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Helping Teens Grow Into Successful Adults With Personal Finance Knowledge

Dr. Martin Luther King, Jr. once said, “Education must enable a man to become more efficient, to achieve with increasing facility the legitimate goals of his life.” The function of education, he argued, is vital for the betterment of students’ lives and society as a whole.

As we continue to focus on the need for personal finance education, specifically as April marks Financial Literacy Month, it’s important to recognize its role in forming a well-rounded student. Because teens who lack a basic understanding of personal finance will grow into adults who are not equipped with the tools to lead financially stable lives.

The Proof

A 2012 study of nearly 30,000 teenagers from 18 countries found more than 1 in 6 students in the United States failed to reach the baseline level of proficiency in financial literacy, according to the Paris-based Organisation for Economic Co-operation and Development. That places American students in the middle of the pack worldwide.

Moreover, a 2016 survey from the Council for Economic Education reports only seven U.S. states require high school testing of personal finance concepts, with stagnation in mandates for personal finance education. Additionally, the number of states that require completion of economics courses is on the decline over the past two years.

The Results

In a 2015 national survey we found 42 percent of teenagers said they are not “financially fit,” and 2 in 5 teens would give up their smartphones if it meant graduating college debt free. A similar study in 2014 revealed 83 percent of teenagers do not keep a budget.

The juxtaposition of these statistics is stark. Teenagers show concern for the future of their financial health but aren’t taking the proper basic measures to set themselves up for success. With the continually rising costs of college education and a shortage of financial skills, young adults are greeted with shock upon leaving the confines of college campuses.

Seventy percent of college graduates, according to debt.org, leave school with student loan debt that in 2014 averaged $33,000. In total, U.S. student debt is around $1.2 trillion, with $3,000 of debt accrued each second.

The Solution

It all starts with the basics: personal finance education. Whether at school or at home, students should have the opportunity to learn practical life skills, like balancing a checkbook, the importance of saving early and saving often, and how investments can benefit from growth over time.

“To be successful, most kids don’t need to learn about collateralized debt instruments, but they do need to know how to open a bank account, how much they need to save each month to reach their goals and, if they borrow this amount of money, how much money they will need to earn to pay it back,” said Nan Morrison, president and CEO of the Council for Economic Education. ”

The Council for Economic Education found students who learn these basic financial literacy skills are more likely to engage in financially responsible behavior such as saving, budgeting and investing, and have better average credit scores and lower debt delinquency.

These are the skills the younger generation must possess because before we know it, they will be the ones who have the money and run the country. Don’t we want them to run it properly?

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5 Tips for “Spring Cleaning” Your Finances

When you hear the word “spring,” uttered for the first time after months of dreary winter, what kinds of images are conjured up in your head?

Warmth. Sun. Birds. Flowers. Cleaning?

It may not be the most alluring aspect of the new season, but according to the American Cleaning Institute, 72 percent of people will likely engage in some sort of spring-cleaning this year. So if cleaning is top of mind when you think of spring, you’re not alone.

But don’t limit spring-cleaning to only your home. This is also the perfect chance to give your finances a nice tidying up. Here are five financial spring-cleaning tips that will give your finances a fresh new shine for the rest of the year:

  1. Form a realistic plan for getting out of debt

Without a strategy, you could suffer from the fiscal strain of debt for years. Apply a simple plan for your debt, and you’ll be able to mark a date on your calendar when you’re free from the shackles. Start by spending less than the amount you earn each month, and then decide on an amount you’ll put toward debt each month and stick to it.

  1. Do your math before taking out a loan

Whether you’re planning for your teen’s education or considering furthering your own, loans are often part of the equation. Make sure you understand the commitment before accepting a loan or you’ll be in for a rude awakening. A $100,000 loan at 6.8% interest will demand monthly payments of $1,100 for the next 10 years.

  1. Save for retirement

And do it now! The sooner you start putting in money for your golden years, the shinier those years will be. Once you’re retired, you won’t have a source of income to support yourself. Seems obvious, but then again so does saving now for retirement, yet plenty of people neglect to do so.

