I just finished a 2-session workshop on personal finance for teens at an area school. I have run these workshops for more than a decade, because schools generally don’t teach this crucial life skill. Surveys consistently demonstrate that basic knowledge of personal finance in the US is barely at a passing grade, and the least knowledgeable adults are the youngest. (Here’s a link to a disheartening TIAA survey.)

Parents, here’s where you need to take action: either spend time teaching your teenagers and young adults or find someone who can.

Below is an outline of what your teenager or young adult needs to know:

1. Budgeting: Make a budget and check it periodically. Distinguish between needs and wants. Make sure to account for taxes. Explicitly create a line for savings – what we call “pay yourself first.” If you don’t proactively save, it won’t happen, and you won’t be able to afford to retire.
2. Credit and debit cards: Do everything you can to pay your credit card balance in full, every month. Otherwise, the interest rates and fees are outrageous. An easy way to avoid credit card debt is to avoid credit cards. A debit card is more than enough until someone is mature enough to have a credit card.
3. Saving: Start with an emergency fund, which should cover expenses in the event of job loss – the largest financial risk which isn’t insurable. Then save into retirement plans. Target saving 10-15% of gross income, if possible. Automate saving, whether through payroll deductions or monthly transfers. If anyone doubts the power of saving, remember the quote often attributed to Einstein: Compounding is the 8^th wonder of the world.
4. Investing: I have saved the most “glamorous” topic for last, because if you don’t manage items 1-3, you’ll have nothing to invest. The only way to generate an attractive long-term return – which will almost surely beat inflation over your lifetime – is to take investment risk, typically by buying stock. Figure out how much risk you can take. Keep everything else in safer investments – cash or high-quality bonds. For your risk investments, use low-fee, diversified stock funds and avoid big bets on individual stocks.

If you are comfortable sharing some of your personal financial details with your children, you can show them how you handle these aspects of your finances. It makes the topic real.

This all sounds simple. But I am amazed, every time I teach this course, how little information the next generation has about the basics of personal finance. They need our help.