
Now that you understand how compound interest works in your favor with savings, imagine the opposite. That’s what debt is. When you save your money, you choose not to spend it today in order to have more of it on a future tomorrow. When you take on debt, you’re choosing to spend money you don’t have today and you’ll end up paying more for the object or experience overall. That’s because compound interest can also work against you. If you don’t pay your credit card balance in full or you don’t make a large enough student loan payment to cover the interest, accrued interest becomes part of your principal balance and accrues more interest.
Since you can’t obtain your own credit accounts until age 18, we’ll go more into the details in the next section. For now, the most important takeaway is to make compound interest work in your favor, through savings, instead of against you, through debt. A mortgage loan is one exception to this rule, but almost every other type of debt should be avoided at all costs. If you’re thinking, “what about student loans?”, college affordability is our next lesson.
Finding an Affordable Path to College
Here in Pennsylvania, we have the unfortunate distinction of being the top state for education debt. While it may seem like student loan debt is unavoidable, there are a variety of ways to avoid it or at least minimize the amount you borrow.
- Start out at a community college. Did you know that Bucks County Community College, like other two-year institutions in PA, has dual admission agreements with public and private universities across the state? From Penn State Abington to Temple University, Chestnut Hill College, and more, you can save money on the first two years of school while still ultimately receiving your degree from a four-year university. You can also transfer credits to any other college in the country, subject to their own credit evaluation process. Even if you enroll in a four-year school from the beginning, many students take summer classes at community college to fulfill some core class requirements and save a little tuition money.
- Live at home. If you’re not going far away for college, consider living at home to save on the cost of room and board.
- Don’t be wooed by glossy brochures and brand new athletic centers. The conventional wisdom may be to find your “best fit” in a college, but we recommend making a more logical decision based partly on personal tastes but also concrete data. The College Scorecard website from The Department of Education allows you to compare the same degree program across schools with statistics like average annual cost, graduation rate, and salary after attending. For example, here’s a search for business degree programs at various PA colleges. You can also look for the net price calculator on individual school sites to see what your total annual cost (not just tuition) would look like.
Understanding Financial Aid
Once you decide where to start your college journey, it’s time for the important business of figuring out how to pay for it. The most important thing to keep in mind is that “Financial Aid” is a catch-all term. It refers both to aid you don’t have to repay, such as scholarships and grants, as well as student loans that you will have to re-pay once you’re no longer enrolled full-time in school.
When you receive your acceptance letter, the college will also offer you a financial aid package. Based on your FAFSA (Free Application for Federal Student Aid), the package may contain institutional scholarships based on need or merit as well as federal student loans. You can also apply for outside scholarship money to put toward your tuition. Read the “Types of Aid” page from Federal Student Aid to understand your options and how to apply for aid.
Ages 18 – 21: Leaving the Nest
Whether this stage of life finds you studying for midterms or working your first full-time job after high school, every new adult navigates the same financial milestones.
Making a Budget
Even if you’re still living at home, it’s time to practice the art of budgeting. Contrary to its reputation as a restrictive exercise, making a budget should be empowering. Instead of wondering, “do I have enough money to go out tonight?” you’ll make choices about how to allocate and spend your funds in advance.
- Make a list of your fixed expenses. These are the monthly bills, such as your cell phone payment or rent, that stay the same and must be paid. Add up the list to figure out your total monthly fixed costs.
- Estimate the rest of your monthly costs. Now it’s time to think through everything else you spend money on each month. This means fluctuating bills such as utilities, transportation expenses, groceries and more. Try to err on the side of estimating high. This will give you wiggle room later on if you need to cut something within your control, such as the amount you spend on food.
- Add your total fixed and varying monthly expenses. This is the minimum you need to clear in monthly income to get by.
- Make a list of your income sources. From your paycheck to family support, financial aid, etc., add up your total monthly income. This time, err on the side of estimating low.
- Compare your two monthly figures. Is your income more than your expenses? This is the position you want to be in. Once your income surpasses your expenses, you can allocate what’s left over for saving and discretionary spending such as entertainment.
Congratulations! Now you know how to budget (yes, it’s really that simple). As far as where to record your budget, it can be as simple as a notebook or spreadsheet, or as complicated as using software like Mint or You Need a Budget. Figure out what works for you and ignore the rest.
How to Balance a Checkbook
With online banking and bill pay options, you may think physical checkbooks are only for that old lady holding up the line at the grocery store. But along with making a budget, balancing your checkbook is a core part of your financial hygiene. Simply put, balancing your checkbook is about tracking the money that flows into and out of your checking account, including checks you’ve written before they get cashed. This will prevent you from spending money you don’t really have (because you have an uncashed check out in the universe) and incurring an overdraft fee.
As with your budget, you can choose the medium that works for you to balance your checkbook. The register that comes with your checkbook is still a great way to do it.
- Start with your available balance.
- Next, write down any pending transactions that haven’t cleared yet. This could be an online bill payment, debit card charge, or a credit to your account like a check you deposited. Include the date, a brief description, and the amount.
- Also log checks you’ve written to others that haven’t cleared your account yet. Include the same information, plus the check number.
- Subtract every transaction you record from your available balance. At the end, compare the balance in your check register to the balance listed in your online or mobile banking dashboard. If the two match, your checkbook is balanced.
Remember that balancing your checkbook will also help you catch any errors so you can report them to your bank asap. Try to do it once a week–you can make it fun, like setting a weekly coffee shop date to balance your checkbook and update your budget.
Building a Credit History
When you turn 18, you’ll be able to apply for your first credit card. This is when many young adults get in trouble. While you do want to build a positive credit history for your future, you don’t want to fall into the trap of using a credit card to spend money you don’t really have. Remember that compounding interest will work against you if you carry a credit card balance. They can add up quickly and are hard to pay down once you’re overspent.
Talk to the adults in your life about responsible credit card usage. One fool-proof strategy is to get a credit card only to build your credit score. You can designate one expense per month to use it for and be sure to pay off the balance in full so you don’t accrue interest. We’re also happy to help you build your credit history; The First offers a variety of credit cards for personal use.
Ages 21 – 25: Thinking Long-Term
At this stage, college grads will start their careers and make a go of this “adulting” thing. Young adults in this age range may also start marriages and families. It’s time to think long-term and set yourself up to achieve your financial and life goals.
Paying Down Debt
Some financial advisors will tell you to pay down your student loans and consumer debt before you worry too much about saving for retirement. Others will advise tackling both goals simultaneously. The way you prioritize will depend in part on your overall financial and job situation. The bottom line is to try and avoid accruing debt and, once you’re in it, try to pay it off as soon as possible, even if that means sacrificing other things or taking on a second job. If you do plan to start a family one day, it pays to get out of debt before you add the costs of having children to your budget.
Saving for Retirement
Once you get a full-time job, you’ll hopefully be eligible for an employer-sponsored retirement plan like a 401(k). Make sure to contribute enough to receive the full company match; otherwise you’re leaving money on the table. If you can’t sign up for a 401(k) at work, start your own Individual Retirement Account (IRA).
The First is your trusted financial partner for life.
As the longest running community bank in Bucks County, The First has helped generations of Bucks residents manage their finances and meet long-term financial goals. From our youth savings and education accounts to IRAs, home loans, and investing, turn to The First to get yourself on the right track for lifelong financial success.