  1. Make a budget

Putting your plan on paper in the form of a budget will help make the first three tips easier. If you don’t know where to start on a budget, follow the 50/20/30 rule: 50 percent to essential expenses, which includes housing, transportation, utilities and groceries; 20% to financial priorities, which are retirement, savings and debt (in that order); 30% to lifestyle items, which are gifts, travel, dining out, shopping and everything else.

  1. Check (and understand) your credit report and credit score

A good indicator of how tidy you’re keeping your finances is your credit report and credit score. They will determine if you’re eligible for big savings when you make major purchases like a car or house (anywhere from thousands to hundreds of thousands in some cases). Additionally, make sure there aren’t any mistakes on these documents as that can have serious effects on your credit and your ability to borrow money.

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If the Easter Bunny Were an Accountant: The Importance of a Nest Egg

When you were a small child, did you ever stumble upon the grand prize during an Easter egg hunt? While all the other children were frantically searching for eggs with a couple of measly jelly beans inside, you had found the winner—the egg with the best candy bar, a toy or even some sweet, sweet Easter cash.

Let’s say you found the egg that was stuffed with dollar bills. Did you go out and spend it immediately or did you put it toward your savings? If you wisely put it in the piggy bank, then that Easter egg was actually the start of your nest egg. Let’s talk about the importance of this kind of egg.

What’s a nest egg?

A nest egg is a term that refers to a sum of saved money that is earmarked for larger investments in the future (think: car, education, house). Although this may seem like more of an adult concern, the sooner you begin to save, the better off you’ll be. The adult you will thank the teenage you.

Why is this nest egg so important?

A recent report claims that 63% of Americans don’t even have $1,000 set aside in emergency savings. Yikes! That means in the event of an emergency over half of the country will go into debt in the aftermath. Moreover, the Federal Reserve reports that the median balance of retirement accounts held by Americans who are saving for retirement totals less than $60,000. Retirement accounts are in essence the ultimate nest egg, and the average American only has about one year of salary (according to nationwide averages) to last them all the years after they retire.

When should this nest egg hatch?

Our recommendation is to build up your nest egg so there’s at least $1,000 in it at all times. That means even if you’ve just spent $1,000 on an emergency, there should be an additional $1,000 in case of the dreaded back-to-back emergency situation. As a teen, you can start with just one nest egg and then divvy it up into a retirement fund when the time comes. It’s helpful to know that the average person retiring at age 65 with $103,000 in retirement savings would only be able to withdraw $343 per month. That’s hardly enough to live on.

If you’re interested in how much you should save in order to have the retirement nest egg you’d like, use this retirement calculator to quickly crunch some numbers and get a basic picture. But for now, enjoy those jellybeans and happy Easter egg hunting!

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The Dollar Doesn’t Fall Far from the Money Tree: Making Sure Your Teen Doesn’t Pick up Your Bad Financial Habits

Think back to when you were a bright-eyed teen. Do you remember where you acquired the personal finance skills that would serve as your foundation for saving, spending and investing as an adult?

If you were lucky, you learned what you know from your parents. Otherwise, you probably picked up tidbits here and there through trial and error.

Even with a whole new generation of soon-to-be-adults out there with an appetite for money management, studies show the majority of them are still learning from their parents due to a lack of in-school financial literacy education. That leaves you in the role of parent/teacher.

All of those decisions you made with your money are now useful teaching tools in steadying your teen on the right track from the get-go. If you never quite learned proper financial literacy yourself, now’s your chance to clean the slate and start anew alongside your teen.

These three tips will help you and your teen build a strong financial literacy base:

  1. Don’t forget to save

Any responsible adult will agree that saving money is important. This key component to effective financial literacy spans the gamut: saving for personal items like clothes or entertainment; keeping enough funds in the bank for essential items like a car or rent; stashing away enough for retirement and beyond. If you’re not saving, you’ll eventually run into trouble. Yet, according to a Federal Reserve Board study, 47 percent of Americans would not be able to cover an emergency expense of $400 without borrowing money or selling something for money. Don’t let your teen be one of the 47 percent. Urge them to save early and often to avoid harrowing times when an emergency arises.

