Gaps in financial education are one of the reasons why people struggle with money management. A laidback attitude for saving money and not realising the importance of compound interest cause financial concerns in the long run. Budgeting can help you come to grips with your personal finances. On no account does it mean restricting fun. It will rather let you have control over your cash flow.

Financial education is not emphasised in schools and universities in any programmes except finance courses. Most of the students struggle to enlighten themselves about the fundamentals of finance which results in poor money management. Here are the three crucial financial lessons that every teen must be taught:

#Lesson 1: the importance of budgeting and savings

It is a common habit among adolescents that they spend money as soon as they receive it. Having a conversation with them helps them understand how they can make the most of it. Teach them how to budget. There are various types of budgets aimed to help you with different financial problems. A budget is crucial to track your expenses. Encourage your teens to note down all expenses in a diary or in a digital notebook. Tell them to use a budgeting app, as their advanced features will make budgeting smooth without the hassle of making manual entries.

With the help of budgeting, your teens will be able to assign a purpose to each penny. As you know the goal of your every penny, you can prevent yourself from overspending. The goal of budgeting is to help you save money. Make sure you set aside a fixed sum every month.

Having an emergency cushion can prevent you from being dependent on loans without guarantor. Let your teens know the types of savings accounts and how each account yields different interest rates. Savings should not be left idle. They should not be within your instant reach, such as in your wallet, as you might dip into them for frivolous purchases.

#Lesson 2: managing debt smartly

Life without debt is not possible unless you are from a well-to-do family. You will need to take out a mortgage or a car loan down the line, but it is advisable to borrow money based on your borrowing capacity. As a teen, you should start building a credit history. Understand the importance of having a stellar credit report.

A good credit report can help you avail yourself of lower interest rates. Teens should be told ways to improve their credit rating. It is crucial to tell them the importance of:

• Paying bills on time
• Using credit cards smartly
• Keeping the debt-to-income ratio as low as possible
• Maintaining a credit utilisation ratio of 25%

At the same time, teens must be taught about the difference between good debt and bad debt. Just because loans are conveniently available does not mean that they are all good. You should beware of high-interest debts such as very bad credit loans with no guarantor from a direct lender. Such loans do not help build your credit history but can damage your credit file if you make a default. You should know the difference between small emergency loans and instalment loans.

Teens should also know how mortgages and car loans work. Buying a house is not a cinch, especially if you have little deposit and a very thin credit history, but you can improve your chances by putting down a larger down payment. Encourage them to whittle down their expenses to save a larger sum for the deposit of their first house. There are several ways to do that, such as saving on rent by moving into your parents’ house.

Car loans are available from car dealers and private lenders. You should know how car finance by dealers varies from car loans by lenders. By understanding the basic and little differences, you will be able to make the best choice. For instance, purchasing a personal contract is a good idea only for those who need a new car more often than not.

Teens should also be taught how they can prevent themselves from falling prey to scams. Educate them about the Financial Conduct Authority, and they should always pick a registered lender. Train them on how they can see through the lies of scammers. Many lenders claim to offer “guaranteed approval”, which is not practicable. Such lenders should be avoided because they charge very high interest rates, and you may fall into an abyss of debt.

Prepare your teens for not sharing their bank details, OTP and other confidential information. You can be tricked into sharing your financial details, and the next moment, you see your account is stripped of money.

#Lesson 3: the importance of investing

Teens often think that it is too early to start investing money, but delaying it means bearing the loss in compounding. It is crucial to remember that money loses its value due to inflation. As a result, your buying power becomes weak. You can offset the impact of inflation by investing in it.

Encourage your teens to start investing money as soon as they start earning. It is not necessary to invest thousands of pounds to create your portfolio. You should start with a smaller sum. Some budgeting apps round off your expenses to the next closer value and then invest that spare money. It is a good way to take it in your stride.

Access online material and investment books and gather information from other sources. Teens must know the difference between different types of assets and the importance of risk assessment and creating a diversified portfolio. An investment expert can help you understand various investing concepts.

By investing money, you will earn returns. As a result, your wealth will increase. Teens do not bother about retirement funds and savings for large expenses such as housing and cars. Without investing money, it can be hard to secure your financial future. Make sure you choose a combination of safe and risky assets. Safer assets include bonds and fixed deposits, and risky assets include shares and mutual funds.