The 6 ‘money’ words every parents needs to teach their teen.

Video by Mamamia

Teenagers are at the height of financial pressure as they start to steer away from their parents and gain financial independence.

This can be powerful however, with independence also comes risk especially for those who don’t understand the in’s and out’s of financial literacy. Here are six financial words every teen must know:

‘Principal Amount’

Also known as present value, refers to the original amount borrowed or the amount owed on a loan, not including interest.

This term may sound simple however teens often fail to understand how much money they’ve gained or lost because they forget what money they started with. The amount that is gained or lost can be calculated by subtracting the principal from the final amount.

"Teenagers are at the height of financial pressure as they start to steer away from their parents." (Image: iStock)

'Compound Interest'

The interest that is added to the principal amount and reinvested so that the amount of interest increases. In other words, it is the interest which is added on the principal amount and then at the end of each month interest is added on the new principal.

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Money can be compounded weekly, monthly or annually. This term is imperative for teens to understand to ensure they’re choosing their type of interest rate wisely so they can accumulate the maximum amount of interest on their investments and the least amount on their loans.

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'Stocks'

Can also be referred to as shares or equity. Stocks gives the buyer ownership in a company resulting in the buyer being a shareholder which allows them to claim part of the companies assets and earnings.

Having stocks can increase a person’s financial value if they have capital gains. It is beneficial for young people to broaden their financial portfolio by investing in stocks.

'Capital Gains'

The increase in the value of an asset or investment above the original purchase price. However, the asset is only increasing in value on paper until it is sold. In contrast, capital loss is the decrease in the value of an asset or investment.

"It is beneficial for young people to broaden their financial portfolio by investing in stocks." (Image: iStock)

Teens need to be able to determine whether their stocks are resulting in capital gains or suffering from capital losses so they can allocate their money wisely and understand if their stocks are financially successful.

'Asset allocation'

The process of choosing what proportion of your portfolio you’d like to invest in assets and allocating the desired amount based on your interests, goals and personal risk tolerance. Those with more experience investing and have more financial stability can allocate more of their finances into these investments.

'FICO Score'

A score used by banks to measure a borrower’s credit worthiness. A bank won’t lend money to a borrower who has a poor FICO score.

"Armed with this knowledge, your teen will be on the right track to a successful financial future." (Image: iStock)

Borrowers can gain a high FICO score by having good credit history and paying all their bills on time. This is imperative to ensure you can always borrow money to finance your investments- and who doesn’t want more money?

Once your kids know the meaning of these six financial words, they will be well on their way to achieving financial security and success.

This post originally appeared on The Ascent, you can read it here. If you want to educate your kids now so they can be financially secure and independent when they’re teenagers, Pennybox is a free app that can help. You can access the beta here.

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