It’s not natural to know how to manage money. Peoples’ understanding of financial management comes from observing others and from their own experiences. The way that parents talk about money and the decisions they make surrounding it have a strong influence on teenagers.
Although it is beneficial for teenagers to witness their parents making sound decisions regarding money, this is not enough. teenagers crave responsibility and crave being included. If you have discussions with your teen about money and what your expectations are, this will allow them to transition into adulthood while being equipped with the experience and information necessary to manage their finances wisely and steer clear of costly errors.
There are essential money concepts your teen needs to master, just like they take classes for math, history, science, and language arts at school.
10 ways to teach teens to be financially responsible
Whether your teen is managing money from a job or budgeting an allowance, developing good habits will help them make good decisions once they’re on their own. Here are ten hands-on ways you can help get them started:
1. Earning money
Teens need to earn money before they can manage it. They can start by doing extra work around the house, yard work for neighbors, or pet care. If they are old enough, they can get a part-time job.
Once they’re earning, have your teen divide their money into dedicated amounts for saving, giving, and spending. The Consumer Financial Protection Bureau (CFPB) recommends saving at least 10% of each paycheck and teaching teens about payroll deductions. Another option is 70-20-10 budgeting. Under this strategy, 70% goes to needs and wants, 20% to savings, and 10% to donations.
2. Charitable giving
Teens can experience the rewards of giving even when they don’t have a lot of money available to share. Being intentional and consistent with giving, even when your budget is tight, requires commitment and discipline. Donations don’t need to be large sums or given to large organizations.
A few dollars dropped into a collection box for any number of different causes can be a great way to support different organizations. You can encourage your teen to give to organizations or causes they are passionate about to help motivate them.
3. Bank accounts
Matt Gromada, head of youth, family, and starter banking at Chase, discusses the benefits of both parents and kids having a bank account. Teens are able to manage their money independently while still receiving guidance from their parents.
“First, it opens the door for important conversations and real-world scenarios about the basics of finance – from spending and saving to explaining interest and how it accrues,” Gromada says. “Second, it gives the child a sense of independence and freedom, providing the opportunity for real-life experiences and learning.”
If your child is earning money from a job, it is convenient to set up direct deposit. The bank or financial institution where you set up the account should be insured by the federal government and offer online and mobile access. This will allow your teenager to check their account balance from their phone.
4. Debit or prepaid cards
The simplest solution is to give your child a checkbook and provide guidance on how to keep track of their spending. Your teen will need a way to access their money with a bank account. Debit cards are connected to their account and debits the amount they spend, and can be used instead of a credit card. They can be convenient, but can come with fees and penalties if the account is overdrawn. The simplest solution is to give your child a checkbook and provide guidance on how to keep track of their spending.
While prepaid cards offer more financial safeguards for teens, they provide less opportunity for real-life learning. With a prepaid card, the parent loads the card with a set amount of money. If a purchase exceeds the balance on the card, it is not approved. However, some prepaid cards come with linked apps that allow parents to transfer money instantly to the card if needed. For teens who are not yet ready for a traditional debit card, a prepaid card can be a reasonable solution.
Some things to consider when deciding if a debit or prepaid card is right for your child include their money skills and maturity, as well as your needs and wants as their parent.
5. Saving
One important lesson that will serve your teenager well into adulthood is learning how to save money. You can help them get started by creating a budget with them and explaining the importance of spending wisely. It’s also crucial to teach them to prioritize needs over wants. By doing so, they’ll be better equipped to handle large expenses like college tuition or retirement, as well as unexpected financial emergencies.
The CFPB suggests that teens save 10% of their earnings and have at least three months worth of living expenses saved up in case of an emergency.
Making a budget with your teen and discussing how much they can save is a good way to get them thinking about what they’ll have to give up to meet their savings goals. It’s also worth asking why it’s worth it to save up.
It is important to model restraint to teenagers when making purchases in order to show them that they are in control of their money and choices. Epstein advises against saying to a teenager that you “can’t afford” to buy something that they really want, as this implies a lack of control over finances. It is better to say that you are willing to consider it if they can find it at a better price, for example. This shows that you are in control and that you have choices and a way to use what you have, wisely.
6. Paying for college
One of the most important financial goals for your teenager may be paying for college. Hold real discussions with them about the expense, how much you as a family can contribute, and how much they will be responsible for themselves. They will do well by saving early, having a plan, and looking for grants and scholarships. The less debt they have when they finish school, the better.
If you’re looking to get an idea of college costs, the College Savings Plan Network has a calculator that can help. This organization advocates for tax-free state savings plans called 529s.
