Teach your teen to be financially independent
The teenage years may present a challenge for parents when it comes to teaching the importance of saving money for the future, as teenagers often don’t see much past the upcoming weekend. Striking a balance between allowing them to make their own financial decisions and giving them helpful guidance can be difficult. However, the teenage years are the ideal time to teach kids how to be financially independent.
Besides using online information to simplify complex financial decisions to teach your teen, you can also help them become financially savvy with these simple lessons this summer:
Summer jobs help teach money-management skills
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 the importance of living within their means too. Depending on your family’s income level, it could be a win-win: Your teen’s paychecks 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 toward 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 529 plan or a Roth IRA (which will show them the magic of compound interest).
Help your teen choose a checking account
If you’ve already introduced your teen to the concepts of banking with a savings account, great. Now it’s time to go to the next level: Checking. A checking account is usually the first place your money comes in (paycheck) and goes out (purchases). Of all incoming college students, 80% already have a checking account.
Make your teen part of the process 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. Depending on where you live, you’ll likely need to have a joint checking account with your teen if they’re under the age of 18.
A prepaid debit card, with a set amount of money loaded on it, is an alternative to a regular student checking account. New consumer protection laws have really helped holders of prepaid cards (which formerly charged high fees).
Teach teens 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 for to them to follow a prosperous path for many years to come.
One way to teach your teen is to put them in charge of a sum of money that is targeted to cover their basic expenses. For example, every quarter, give them an amount that they can use to pay for gas, clothing, and entertainment expenses. Then it’s up to them to budget their spending until their next “payday.” If they run out, they’ll soon learn that a budget is key to their success. If they have a part-time job, allow them to use their paychecks to do the same. Set a budget and cover basic expenses, putting a certain amount aside for entertainment.
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 help them to develop some smart spending and saving habits.
Encourage teens to set goals
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.
Teach teens how to manage 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 difficult to regain 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 $20 a week if they wait to collect until the end of the month.
Teach teens the important lessons of borrowing
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. For example, taking a 12-month 5.99% APR loan is smarter than incurring debt on a high-interest credit card, which is why many MoneyLion Plus users use their 5.99% APR loans to pay off high-interest credit card debt.
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 purchasing a car. Make sure they understand the balance between using credit and managing it wisely.
Teens usually don’t fully understand what adulthood entails in terms of financial responsibility. 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.