  1. Don’t forgo other essentials

When money is tight, some people will deprioritize certain aspects of their lives in order to pay the most pressing bill. The same Federal Reserve Board study reported that 31% of their respondents went without some form of healthcare in 2014 because they couldn’t afford it. Not only does this fact highlight the importance of savings, it also stresses the need to sacrifice non-essential items if needed. Your teen should be made aware that medical treatment is ultimately more important than the newest iPhone.

  1. Communication is key

You may think you’ve been doing a good job as parent/teacher, but what does your teen say? A Time article claims that while 73 percent of parents say they regularly talk to their kids about saving and spending, only 61 percent of kids agree with that sentiment. So before giving yourself teacher-of-the-year award, make sure your teen understands what you’re saying and can apply the learnings in practical setting. One easy way to accomplish this is by not forking over cash for your teen’s luxury items, for instance if your teen wants to go to a concert, make sure they can earn cash either through a part-time job or even household chores.

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5 Questions to Ask Your Teen before Lending Them Money for a Big-Ticket Item

As children become teenagers and begin growing both physically and mentally, parents begin to find their “little ones” get too big for more than just their clothes. A developing teen with tastes and preferences all their own is a teen who will inevitably want to make bigger, more expensive purchases.

Gone are the days of giving little Billy a $5 bill to spend on comics and candy. Teenaged William is interested in buying a car, and he’s looking to you for financial assistance.

But before you throw a chunk of change right in Billy/William’s lap, it’s important to use this opportunity as a teaching moment. Parents should feel encouraged to lend their kids money and be paid back as part of a financial exercise in credit, lending, and timely payments.

As a parent, you should ask yourself these five questions before lending your teen money for a big-ticket item:

  1. I can’t believe my baby is all grown up!

Technically that’s not a question, but children do grow up fast. Try not to get too emotional… let’s move on to the next question.

  1. Does my teen need this item or is it a luxury good?

While even necessary items can cost a pretty penny, it’s those luxury items teens should really learn to budget for. Responsible adults have to weigh all factors when making purchase decisions, often deciding not to buy a luxury item in favor of necessities.

  1. Will this item help my teen advance their education or career?

If your teen needs an item to advance their education or career, it doesn’t necessarily make it a necessity — luxuries can exist within necessity. But purchases that directly link to income (i.e., car for transportation) or education (i.e., text books) are obligations that should warrant a loan. Just make sure your teen actually uses these items once they’ve been purchased!

  1. Can my teen realistically pay back the loan?

It’s difficult to pay off a loan without an income stream. If your teen doesn’t have a part-time or side job, think about implementing an allowance-for-chores system. This will teach them the value of a dollar. If your teen does have a job, encourage them to start saving some money with each paycheck and begin budgeting for loan payments.

  1. Can I establish a payment process that will actually teach my teen something?

The point of the parent/child money-lending exercise is two-fold: it gives teens a taste of adulthood while introducing them to all the intricacies of money management. The exact process you set up for your teen is up to you. Will you set a payment due date? Will you add interest? It’s all up to you. Remember not to distort the reality of the process though, which can provide your teen a false sense of potential consequences.

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Teens & Taxes: Spring Is Coming! But So Is Tax Day

Punxsutawney Phil’s declaration this morning that we’re in for an early spring may have you thinking of frolicking through dewy meadows, but don’t let that distract you from the upcoming tax deadline.

For 2016, that date remains fixed as April 18, despite what any rodent has to say about it.

With that sobering reminder, it’s a good idea for teens to learn the tax basics while still cooped up indoors. In the event your teen needs to file a return, getting the work done now during the winter months so one can relax in spring is a good idea.

Here are five important facts to help you understand taxes:

1.    What exactly are taxes?

Taxes are imposed on citizens by federal and state government bodies to finance various public services, such as transportation and infrastructure (think highway maintenance) and Social Security (monthly benefits to support the retired or eligibly disabled and their families) among other safety net programs. In essence, taxes help to support the country we live in.

2.    What’s the deal with Tax Day?

The chatter around Tax Day deals specifically with income tax, which is money deducted from paychecks and other forms of earned income, like investments. Typically on or before April 15, Americans must file a tax return, which notifies the government how much money individuals have earned over the past year and how much they’ve already paid the government through taxes. If you’ve paid more than required, you will receive a refund from the government. If you haven’t paid enough, then you’ll have to fork over extra cash.

