Are Your Teens Smart About Money?

Suzanna De Baca -- Expert Business Source, 8/1/2008 8:24:00 AM

Do your teenagers blow through money like a tornado through a cornfield (an apt metaphor since I’m from Iowa) without appreciating how long it took you to earn it? Do they understand why gas or food prices go up or down?  Do they pay attention to the stock or bond markets or even employment trends? In short, are your teens smart about money?

There are different kinds of money smarts.  Being “money smart” may refer to the ability to handle responsibly handle money, making good choices about spending or saving. As I discussed in an earlier article entitled “Teaching Teens About Money,” educating your kids about money and good financial habits is crucial to helping them become financially responsible and independent adults.  But being smart about money may also mean having a good sense of how the economy works. 

Why is understanding the economy important for your teens?  It is vital for kids to start understanding the economy because in the blink of an eye, they will be participating in it as adults.  While they do contribute to the economy right now, as they become older their decisions will shape our country’s economic health.

America’s teens are not particularly financially literate. Denise Winter writes a Parenting Teens Blog on About.com, and in July 15, 2008’s post, entitled “Are Our Teens Money Smart?” she refers to a 2006 study by The Nation’s Report Card:  Economics 2006.  According to Winter, the study reported on the economic literacy of America’s 12th graders, as measured by their knowledge of the market economy, the national economy and the international economy. 79% of students scored at or above the Basic level – in other words, their knowledge was pretty dismal despite the fact that 87% reported having some economics education in school.

The 2008 Jump$tart Coalitions recent study on financial literacy is even worse.  According to a July 22, 2008 Bankrate.com article published on FoxBusiness.com called,“10 Tips to Raising Money Savvy Teens,” author Jennifer Maciejewki reports that “high school seniors correctly answered only 48 percent of the questions.”  She goes on to say that college students weren’t much better, scoring only a 65 percent on their survey.

Ouch!  These kids are going to be in charge in a few decades!

What can you as a parent do to prepare them? 

Talk about money.  Just talk about money in general to your kids.  Discuss what things cost, the minimum wage, what people earn in different fields, and what it costs to live.  Many teens are oblivious to the reality of basic expenses – I know I was and I’m sure my parents did talk to me about it.  You don’t have to show your kids your balance sheet, but you can tell them what the heat bill is, what the grocery bill is, and how much it costs to insure a car.  I’m not talking about accusing them of overspending;  I’m simply saying that the more you talk about the reality of finances the more they understand what it takes to live.

Talk about the economy.  You may not feel like an economics expert, but if you watch the news or read the paper, you are certainly aware of what is happening in the markets.  Why not discuss what you hear or read with your kids?  The stock market, gas prices, and rising food costs can be interesting when tied to things in their own life.  Gas, clothes and entertainment may be the most relevant issues to them – so talk to them about why they think these costs might be rising.  You don’t have to know all the answers;  it can be instructive and interesting to look up some of the answers together or speculate on what forces might be driving certain trends.

Discuss your own work or business.  If you are a business owner, manager or employee, you are observing market forces at work every day.  Talk to your kids about what you see happening.  If there are layoffs at companies near you, ask what you think might be causing the cutbacks.  If the stock of local companies is decreasing, talk about why.  Tell them about what is happening in your own company – rising costs, revenues, anything.  Simply making economics a part of everyday conversations can help kids to understand how issues like supply and demand, market cycles, and interest rates affect day to day financial decisions.

Encourage small investments.  If your child has some savings or if you can assist them, it can be beneficial to help them either purchase a Certificate of Deposit or actually buy a stock or mutual fund with their input.  Depending on your circumstances, deploying some funds for this purpose can give your kids a front row seat when it comes to the economy.  They not only watch, but actually see the affect of interest rate, market cycles, and various other economic forces, on their own money.  That tends to sink in.

Nothing replaces experience. Talking helps, but experience is forever.  Integrating money conversations into your discussions with your teens can help them increase their financial literacy.  But if you can help them learn, earn, save, spend, or invest, those experiences will assist them in a hands-on way.  A money smart teen is one who can be responsible with his or her funds, but also has a general understanding of how the entire economy fits together – and how they fit into it as well.

Suzanna de Baca is president of Private Capital Solutions Group. Securities offered through Broker Dealer Financial Services Corp. Member FINRA & SIPC. Investment Advisor Representative of Investment Advisors Corp., A Registered Investment Advisor. Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice.