You may have studied trigonometry in high school, but did you ever learn how to create a household budget?
If the answer is no, you're not alone.
A recent poll of BOK Financial® employees revealed that budgeting is the top financial topic that they wished they'd learned about in middle school or high school.
Credit ranked second among the responses, followed by taxes, savings and compounding.
Though mastering these concepts early is best, it's also never too late to learn. Here's what you need to know to get started:
Budgeting is a foundational skill for financial success, said Esmeralda Rigdon, an institutional wealth and corporate trust relationship manager with BOK Financial. Less than one-third of U.S. households prepare a monthly budget, however. One way to start is the 50/30/20 rule: 50% of income for needs, 30% for wants and 20% for savings and debt repayment.
To document spending, which can be tracked online using personal finance programs, begin with a savings goal followed by recurring expenditures like housing, auto, food, utilities, clothing, insurance, etc. Debit and credit card-embedded apps can identify historical spending and categorize outlays by type, amount or percentage for any time interval.
Taxes make an impact at every age and are best acknowledged or accepted as early as possible. When many young employees get that first paycheck, they're surprised to see that 20% to 30% of anticipated earnings are "missing" due to employer-required tax withholdings. Some may even think they are tax-exempt until age 21 or when they have a "real job." Self-employed workers, nearly 10 million and rising as of January 2023, must be especially conscious of tax liabilities that are usually not withheld from earnings, but must be paid independently to avoid penalties.
Credit can be used or abused—and often, it's both. Rigdon learned lifelong lessons after her father gave her a credit card with a $1,000 limit in high school. Though intended for emergencies, she instead bought clothing and other items she deemed as necessities then. With her father making the payments, she didn't learn the responsibility of making timely payments or the consequences of not making them. Another time, when the card issuer wrote-off her unpaid balance, her credit score was compromised, and she did not have credit when she needed it most—to repair her car. She believes that family money conversations would have helped back then and is now teaching her young children the basics. "Financial responsibility begins in the home," she said.
Achieving and maintaining a good credit history is vital, according to Erin Tuttle, personal banking team lead. She recalls when she "dug herself a hole with credit cards" in her early 20s and it took years to repair. "If I could only go back in time and have a heart-to-heart with 18-year-old Erin!" she said.
Eventually, her restored credit history and rating helped her qualify for a mortgage. Having learned several "hard lessons," she and her husband now have "immaculate" credit. They keep their debt-to-income ratio at 30% or less and automate their payments to avoid late fees.
With the average American household credit card debt at $9,000, today's credit card users may have also missed that lesson early on, too. As of the Fed's May 2023 interest rate hike, average credit card rates exceeded 20%; compared to an average of less than 15% in 2017.
“As a financial institution, I feel we owe it to our clients and our community to share our knowledge and help guide them to better financial choices.”- Erin Tuttle, personal banking team lead
Saving is a learned discipline that forsakes now for later. Since time cannot be replaced—and is often a saver's biggest ally—missed savings are a lost opportunity.
Goal-oriented savings can take months or years, but it can be facilitated by online calculators that use contribution amounts and interest rates to target a goal-achievement date. Automation and payroll withholding, even for young people, are effective ways to direct a segment of your income toward savings.
To achieve her savings goals, Rigdon assigns a portion of her earnings for "fun money" apart from her bill-paying account. She also saves into an external account that reduces her temptation to spend. By committing to a consistent saving goal, Tuttle and her husband purchased another home with a "large amount" of equity and converted their original home into a rental.
- Compounding grows money exponentially over time when interest is repeatedly applied to a principal amount. Through compounding, interest-on-interest accumulates and total value snowballs, with the money working powerfully for the saver. Compounding at various rates is an essential part of wealth building to reach short-term goals and eventually can be a strong enabler of retirement.
Many adults lament over financial mistakes or missed opportunities when they look back at their younger selves. By learning differently from their predecessors, teenagers and young adults can employ basic financial skills sooner, helping them to work smarter and potentially avoid some of the previous generations' pitfalls.