4 Money Lessons to Teach Your Teenage Kids

Your teen is becoming more independent, but still needs plenty of advice from you. With more money to spend and more opportunities to spend it, your teen can easily get into financial trouble. So before money burns a hole in your child's pocket, teach them a few financial lessons. With your help, your teen will soon develop the self-confidence and skills they need to successfully manage money in the real world.

Lesson 1: Handling earnings from a job

Teens usually have more expenses than younger children, and as a result, they may come to you more often for money. But if you’re 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 them to earn money for expenses. Here are some things you might want to discuss with your teen when they start working:

·         Now that your teen is working…

o   Will they need to help with car insurance or clothing expenses?

o   Should they save 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 their paycheck.

·         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.

If you’re teen isn’t at working age, they could make extra cash by babysitting or doing odd jobs for you, 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

Developing a written spending plan or budget can help your teen learn to be accountable for their 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 your teen…

·         Start by listing all their sources of regular income (e.g., allowance or earnings from a part-time job).

·         Next, have them brainstorm a list of regular expenses (don't include anything you normally pay for).

·         Finally, subtract your teen's expenses from their income. If the result shows they won't have enough income to meet their 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 your teen 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 their spending decisions rather than buying items right away. Show them how to compare prices or how 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 (e.g., rent a DVD to watch with friends rather than go to the movies) to resolve a budget shortfall.

·         Show your teen how to modify a budget by categorizing expenses as needs — expenses that are unavoidable — 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, they’ll never learn to manage money wisely. But don't be judgmental — your teen will inevitably make some spending mistakes along the way. They should know that they can always come to you for information, support, and advice.

Lesson 3: Saving for the future

As your child gets older, it’s time for them to focus on saving for larger goals like a new computer or a car and longer-term goals such as college.

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

·         Have your teen write out their savings goals to make them more concrete.

·         Encourage your child to set goals that are based on their values, not about what their friends have or want.

·         Motivate your teen by offering to match what their saving towards a long-term goal. Perhaps, for every dollar your child sets aside for college, you match with your own contribution.

·         Consider increasing your teen's allowance if they’re too young to get a part-time job.

·         Praise your teen for showing responsibility when they reach a financial goal. Teens still seek out their parent's approval.

·         If you haven’t already done so, open up a savings account for your teen.

·         Introduce your teen to the basics of investing by opening an investment account for them (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

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 they own 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 teen can't pay the bill.

·         Make sure your teen understands how long it will take to pay off a credit card balance if they only make minimum payments. Demonstrate this by using an online calculator or 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 off with a prepaid spending card. A prepaid spending card looks like a credit card but works more like a prepaid phone card. 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.

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