Your guide to financial decisions – the teens’ edition

The teenage years can present a challenge for parents when it comes to helping their kids see the serious importance of saving money for the future. Maturity and life experience help but, let’s face it, teenagers don’t tend to have a lot of either one. Time is time. What parents can do is strike a delicate balance between letting their teens make their own decisions about what they spend money on and save, while also giving them really helpful and pragmatic guidance so they can learn to be financially self-sufficient. This way, once they leave home, they’ll be truly prepared for the real world.

One thing that’s very encouraging is that teens today can access to tons of information online that can help simplify complex financial ideas and make financial decision-making easier.

Want to help your kids become financially-savvy (maybe even more than you were?) Here are some simple tips to help them do that:

Summer fun can also be profitable. A summer or part-time job can be a great way for your teen to learn that hard work pays off. It can teach them how the importance of living within their means. And depending on your family’s income level, it could be a win-win: that money might replace their allowance, allowing your teen to fund most of their own expenses (a break for you, greater independence for them).

However, it’s also reasonable during these years to put some of your child’s income towards longer-term goals like their college education costs – or even retirement. Discuss the economics of higher education, relative to the career choices your child is considering. In addition, if your teen’s income turns out to be rather substantial, consider having them open a Roth IRA (along with showing them the magic -and incredibly informative chart that breaks down how compound interest works - from age 17 to 70!)

Open a checking account. If you’ve already introduced your teen to the concepts of banking earlier with a savings account, great. Now it’s time to go to the next level: checking. Ultimately, a checking account is everybody’s lifelong financial fulcrum – it’s usually the first place your money comes in (paycheck) and goes out (purchases). 80 percent of students who arrive at college already have a checking account.

Make your teen part of the search process when looking for the best checking account by introducing them to comparison sites such as Nerdwallet. They’ll be able to explore their options to help them arrive at the right choice. Even if they ultimately sign up at your bank, explain the specifics of why that makes sense, focusing on fees, ATM networks, deposit minimums and the other factors that make it a smart choice. Depending on the state, you’ll likely need to have a joint checking account with your teen if they’re under the age of 18 or 21.

A prepaid card, with a set amount of money loaded on it, is another alternative to a regular student checking account. New consumer protections really help holders of prepaid cards (which formerly charged high fees).

Teach them how to live on a budget. Despite what you might think - and the common misperception that teens aren’t the most conservative when it comes to money - many personal finance experts suggest that kids of this age should be given more financial responsibility, not less.

And with young adults on the cusp of independence, the concept of a budget should be at the very core of their learning about how money works. The sooner they learn this, the easier it will be to them to follow a prosperous path for many years to come.

One way to do this is to put your teen in charge of a sum of money that is targeted to cover their basic expenses. For example, every quarter or so, allot them an amount that they can use to pay for gas, clothing and entertainment expenses. Then, it’s up to them to fund their spending until their next “payday.” If they run out, they’ll soon learn that a budget is key to their success.

For teens, living on a budget, and actually having to make those hard ‘spend vs. save’ choices, will prove far more helpful than just learning about budgeting as some abstract idea. They’ll have to live it and experience it for themselves which will probably (ideally!) help them to develop some smart spending and saving habits.

You can also help your teen along the way by encouraging them to keep a spending journal and showing them how to build a rainy-day fund or save for a big-ticket purchase. Instant gratification is a very modern way of life in our society but having to wait for something we want by saving for it can have its unique and significant benefits as well. Delayed gratification builds confidence in goal-setting as well as a realistic perspective on how independent financial life (away from you) really works.

Give them some extra credit. As many of us may have learned the hard way, you can do a lot of damage pretty quickly with access to credit. In fact, a recent survey showed that 68% of Americans will make a major credit mistake before the age of 30, including overspending, defaulting on a loan, or having an account go to collection.This can have dire consequences on a person’s credit profile and can lower their credit score, making it very difficult to gain ground financially as time goes on.

Essentially: it is never too early to learn about the concepts of credit, debt, and interest. Here’s one low-risk way to teach the concept of interest: offer your teenager a chance to earn interest on their allowance if they wait longer to collect. If they get $10 a week, tell them they’ll get $25 if they wait for a month.

This highlights the concept that borrowing works the same way. Explain that when you borrow money, you repay the money with interest, so finding the lowest interest, by comparing annual percentage rates (APR), is key. Tell your teen that the longer they take to repay a debt, the more they will pay in interest. In other words: they’re paying somebody else for something they already did. Nobody wants to pay 25% more for a $12 salad they ate six months ago. Showing them what this looks like in real life can be life changing. Showing them that they’ll pay exorbitant fees and their credit scores will suffer will help them see they’ll have a hard time borrowing money at affordable rates down the road, an unfortunate reality no one wants to face if they can help it.

Part of this lesson should be explaining the benefits and usefulness of credit – it’s easy to go straight for scare tactics, but teens should understand that credit can be a tool that they use to accomplish financial goals, like buying property. Make sure they understand the balance between using credit and managing it wisely.

As you may remember yourself, teenagers are chomping at the bit to be real adults. They don’t fully understand what adulthood entails in terms of financial responsibility. But by introducing basic budgeting and other money management skills to them early on, parents can help ensure that their teens will be financially ready when they begin that very real transition to adulthood.