3.     How did this all come to be?

A federal income tax was first imposed in the 1860s when the government needed money to fund the Civil War. Congress repealed this in 1872, but subsequent iterations of a federal income tax were imposed in large part to fund our military for protection from enemy nations. In 1913, the Sixteenth Amendment of the United States Constitution was ratified, decreeing Congress’s right to impose a Federal income tax.

 4.    Is paying taxes voluntary?

Simple answer: NO! Although the U.S. income tax system is defined as a voluntary system, reporting income your income to the IRS is mandatory. If you’re an income-earning resident of the United States or a nonresident with taxable U.S. earnings, you are required to pay your tax liability. No one is immune, not even the powerful and dangerous. Sure, Al Capone could get away with organized crime activity, but he couldn’t escape tax evasion. If you don’t pay the government, they will find out and collect their money, often with penalties and interest. In the most severe cases, criminal action can be taken against delinquents.

5.    But do I have to file a tax return?

Good question. That depends primarily on your age and income, along with some other factors. If you worked a job and had money taken from your check, you should file one because you may get money back. Read this earlier Dollar & Sense blog post for a more detailed explanation of whether or not teens have to file a tax return.

Understanding how to file a tax return can be complicated, which is why it’s beneficial to gain an understanding of the basics early on. It may not be everyone’s favorite, but it could be worse. You could be a groundhog tasked with crushing the warm-weather dreams of an entire country.

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Does My Teen Have to File a Tax Return?

With the deadline to file tax returns three months out, and what accountants refer to as “busy season” more than a month away, you may be wondering why we chose now to discuss tax returns.

No, it’s not to stress you out. In fact, it’s quite the opposite.

A little preparation now will go a long way in making your life easier come busy season — especially if your teenager recently entered the workforce in 2015 with a summer or part-time job.

There are several somewhat confusing rules that will determine whether or not your teen needs to file a tax return, so let’s start with the basics.

Is your teen a dependent?

Your child is your dependent if the child lived with you for more than half the year, did not provide more than half of their own support, and they were under 19 years old on Dec. 31. A child under 24 years old who isa full-time student or a child of any age who is permanently disabled may also be a dependent. In most cases, if your teen is a dependent they will not be required to file a tax return. But there are exceptions.

How much did your teen earn this past year?

Even as a dependent, your teen may have to file taxes depending on their yearly earnings. For instance, if their earned income is more than the standard deduction, then they must file. Standard deduction amounts can fluctuate from year to year, so check with the IRS for the most accurate figure.

Alternatively, if your teen has unearned income from dividends, investment gains, or interest that totals more than $1,050, they will be required to file a tax return. (Again, consult the IRS for accurate figures)

Lastly, your teen will need to file a return if the combined values from earned and unearned income for the year totals more than the larger of $1,050 or if their earned income exceeds $5,950 plus $350.

This last part is by no means simple to understand, so it may be best to let a tax professional do the math if your teen has both earned and unearned income for the year. A tax professional can also determine if your teen was hired as a contractor rather than a “regular” W-2 employee and what that means in terms of either owing or receiving money from the government.

Learning financial literacy is fun with the H&R Block Budget Challenge. To find out more about how your teenagers or students can learn real-world money management skills without the real-world consequences, encourage teachers to register here for the next H&R Block Budget Challenge simulation.

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3 New Year’s Resolutions That Can Save You Money (and Are Actually Attainable)

As 2015 comes to a close, it’s natural for people of all ages to reflect back on the past year. Common questions one may ponder are: “Did I have a successful year? Did I achieve any or all of the goals I set for myself? Where did I fail?”

That last question is the one that resonates most loudly, especially when it comes to finances. Whether failing to save for a new skateboard or putting too little into a 401K fund, we look to January 1 as a chance to start from scratch. Yes, it’s New Year’s Resolution time!

The Washington Post reported that less than half the population sticks to their resolutions for six months. However, a Time.com article stated that resolutions of a financial nature tend to have better success than those having to do with health or fitness.

