Financial Lessons for Young Adult

The late teens and early twenties are some of the most important years in someone’s financial life, and yet, this is when most people make their worst financial mistakes. This is why you should teach your children about financial lessons as soon as possible. Ideally, this is something that should be done when children start understanding the concept of money but now is not too late if your children are entering college or near college age. Let’s take a look at some sound financial principles that should be taught to every young adult.

Credit is Your Friend

One of the most important things that need to be taught to young people is that using credit is not a bad thing. Having sound credit will open doors not only to financing opportunities but will also make it easier for them to get an apartment, sign up for services and get amenities, and even get a job. And there’s no way to build your credit outside of using it. 

So, you will have to walk them through the process of applying for their first credit card, but make sure that it will be suited for them and that they won’t have too high of a limit so they don’t go overboard. Make sure that they pick one with a few perks that will help them save too.

You might also want to teach your child how to maximize their card usage so they can build their credit faster. But to do this, you first have to know yourself how credit card payments can affect credit scores.

One area where there’s lots of confusion is how you should time credit card payments and how much you should pay. A lot of people, for instance, are under the impression that credit card providers prefer people pay to the minimum on their card. Others bizarrely seem to think that paying too early is a bad thing and that credit card companies somehow prefer people who pay just on time.

If you’re wondering ‘what happens if I pay my credit card early?‘ you should check out this article by Tally. They tackle the question ‘what happens if I pay my credit card early?’ clearly and explain the benefits of doing so. They go in-depth into how FICO scores work too so you can have a better understanding of how payments can affect scores positively or negatively.

One of the most important ranking factors to learn is credit usage. This refers to the amount of credit used versus the amount of credit available. The more unused credit someone has, the better their score will be. Teaching this early to your child could be very beneficial and prevent them from making the mistake of limiting themselves to one credit card when they’re building their credit.

The Power of Compound Interest

Compound interest is something a lot of people only learn about once they’re in their thirties or near retirement, and this is a shame since compound interest needs time to work its magic. Compound interest is when you invest a sum of money and reinvest the interest you made to the principal. This will have a snowball effect and cause that original sum you invested to balloon over time, sometimes to very shocking proportions. 

If someone invests $3000 at the age of 21, for instance, and gets an 8% return compounded yearly and saves about $300 per month, then this person would have $167,548.54 at the end of 20 years. This should be enough to convince them to look deeper into compound interest and encourage them to save. You could also play with this compound interest calculator and see how different structures could provide areturn to encourage them a little bit further.

Assets Over Liabilities

You should also teach your children to invest in assets instead of liabilities early. So many young people could have spent their money on things that could actually appreciate in valuelike a small business or real estate but spent on things like cars and fleeting experiences instead. 

The issue is that many young people think that ownership is unattainable at their age, and this is again where you need to teach them the virtue of good credit and fiscal responsibility. Also show them that there are plenty of low-cost ways to start a business or invest in real estate, like REITs, brokering deals, or buying small parcels of land. And teach them that learning a trade or two on top of whatever studies they think of doing is an investment as well as it could open more earning opportunities.

These are all financial lessons children over the age of 20 should learn from their parents before they venture into the world. This will make sure that they have a foundation they can build a solid financial house upon.