As many as 82% of 17 and 18-year-olds worry about finances, and a big reason for this is a lack of knowledge about money management. The sooner teens understand finances, the better equipped they are to manage their money responsibly and keep financial stress to a minimum. Here are three important finance lessons we wish we’d had as teens.
Important finance lessons we wish we’d had as teens
1. Build a credit record
Your credit score is a measure of your trustworthiness when it comes to repaying money. Paying bills in a timely manner reflects positively on your credit score. Missed or late payments reflect negatively. If you don’t have a credit history because you’ve never borrowed money before, it’s difficult for lenders to assess the risk of lending to you at all.
The better your credit score is, the better the interest rates you’ll be able to secure on future loans. You can save a significant amount of money with small reductions in interest rates.
For example, if you take out a £200,000 mortgage over 30 years, you could save over £40,000 in interest when you secure a 3% interest rate versus a 4% interest rate. This is why it’s important to build a credit history as soon as you’re able, as long as you borrow within your means and make repayments on time. A good tactic is to use a credit card to complete your weekly shop and set up automatic payments to repay the statement balance every month.
2. Budget with the 50/30/20 rule
Budgeting is an important way to avoid spending beyond your means and build up your savings. A good way to create a budget is to use the 50/30/20 rule. This is where you split your post-tax income into three parts. You have 50% to spend on essentials, 30% to spend on non-essentials, and 20% to save. Not only is this an efficient way of saving, but it also helps you categorise your outgoings easily so you can spend within your means.
If the 50/30/20 rule isn’t realistic for you, adjust it to suit your circumstances. For some, starting with 5% savings is more achievable. You might find as your career progresses and income rises that you can gradually increase the amount you save each month.
3. Your take-home pay is less than your wages
If you’re in employment, your income is taxed as you earn. Your payslip is your wages minus your income tax, national insurance contributions, and student loan repayments if applicable. It’s important to understand how taxes work and keep track of tax rates, which change regularly. This will help you to budget in line with your take-home pay rather than your wages or salary. Plus, it will help you identify and fix tax errors on your payslip more easily.
Everyone has a personal allowance, which is the amount we can earn with paying income tax – this currently stands at £12,570. Any income earned above this personal allowance is taxed at the basic rate of 20%. Those who earn more than £37,700 are taxed at 20% on the portion of the income below this threshold and at 40% on the portion of the income above it. National insurance contributions are calculated separately from income tax, but they’re also deducted from your take-home pay.
Financial literacy supports financial stability
If you want to be financially stable, the first step is becoming financially literate. By learning about finances when you’re a teen, you can make smart financial decisions and set yourself up for a financially secure future.