So this year, instead of making grand resolutions that are difficult to keep—I’ll run a marathon—and then give up a month in when you see yourself veering off track, you and your family should make smaller financial goals that are attainable. The same methods that can help your son or daughter save for their first car can help you save up for their college education.

Here are three realistic financial resolutions that your whole family can make to start 2016 off on the right foot.

1. Create a budget

Budgeting is the most important step to being a smart money manager. If you don’t know what you’re spending your money on, it’s hard to accurately save. The easiest way to start building a budget plan is to record spending habits for a month. There are several mobile apps that can simplify this process. Track expenses like bills, cost of transportation, and money spent on both food and leisure activities. Once you see where you spend your money, you can forecast for the next month, with the intention of putting aside more money for savings.

2. Set aside a little bit every week

In 2015, it was estimated that roughly one-third of Americans had no savings set aside, meaning more than 72 million people don’t have a safety net to catch them in the event of hard times. No matter your age, savings are absolutely vital in the money management process. Even a little of savings is better than none, and there’s no better time than the present to begin. Put aside a small amount—$10 for instance—every week, and include it into your budget plan. It may not seem like much, but $10 every week for a year will amount to $520.

  1. Eliminate wasteful spending

If you’re finding it difficult to set aside money for savings, there’s one simple way to get over the hump: reel back on wasteful spending. With an accurate budget in place, it becomes very clear where and when you spend money on non-essential items. Even if you only eliminate that after-school or after-work treat—enough to save you $10 for weekly savings—you’re doing a great job. The more fat you can cut from your spending, the more you can save. It’s that easy!

It may not seem like much, but these three simple financial resolutions can pave the way to more disciplined financial behavior, especially if you tackle them together as a family.

Learning financial literacy is fun with the H&R Block Budget Challenge. To find out more about how you and your class can learn real-world money management skills without the real-world consequences, encourage your teacher to register here for the next H&R Block Budget Challenge simulation.

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How to Help Your Teen Save Money While They’re in Debt

For teens eager to shed the restraints of adolescence, financial independence is one of the first true milestones. That means saving money, budgeting and paying bills in a timely fashion.

But without the proper money management tools, financial independence can be a tough road to navigate, leaving a lot of teens in debt right out of the gate. It may seem counterintuitive to try and save money while working to pay off debt, but it’s a necessary one-two punch for teens trying to maintain their newfound independence.

Here are three ways to save and pay off debt at the same time:

  1. Analyze spending habits

If your teen quickly fell into debt after opening their first credit card, work with them to assess and audit their spending and lifestyle. If they’re buying expensive items without the ability to pay off even the minimum monthly amount, then they must understand the basics of credit card ownership before going any further.

Even small purchases can take their toll. That pre-class Frappuccino, after school candy bar and weekly mobile app purchase can quickly add up. By helping your teen trim their budget, they can easily save anywhere from $20 per week or more by eliminating non-essential items. If this change is too sudden, encourage them to at least cut back on these types of purchases and make a note of how much they save as a result.

  1. Starting saving NOW!

Even with debt looming over their heads, it’s important for teens to start putting money into an emergency fund immediately. By doing so, teens will have funds to use in an emergency without having to use their credit card, which will put them further in debt. These savings should be kept in a not so easily accessible savings account where they can earn interest and prevent any temptation spending. Once an emergency fund has been established, your teen can start paying off their debt.

  1. Show your interest

The biggest problem with debt is the associated interest rates. Establish how many bills your teen has, how much is owed on each and the associated interest rates. This will help you map out the long-term costs associated with the debt held on each account.

Help your teen figure out the best payment method for them, whether it’s paying off their smallest bill to eliminate it completely, or paying off a larger chunk of the bill with the highest interest and avoiding costly fees. With the second option, it makes sense to compare the amount saved by paying off the debt with the amount that money could earn with interest in a savings account. If paying the debt proves to be a better use of the money, then pay it off until the advantage tips back to the interest earned in a savings account, at which point they should continue to pay the minimum costs. Whatever you ultimately choose, make sure that your teen always pays the minimum amount on every bill each month.

By saving money and paying off debt at the same time, your teen will eventually be debt free with some money in savings. This two-pronged effort may not be the quickest way to become debt free, but it will ensure your teen has a safety net in the process.