How to Teach Your Teen About Money

Teens love to think they’re independent. They also love to try and convince you of it, but despite what they say, your teen still needs your advice.

With more money and more ways to spend it, teenagers can more easily find themselves in financial trouble.

So before money burns a hole in your teen’s pocket, teach them a few financial lessons. With your help, your teen will soon develop the self-confidence and skills he or she needs to successfully manage money in the real world.

Here’s how to teach your teen about money.

Lesson 1: Handling Earnings From a Job

Teens have a lot of things that younger children don’t, including expenses. That means they might come to you for money more often. With you holding the purse strings, your teen may have difficulty making independent
financial decisions.

One solution? Encourage your teen to get a part-time job that will enable him or her to earn money for expenses. Not only does it teach them the value of earning their pay, but it’s also a great opportunity to teach them other valuable financial practices.

Here are some things you might want to discuss with your teen when he or she begins working:

• Agree on what they should use their pay for. Now that your teen is working, will he or she need to help out with car insurance or clothing expenses, or do you want your teen to earmark a portion of each paycheck for college?
• Talk to your teen about taxes. Show your child how FICA taxes and regular income taxes can take a bite out of his or her take-home pay.
• Introduce your teen to the concept of paying yourself first. Encourage your teen to deposit a portion of every paycheck in a savings account before spending any of it.

A teen who is too young to get a job outside the home can make extra cash by babysitting or doing odd jobs for you, your neighbors, or relatives.

This money can supplement any allowance you choose to hand out, enabling your young teen to get a taste of
financial independence.

Lesson 2: Developing a Budget

Writing a spending plan or budget can help your teen learn to be accountable for his or her finances. Your ultimate goal is to teach them how to achieve a balance between money coming in and money going out.

To develop a spending plan, have them start by:

1. Listing out all sources of regular income (e.g., an allowance or earnings from a part-time job).
2. Have your teen brainstorm a list of regular expenses (don’t include anything you normally pay for).
3. Subtract your teen’s expenses from his or her income. If the result shows that your teen won’t have enough income to meet his or her expenses, you’ll need to help your teen come up with a plan for making up the shortfall.

Here are some ways you can help your teen learn about budgeting:

• Consider giving out a monthly, rather than weekly, allowance. Tell them that the money must last for the whole month, and encourage them to keep track of what’s been spent.
• Encourage your teen to think through spending decisions rather than impulse buying. Show them how comparing prices or waiting for an item to go on sale can save them money.
• Suggest ways your teen can earn more money or cut back on expenses to resolve a budget shortfall.
• Show your teen how to modify a budget by categorizing expenses as needs (unavoidable expenses) and wants (expenses that could be cut if necessary).

• Resist the temptation to bail your teen out. If your teen can depend on you to come up with extra cash, he or she will never learn to manage money wisely. But don’t be judgmental. They’ll inevitably make some spending mistakes along the way and should know that they can always come to you for information, support, and advice.
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Lesson 3: Saving for the Future

When they were younger, your child saved up for a short-term goal such as buying a favorite toy. But now that they’re teenagers, they’re ready to focus on saving for larger goals such as a new computer, a car, and college.

Here are some ways you can encourage your teen to save for the future:

• Have your teen put savings goals in writing to make them more concrete.
• Encourage your child to set goals that are based on his or her values, not on keeping up with what other teens have or want.
• Motivate your child by offering to match what he or she saves towards a long-term goal.
• Consider increasing your teen’s allowance if he or she is too young to get a part-time job.
• Praise your teen for showing responsibility when he or she reaches a financial goal. Teens still look for and count on their parent’s approval.
• Open up a savings account for your child if you haven’t already done so.
• Introduce your teen to the basics of investing by opening an investment account for your teen (if your teen is a minor, this will be a custodial account). Look for an account that can be opened with only a low initial contribution at an institution that supplies educational materials introducing teens to basic investment terms
  and concepts.

Lesson 4: Using Credit Wisely

Like any powerful tool, credit is dangerous.

You can take some comfort in the fact that credit card companies require an adult to cosign a credit card agreement before they will issue a card to someone under the age of 21 (unless that person can prove that he or she has the financial resources to repay the credit card debt), but you can’t ignore the credit card issue altogether.

Many teens today use credit cards, and it probably won’t be long until your teen asks for one too.

If you decide to cosign a credit card application for your teen, ask the credit card company to assign a low credit limit (e.g., $300). This can help your child learn to manage credit without getting into serious debt.

Here are some things to discuss with your teen before he or she uses a credit card:

• Set limits on what the card can be used for (e.g., emergencies, clothing).
• Review the credit card agreement, and make sure your child understands how much interest will accrue on the unpaid balance, what grace period applies, and what fees will be charged.
• Agree on how the bill will be paid, and what will happen if your child can’t pay the bill.
• Make sure your child understands how long it will take to pay off a credit card balance if he or she only makes minimum payments. You can demonstrate this using an online calculator or by reviewing the estimate provided on each month’s credit card statement.

If putting a credit card in your teen’s hands is a scary thought, you may want to start with a prepaid spending card.

These look like credit cards but work more like prepaid phone cards. You load the card with the dollar amount you choose and your teen can generally use it anywhere a credit card is accepted.

Your teen’s purchases are deducted from the card balance, and you can transfer more money to the card if necessary. Although there may be some fees associated with the card, no interest or debt accrues.

One thing you may especially like about prepaid spending cards is that they allow your teen to gradually get the hang of using credit responsibly.

Because you can access account information online or over the phone, you can monitor your teen’s spending habits, then sit down and talk with your teen about money management issues.

Conclusion

Learning how to handle money is a lifelong endeavor.

As experienced financial professionals, we help clients like you figure out the best strategies for their situation so that they can save and invest their money with peace of mind.

Please connect with us and let us help you plan for your future. We would be delighted to go on the journey with you.