Financial illiteracy is a big problem that affects many people’s lives. Making good financial decisions is a critically important part of your life that will affect your opportunities, financial stability, and health (both physical and mental.)

Although it might seem like understanding financial subjects is important as a teenager, and that you’ll learn about that sort of thing as an adult, this isn’t true. 

Unfortunately, most adults don’t have good financial habits. 47% of adults say they are living paycheck to paycheck, a number that has increased to a sickening 63% during the pandemic. 

This is just one metric that demonstrates the shocking lack of financial literacy –– which is necessary to make sound financial decisions –– in America. 

And even though financial literacy is a crucial part of success as an adult, most schools don’t teach it. 

This is why it’s so important to take it upon yourself to become financially literate.

What is financial literacy?

“Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. Financial literacy is the foundation of your relationship with money, and it is a lifelong journey of learning. The earlier you start, the better off you will be because education is the key to success when it comes to money.” – Jason Fernando, Investopedia.

How financial literacy affects wealth

Financial literacy has been found to have a clear and significant effect on wealth. In a recent study, respondents were asked to complete a set of questions to assess their financial literacy. When the data was analyzed, researchers found that the median net worth of individuals in the top 25% of most financially literate participants was over $225,000, which is quadruple the median net worth of those in the bottom 25%. 

This shocking difference suggests a strong correlation between financial literacy and wealth. 

And it makes sense; being financial literate will allow you to make informed financial decisions, with a higher chance of. 

Why it’s so important for teenagers

And becoming financially literate is especially important for teenagers.

Understanding the principles of personal finance is necessary for adults, but unfortunately, there’s a severe lack of financial education. Most of the time, financial knowledge is taught by parents to their children, but money is often considered a “taboo” subject and isn’t often talked about, even among family. If you aren’t lucky enough to be taught good financial habits by your parents, you’ll have to take it upon yourself to build financial knowledge.

The great thing about being to build financial habits as a teenager is that when you make mistakes, the consequences are much less significant than if you were an adult.

Additionally, once you build financial habits, it’s hard to change them. If you start adulthood with good financial habits, you’ll likely continue to follow those patterns for the rest of your life. 

In contrast, if you develop bad financial habits, it may be difficult to change them as an adult.

How to become financial literacy 

So now that you understand what financial literacy is and why it’s important, how should you actually learn about personal finance? Well, there are a number of resources that you can use to better your understanding of personal finance.

YouTube

YouTube is actually how I discovered personal finance in the first place. I was scrolling through YouTube when a video titled something like “How to Make Money as a Teenager” and I clicked on it. It was by Graham Stephan, a personal finance YouTuber. I was immediately hooked by the idea of making money and began watching many of his other videos, continuing to learn more about personal finance. This was a great way to gain exposure to different ideas and terms, as well as find the areas I wanted to learn more about.

What makes YouTube such an amazing resource to become financially literate, is that the videos are made to be entertaining, and appeal to many people. 

Although you might not acquire as much detailed financial knowledge watching YouTube as you would from reading books blog posts, YouTube is a great way of getting surface-level knowledge for beginners looking for a place to start.  

Books

There are a seemingly endless number of books about financial literacy and personal finance that you can read to gain an even deeper understanding of these important topics. 

There are so many books I could recommend but here are some of my favorite books about finance:

The book Think and Grow Rich by Napoleon Hill, is one of the most famous books about success in general, with over 100 million copies sold. The book describes the habits and mindsets of the hundreds of successful people he studied, what they all have in common, and how you can replicate them to achieve your goals. 

The book Your Money or Your Life by Joseph R. Dominguez, Monique Tilford, and Vicki Robin is a classic personal finance book that offers an alternative perspective on the value of money. In the book, they recommend thinking of each purchase in terms of how long it took you to make the money you spent. For example, if you make $10 an hour and buy a $15 sandwich, you’re trading an hour and a half of your time for the sandwich.

These are just two of the amazing books to help you become financially successful.

Blogs

Blogs – like this one 😁 – are a great resource to learn more specific knowledge about personal finance, especially as it relates to teenagers. For teenagers, theirs a lot less available information, and this is why blogs are an extremely useful tool.

One such blog I would highly recommend reading is teenfinancialfreedom.com. They have great content about personal finance, making money, and productivity, specificly for teenagers. 

Next steps to take 

After you’ve become financially literate and have a good understanding of core personal financial skills you have to take the next steps to actually build good habits and apply the principles you’ve learned about.

Budget

“Since budgeting allows you to create a spending plan for your money, it ensures that you will always have enough money for the things you need and the things that are important to you. Following a budget or spending plan will also keep you out of debt or help you work your way out of debt if you are currently in debt” – My Money Coach

To create your own budget, begin by tracking your expenses for 1-3 months and categorizing each of your purchases into categories like food, clothing, etc. During this period, you’re just collecting data, so don’t try to limit your spending or change your natural habits. 

After tracking your spending for a few months, total up all the categories. Then, analyze the categories to see which categories you could cut back your spending in. After reviewing your spending, set a monthly amount of money for each category. You should also allocate a percent of your monthly budget to savings/investments.

At the end of every month, re-evaluate which categories you’re spending too much money in, and try to reduce your spending and increase your saving over time.

Saving

Saving is a crucial part of financial stability. Starting to consistently save as a teenager will help you to build the habit of saving for the rest of your life. 

You should aim to save at least 10% of your income but really you should try to save as much money as possible. As a teenager, you probably don’t have many necessary expenses and should be able to save a large percentage of your income.

Investing

Investing is a crucial way of building wealth thats passive, scalable, and compounding. You can start investing as a teenager by opening a custodial account.

“The term custodial account generally refers to a savings account at a financial institution, mutual fund company, or brokerage firm that an adult controls for a minor (a person under the age of 18 or 21 years, depending on the laws of the state of residence). Approval from the custodian is mandatory for the account to conduct transactions, such as buying or selling securities” – Troy Segal, Investopedia.

You can read more about how to invest as a teenager here!