Teaching your teen healthy financial habits is imperative to help them build a secure financial future. However, tackling the subject of financial risk with your teen can be challenging, especially if you are still determining where to begin or how to approach it.
Teaching your teen to understand financial risk and providing them with strategies to avoid or mitigate it can save them from future financial trouble or help them navigate it effectively when faced with challenges.
Understanding Financial Risk
Financial risk occurs whenever there is a possibility of losing money. Common examples of financial risk include operating a business or investing.
To help your teen understand financial risk, encourage them to connect it with something valuable they own and use regularly, especially something more likely to be damaged during use.
For instance, if they own a car, you can compare it to that (though skateboards and drones are also applicable). When they leave their car parked in the driveway, the risk of damage is minimal. However, as soon as they start driving, the danger increases. With higher speeds, the likelihood of damage also rises.
Financial Risk in Investing
Encourage your teen's interest in investing while guiding them toward safer options. However, teens and younger individuals might lean towards riskier options due to the influence of day trader creators on YouTube or TikTok that discuss cryptocurrencies.
If your teens are interested in these investments, it would be best to caution them. Trading and investing in startups, single companies, or cryptocurrencies represent some of the highest risks in the investment world.
If they are still persistent, suggest investing only a small portion of their funds into these riskier options. If they do lose out, they will lose an insignificant amount while learning firsthand about financial risk. However, it is best to persuade them to keep most of their money in financially secure options like ETFs and index funds.
Teaching Strategies
To ensure your teen understands what you're telling them, utilize vital teaching strategies. Some strategies to help teach your teen about financial risk include:
- Begin early—teach basic financial concepts like budgeting, investing, and saving from the outset.
- Establish goals for their financial future.
- Apply these concepts to their life, using examples that resonate with them.
- Avoid lecturing them.
- Encourage open communication.
- Demonstrate support and enthusiasm if they express interest in learning more about finances and investments.
- Utilize their social media. For instance, if they use TikTok, seek out videos discussing financial risk and security. Similarly, if they enjoy watching videos on YouTube, do the same. This approach will help them dive deeper into the subject on their own.
- Use apps and software that help track their spending, savings, and investments.
- Share your financial history as an example. Have you experienced any financial decisions that didn't pan out as expected? Conversely, have you taken any financial risks—whether high or low risk—that yielded positive outcomes?
Practical Applications
When looking for real-world examples, try following the following tips:
- Encourage them to work part-time or contribute to household chores to earn income, providing firsthand experience with budgeting, saving, and investing.
- Engage in budgeting exercises that use imagined or real-life scenarios. For instance, involve them in managing the family budget, which you can later review together. You can also help make a budget for college or a financial goal.
- Introduce investment simulations to them so they learn about the stock market's volatility or the value of compounding interest.
- Apply concepts to real-world situations. Teach them about various types of risk, such as volatility, inflation, markets, business, liquidity, and credit risks, by relating them to actual scenarios—whether personal anecdotes or current events in the news.
Takeaway
Sooner or later, your teenager will encounter financial risk. It's best to teach them about it yourself in a safe environment. This way, they will be equipped to make intelligent financial decisions in the future.
When teaching your teen about financial risk, maintain open dialogue and actively encourage them to ask questions and seek further knowledge. Empowering them with the freedom to budget, save, and invest under your supervision and support will enable them to cultivate healthy financial habits for the future.