A fluctuating economy is challenging for even the most experienced financial planners. Teens may have a similar uncertainty as they enter adulthood. Teaching teens about money now lets them learn some valuable lessons they can use for their futures. Here are eight tips for teaching your teens about money.
Finding balance between enjoying the moment and preparing for the future is a healthy practice for anyone. Before you discuss money management, learn about your teen’s current priorities and goals for the next few years – and beyond. Keep an open mind so your teen feels comfortable sharing their ideas. Only add your ideas as suggestions based on your own experiences. Once they have a list of priorities and goals, work together to develop a plan for achieving and managing them. Use the opportunity to explain how money management is an important part of reaching those goals while still enjoying the life of a teenager. They are going to make mistakes early in the process – but that’s ok. Small mistakes now can help them learn how to avoid and/or fix issues in the future when you may not be around to be their safety net.
Budgeting is a skill that takes time to master. Even when you have all of your income and expenses scheduled, the unexpected always happens. This is where most adults start to encounter unmanageable debt. Even if your teen only has a small amount of income from a part-time job or allowance, budgeting is a good place to start with personal finance for teens. Set up a budget using a spreadsheet, worksheet, or budgeting app. Let your teen decide where to allocate income.
Ask your teen to follow the budget for one month. After that month, sit down together to review the budget and make adjustments. This helps your teen see the challenges of setting up and following a budget, as well as how to include extra money for unplanned expenses. The goal should be to find a balance between responsible spending and enjoyment of life. Neither should be completely sacrificed for the other. Keep adjusting and reviewing the budget until your teen is able to comfortably follow the plan for a month or two.
Once your teen has their budget plan, help them set up an account for checking and savings to better track income and expenses. Be sure your teen understands the associated fees and interest rates, including charges for overdrafts. Taking this step expands accountability for teens because they are now working directly with a banking institution.
Credit scores can be a difficult concept for a teen to understand. Leverage the resources available from the credit agencies to introduce the topic and how it works. This can help your teen better interpret the value in responsibly managing their spending and credit. Just as grades in their classes determine the successful completion of their education, credit scores can determine potential success in life purchasing a home, a vehicle, and even getting the job they may want.
After your teen understands the basics of a credit score and how it benefits them through life, it’s time to help build credit. Discuss options with a financial professional. If you are anxious about your teen with a credit card, start out with a debit card for the checking account. Debit cards help teens understand that they need to have money for the purchase before using the card.
When teens first get added to your credit card or get one of their own, it is important to guide them towards making sound decisions so the credit works for them. Monitor spending with the credit card to watch for any signs of overuse. Review the monthly statement with your teen, including balance, minimum payment due, interest, and fees. Explain the benefits of paying the balance or more than the minimum payment. If you see that your teen may be using the credit card too much, control additional spending until the balance is paid down.
Teens hear references to Wall Street and investing all the time, but aren’t sure what it really means. It can be confusing, even for adults. Helping teens understand how to make decisions about investments for short and long-term goals (retirement especially is a foreign concept to someone who is half a century away from it!). But today is a great time for your teen to begin to understand the importance of planning for the future and how investing can impact their options. Help introduce them to some of the basics, such as CDs (certificates of deposit), mutual funds, IRAs (individual retirement accounts), and of course, stocks and bonds.
Learning financial terms and concepts does not have to be boring. Use some of these ideas to help make it more fun:
We all go through times when our money management skills are tested. You can never guarantee that your teen will always make good choices as an adult, but you may be able to help them prepare for whatever life throws at them by laying the groundwork today. What they learn today may help them better navigate their financial lives as an adult.