4 Money Lessons to Teach Your Teens Before College
It's important to teach your college-bound student the basics of financial literacy. Here's what they should know about money and personal finances.
Every teen should have basic money skills before living on their own or heading off to college.
Understanding the real cost of debt can help them make decisions about college costs.
Discuss your teen’s current finances and future goals as you introduce the concept of investing.
Once kids reach high school, it’s time to teach them how to handle their finances. That’s especially true as they think about college costs.
Teens who learn about money and financial independence are in a better position to understand the cost of their education. These lessons will also serve them well for the rest of their lives.
1. Know the Real Cost of Debt
Help them understand that borrowing money can be helpful for their future: Low-interest student loans, mortgages and car loans can be considered good debt. Credit cards, high-interest loans and payday loans (and even good debt that gets out of hand) can have a negative impact on their finances.
One way or another, young students will likely learn about debt: More than half of college students graduate with student loans.¹ Ideally, you want them to understand the real cost of debt, and not be hurled into a trial-by-fire situation.
One of the best ways to teach children about debt and the impact of interest is to include them in conversations about college costs.
2. Understand Compound Interest
A crucial part of financial literacy involves interest rates. Let’s say you want to show your teen the long-term impact of a 5% interest rate on a student loan. A $1,000 loan at 5% annual interest means you would owe $1,050 after a year and $1,102.50 after two years.
On a $50,000 loan, the debt grows to $52,500 after a year, $55,125 after two years and $63,639.50 after 10 years, with regular monthly payments of $530.33.
A $100,000 loan, at a 5% interest rate over 20 years, ends up with $58,390.40 in interest. That’s assuming regular monthly payments of nearly $660 a month.
Examples like these demonstrate the power of compound interest, which is the impact of the interest rate over time. Each year, that interest rate hits the balance owed, including the principal amount and unpaid interest.
You can also show them this impact with a student loan, using a student loan calculator.
Helping teens see the impact of interest on the cost of their education will help them with credit cards too. The current average annual percentage rate (APR) on a credit card is more than 20%.² If you pay only the minimum each month on a $1,000 balance, it would cost nearly $600 in interest with a 20% rate over 60 months. Seeing the numbers teaches the importance of paying off the credit card in full each month.
3. Build a Safety Net
The sooner children understand the value of an emergency fund, the sooner they may reach financial independence.
To teach them about the emergency fund, start with budgeting. Have them record their spending, even if it’s only small amounts, on a spreadsheet or budgeting website. This gives them a view of their total spending.
You’ll also want to explain the difference between recurring bills for necessities (rent and electricity) and discretionary spending (new clothes and eating out). By understanding the difference, children see what they need to prioritize and where they can adjust if money is tight.
Typically, you want an emergency fund to cover three to six months of necessities in case of a sudden job loss. Emergency funds also can be used to cover unexpected expenses, like a fender bender or medical bills.
4. Tiptoe Into Investing
Lessons on debt and compound interest will serve teens well when you teach them about investing. Instead of working against them by increasing the amount of debt, compound interest can work for them by helping their money grow. Our investment calculator can show them how much a small investment may grow and compound over time if they start today.
And after setting up an emergency fund and budgeting for expenses, they will get a better idea of how much money they can set aside to invest.
Among 2020-21 bachelor’s degree recipients from public and private nonprofit four-year institutions. Trends in College Pricing and Student Aid 2022, College Board, October 2022.
“Average Credit Card Interest Rate in America Today,” LendingTree. Accessed July 17, 2023.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
You could lose money by investing in a mutual fund, even if through your employer's plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.