“As long as you do it for long enough, you’re going to see really good returns,” says Jordan Lee, founder of Backer, an investment platform that makes it easy for friends and family to contribute to a child’s college account. “You never have to pay capital gains tax when you actually use the money, or on the growth of the fund over time.”
Modeling restraint with purchases also shows teens they are in control of their money and choices. In doing so, Varda Meyers Epstein, parenting expert and writer at Kars4Kids, advises to not tell a teenager that you “can’t afford” to buy something you really want, like a new cell phone or other expensive items. “The phrase implies passivity and a lack of control over one’s finances,” Epstein says. “It makes more sense to say, ‘I prefer not to buy that phone because I’d rather put that money toward your college fund,’ or, ‘I don’t want to spend money on a phone right now,’ or, ‘If you can find it at a better price, I might consider it.’ The point is to show that you are in control and that you have choices and a way to use what you have, wisely.”
7. Your Credit Score Matters
As teenagers get older, they become eligible for credit cards. Even with a small credit limit, your teen can make mistakes like making late payments, carrying a high balance on their account, or only making minimum payments.
It is important for teenagers to know that having a good credit score can save them money on things like car insurance and phone contracts. When they are ready to move out and get their own place, a good credit score can help them get approved for a loan or rental agreement and might even save them money on things like utilities.
You should tell your teenager that their credit score could be negatively affected by irresponsible behaviour. It might be a good idea to have a conversation with your children about checking their credit report on an annual basis, to ensure that no one has opened a financial account in their name without them knowing.
Your teen should be aware of sites that request payment for a credit report. Everyone is entitled to a free annual credit report from each of the three credit bureau’s at annualcreditreport.com.
If someone has a lot of credit card debt, it can prevent them from being able to pay it off, which will negatively impact their credit score. This can create a cycle of financial problems.
8. Big Loans Can Really Affect Your Life
Teens are often met with decisions that seem as if they are for adults only when it comes to spending large amounts of money on materials such as cars and college tuition. These young people can rack up thousands of dollars in debt without having a clear grasp of how long it will take them to pay the money back or how easy or difficult the process will be.
The cost of a car might seem small to young adults, only costing $10,000 or a few hundred dollars a month. However, they forget that this is only one expense they’ll have as they become more independent.
Teens considering taking out loans for college should be aware that they may be paying off those loans for many years, even if they get good jobs after graduation.
9. Understand Gross vs. Net Pay
The IRS will take a big bite out of that paycheck. When your teen gets a job, they’ll be excited about getting their first paycheck. But that excitement can turn to disappointment when they realize how much taxes have been taken out.
When calculating what their paycheck should be, teens usually multiply the hours worked by their hourly rate. However, they don’t realize, or forget, that there are withholdings and deductions taken from their earnings.
If you want your teen to avoid being surprised by their first paycheck, explain to them the difference between gross and net pay.
There will be deductions from your teen’s paycheck for federal income tax, Social Security tax, Medicare tax, and any applicable state or local income taxes. There may also be deductions for any retirement plans their employer offers.
If your teen has had too much money withheld from their paychecks during the year, they may receive a refund after filing a tax return. However, they should get used to budgeting their net pay instead of the higher gross pay they anticipated.
10. Start Your Own Business
You don’t need to take on a lot of debt in order to be an entrepreneur.
Some teenagers are good at coming up with ideas for small businesses but they might spend too much time online researching how to make their business grow instead of taking action.
You don’t want to extinguish your child’s hope by only discussing money. But you also don’t want your teen (or yourself) to acquire too much debt before you know that they’ll stick with the business. And that it will be lucrative.
Encourage your teen to brainstorm marketing strategies that are low-cost or free. They should also research what equipment they need and look for ways to get it used or secondhand. Finally, help them identify potential customers and target their marketing efforts accordingly. By keeping startup costs low, your teen will be able to start making money from their business more quickly.
If the company does well, the money made can be reinvested to help the company expand. They can also look for less expensive ways to help the company become larger.
Helping Your Teens Build A Bright Financial Future
Parental guidance is essential when it comes to educating teenagers about money matters. Some topics will be more relevant to younger adolescents while others won’t be appropriate until after they get their first job or finish high school. The more candid conversations about money that take place in your household, the easier it will be to broach the subject with your teens about their financial future. Fortunately, there are many excellent resources available if you lack confidence in your money management skills, if your teen wants to learn more independently, or if you want to explore money management as a family.
It’s important as a parent to teach your teen valuable lessons about money so they can grow up to be financially independent adults.
