“G” writes in:

I’m planning on trying to teach a short lesson on personal finance to my sister’s high school students (seniors).  I’m wondering if you have ideas for an outline of what such a lesson might look like.

I think it’s great that you have the opportunity to educate high school students and I think it would be fantastic if you could do so in an engaging way by talking about topics that they can actually relate to!

At a time when they are ready to head off to college, they are at a perfect age for lessons in personal finance. Remind them that when they get to college, nobody will be there to watch their spending and it will be up to them to decide how to spend their money. I think there are two main topics that are both interesting and important: Planning and Saving.

Obviously those are two very broad topics, so let me break them down a little more to help explain.

Planning

With planning, I’m talking about budgeting. There’s nothing more important than knowing where your money is going, how you’re spending it, and where you need to cut back. Without a plan of how you’re going to spend you’re money, you’ll never be in control of your finances.

Instead of introducing them to software or talking about a budget calculator, I think a good exercise could be naming the important things we spend money on. My guess is that they would include housing, food, and clothes as the most important. But with a limited budget it’s important to note that if they were spending a lot of money on a gorgeous apartment, that would mean less money for shopping.

My suggestion would be to make it fun and give them $1,000 and then ask how they would split it up. The dollar amounts of the different expenses aren’t important, but if everything starts at $250 and increases or decreases, they should be able to understand how increasing in one category means decreasing in another. It’s up to them to find the right balance.

Saving

Compounding interest is one of my favorite personal finance topics and the earlier you take advantage, the more you are able to benefit. I think examples are very important. Start out small and then show how over time, savings continue to grow.

Here’s how I would do it:

First, I’d explain that when your choice is between spending and saving, it’s difficult because you can either get something now or you can get something later. But, if you understand the magic of savings, you find out that by putting money away now, you’ll have much more in the future.

The example could be a showing $100 going toward buying something today versus the saving you put away for 10 years. At 10% interest (to make it simple) that grows to $110 by their Sophomore year or $146 by the time graduation rolls around. They’ll quickly see that while the trade off between having it now and later isn’t appealing to their present situation, they should be reminded that whatever they want now is likely only temporary, but if they put the money away, they’ll have lots of opportunities later and they’ll have more money too!

With all lessons, I think the way it’s taught is more important than the content. If you can’t get through to them, it won’t have any effect. Participation is key, and the best way to do that is to show how this really will affect their lives. Give examples of how you had to use budgeting and these are some of the things you wish you had been taught.

Of course, there are plenty of other topics you could discuss: credit and how to get your credit report, the basics of investing, or student loans, but I think the two outlined above will have the best impact for your audience.

Good luck and let us know how it goes!

I received this email from “Alan,” a 24 year old who was just hired after being unemployed for 8 months after graduating college.

I am in $15,000 of credit card debt and got a job that pays $60,000/year. I was living with friends without really paying rent and now that I’m moving out into the real world, I have no idea what to expect once I get there. I have to pay for rent, utilities, food, and car payments, I’m not sure how much I should set aside for debt, retirement, and savings. How should I allocate my funds?

Alan seems to be in a fairly similar position to me, although his credit card debt is likely accruing interest at a faster pace than my student loan is. I would recommend 5 steps to get started building savings and tackling the debt.

1. Track Expenses

Go right now and sign up at Mint.com. It’s hard to predict exactly how much you’ll spend on lunch with co-workers, fun, and other expenses. Don’t worry about creating a budget just yet, but be responsible with your purchases. Keep in mind that you’re in debt and are trying to get out.

2. Build $2,000 Emergency Fund

After paying the minimums on your credit card, throw everything else into an emergency fund. Some people suggest that $1,000 is enough to get started, but the truth is that $1,000 may not cover what you need. If something happened to your car or if your job doesn’t work out for some reason, this is what you’ll have to rely on. $2,000 should provide you enough of a cushion at the beginning, and after you have that much, keep contributing a small amount each month to give yourself more to fall back on.

3. Build A Budget

Once you have an emergency fund, it’s time to see how much you can afford to throw at the debt. Use Mint to build a budget based on your expenses in the first 2 or 3 months, and cut out what you can. Stick to your budget and you’ll see the debt decrease.

4. Aggressively Pay Off Debt

Anything you have left over after expenses and what you put into the emergency fund, write a check to the credit card company. This number will fluctuate depending your living situation and city you live in, but more you pay now, the less you’ll pay overall. Imagine the feeling of being debt free!

5. Work Hard

While focusing on getting out of debt is great, keep in mind that it will be a slow process. Over time, the mound of debt you have will decrease slowly and surely, but it shouldn’t be all you think about. Focus on your job. Improve yourself, work hard, and get noticed. If the debt is gone but you don’t have a job, then you’ll be right back to where you started. The best thing you can do is to do you job well. Having that job will be much more valuable than the emergency fund.

For now, I am going to suggest passing on the retirement savings because the interest rates on your credit cards are likely higher than the rate of return you’d get in your retirement account. Once you have the debt taken care of, you can start pouring all that money you were using to pa off the debt and instead use it to build a healthy emergency savings account and retirement fund.

What other steps should Alan be taking to get out of debt?

If you have a question you’d like answered, please don’t hesitate to contact me!