Seven Lessons to Teach Your Teen About Wealth Creation
Although my family was far from perfect with money, I am grateful that my father was obsessed with the principles of wealth building. By the time I turned 21, what little money I had at the waiting tables was split between several retirement accounts. At the time, I rolled my eyes at the thought of giving up my precious money for some distant retirement. Now I can watch those funds grow and retirement become less and less distant.
So, whether your teen just spent the summer mowing lawns or landed a prestigious internship, their first paycheck is the perfect opportunity to start a life of financial security. Here are some important lessons to teach your teen about building wealth.
The Power of Compound Interest
This is number one with point: teach your teen the magic of compound interest . Simply put, compound interest means that the interest on an investment grows exponentially over time rather than linearly. This concept can encourage them to start saving and investing as early as possible. Even small amounts saved from a summer job as a teenager can add up to significant amounts by retirement age . The key is to start early and let compound interest work its magic for many decades to come.
Fundamentals of Budgeting and Saving
Help your teen create a simple budget to track income and expenses. Encourage them to save some of any money they receive, whether from an allowance, gifts or a part-time job. Implement the concept of “pay yourself first” by putting aside savings before spending money on necessities. Check out the classic 80/20 (aka “pay yourself first”) budget template here .
Understanding the Different Types of Investments
The main message to convey to your child is that you don’t have to be rich already to start building wealth now. They should be able to understand the basics of various investment vehicles :
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Shares: Ownership of individual companies
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Bonds: lending to governments or corporations.
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Mutual Funds: Professionally managed portfolios of stocks and/or bonds.
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Exchange Traded Funds (ETFs): Baskets of securities that trade like stocks.
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Real Estate: Real Estate Investments
While reviewing simple definitions, explain the potential risks and rewards associated with each type of investment. Explain how diversifying investments across different asset classes and sectors can help manage risk and potentially improve returns over the long term. Teach your teen not to put all her eggs in one basket. Here’s our guide to creating a simple “set it and forget it” investment portfolio.
Credit Basics
With all the wisdom you have now, imagine if you could turn back time and start getting good credit from an early age. Teach them the basics of improving a low credit score , keeping it high , and even getting credit without a credit card —and why it’s important. Explain how maintaining good credit can save money through lower interest rates on future loans and potentially impact job prospects and housing applications.
Manage your debt wisely
Not all debt is the same, and not all debt has to be scary . Teach your teen about good debt (such as student loans) and bad debt (such as high-interest credit card balances). While bad debt can quickly spiral out of control and worsen your financial picture, good debt can help you increase your net worth. Explain the importance of understanding interest rates, credit terms, and the long-term impact of debt on financial health.
Asset protection
I understand that most young, single, healthy people think they don’t need life insurance. Unfortunately, this misconception is difficult to overcome until it is too late. After all, life insurance is one of those investments that you won’t be able to buy once you need it, and if you wait too long, it will cost a lot more to purchase.
Teach your teen about the importance of insurance to protect assets and income. Think about concepts like health insurance, auto insurance, and eventually homeowners or renters insurance.
Patience and long-term thinking
Encourage your teen to think long-term when it comes to finances. Educate them about the benefits of patience when investing and the dangers of trying to get rich quick or timing the market.
Once again, we are talking about much more than just dollars and cents. Emphasize that investing in yourself through education and skill development is one of the most valuable ways to create long-term wealth. Encourage your teen to gain knowledge and skills that can increase their earning potential.
By teaching these fundamental concepts, you will set your teen on the path to financial literacy and long-term wealth creation. Remember, the goal is not just to impart knowledge, but to instill good financial habits that will serve them well throughout their lives.