Seven Lessons to Teach Your Teenager About Building Wealth

While my family was far from perfect with money, I'm grateful that my dad was obsessed with the principles of building wealth. By the time I was 21 years old, what little money I had from waiting tables was split between multiple retirement accounts. At the time, I rolled my eyes at the idea of giving up my precious cash for some far-off retirement. Now I get to watch those funds grow, while retirement is increasingly less far off.

So, whether your teen just spent the summer mowing lawns or at some prestigious internship, their first paychecks are a golden opportunity to kickstart a lifetime of financial security. Here are some essential lessons to impart to your teen about building wealth.

The power of compound interest

This is number one with a bullet: Teach your teenager about the magic of compound interest. Simply put, compound interest means the interest on an investment grows exponentially-rather than linearly-over time. This concept can motivate them to start saving and investing early. Even small amounts saved from summer jobs during the teen years can grow into substantial sums by retirement age. The key is to start early and let compound interest work its magic over many decades.

The basics of budgeting and saving

Help your teen create a simple budget to track income and expenses. Encourage them to save a portion of any money they receive, whether from allowance, gifts, or part-time jobs. Introduce the concept of "paying yourself first" by setting aside savings before spending on wants. Check out a template for the classic 80/20 (aka "pay yourself first") budget here.

Understanding different types of investments

The overarching message to get across to your kid is that you don't have to already be rich to start building wealth now. They should be able to understand the basics of various investment vehicles:

• Stocks: ownership in individual companies

• Bonds: lending money to governments or corporations

• Mutual funds: professionally managed portfolios of stocks and/or bonds

• Exchange-traded funds (ETFs): baskets of securities that trade like stocks

• Real estate: property investments

As you go over simple definitions, explain the potential risks and rewards associated with each type of investment. Explain how diversifying investments across different asset classes and sectors can help manage risk and potentially improve returns over the long term. Teach your teen about not putting all their eggs in one basket. Here's our guide to building an easy set it and forget it" investment portfolio.

The basics of credit

With all the wisdom you have now, imagine if you could turn back time and get a head start building good credit from an early age. Teach them the basics of boosting a low credit score, maintaining a high one, even building credit without a credit card-and why these things matter. Explain how maintaining good credit can save money through lower interest rates on future loans and potentially impact job prospects and housing applications.

Managing debt wisely

Not all debts are equal, and not all debts have to be scary. Teach your teenager about good debt (like student loans for education) and bad debt (like high-interest credit card balances). While bad debt can quickly spiral out of control and tank your financial picture, good" debt can help you increase your net worth. Explain the importance of understanding interest rates, loan terms, and the long-term impact of debt on financial health.

Protecting assets

I understand that most young, single, healthy people assume they don't need life insurance. Unfortunately, this misconception is difficult to reconcile before it's too late. After all, life insurance is one of those investments that you can't exactly buy after you need it, and if you wait too long, it's going to cost a lot more to get it.

Teach your teen about the importance of insurance in safeguarding assets and income. Introduce concepts like health insurance, auto insurance, and, eventually, homeowners or renters insurance.

Patience and long-term thinking

Encourage your teenager to think long-term when it comes to finances. Teach them about the benefits of patience in investing and the dangers of trying to get rich quick or timing the market.

Again: This is about so much more than dollars and cents. Emphasize that investing in oneself through education and skill development is one of the most valuable ways to build long-term wealth. Encourage your teen to pursue knowledge and skills that can increase their earning potential.

By teaching these fundamental concepts, you'll be setting your teenager on a path toward financial literacy and long-term wealth building. Remember, the goal is not just to impart knowledge, but to instill good financial habits that will serve them well throughout their lives.