Parents of teens often wonder if the sage life advice they attempt to impart rubs off on their children. Your kids may not listen to you about brushing their teeth or driving too fast, but their ears are likely to perk up when you talk cash.
Take advantage of this interest in finances by teaching your teen some valuable money management lessons, and you’ll do yourself and your child a favor. With some direction, your son or daughter will make a sound financial launch and be less likely to call home for cash after leaving the nest.
You may live in a state that teaches financial literacy in school, but take some time to impart these essential lessons in financial responsibility before your teen leaves home.
Develop a budget
All sound financial plans start with a workable budget. The fact that your teen most likely has a small amount of money to manage is a benefit, as any mistakes made will have minimal impact but teach lifelong financial lessons.
Review your teen’s income sources, such as allowances, monetary gifts, or a part-time job, as well as expenses, including spending money and savings. Have your child subtract the costs from the income and discuss the results. If there is a surplus, can your child save more for something he or she really wants? And if there is a deficit, discuss ways of cutting expenses.
Budgeting can be done on paper or use one of the many online tools available.
Discuss savings options
Most likely, your child has a standard savings account. Now is the time to talk about the advantages and disadvantages of more complex savings vehicles and perhaps open up such a statement.
Explain the differences between regular savings, money market accounts and certificates of deposit and their various uses. If your child is two years away from college and CD interest rates are attractive, for instance, this may be an excellent time to open a 24-month CD and deposit college savings money.
When your teen has a job, also teach long-range financial planning by opening up a retirement account in his or her name, such as a minor Roth IRA.
Teach price consciousness
Since teens are used to parents paying for everything, it’s often eye-opening when they see how much things really cost. Have your child pay bills with you a few times, and when you’re grocery shopping, have your teen help you meet your budget. This requires examining prices and making choices.
When your child wants a big-ticket item, such as an upgraded cell phone, use this opportunity to teach how to research prices and together determine how long it will take to save enough money to buy the phone.
Open a checking account
To prepare for the eventual task of paying bills, your teen needs a checking account. A custodial checking account gives you a chance to show how to monitor the account and balance it. Checking accounts typically come with a debit card, which is an excellent precursor to a credit card.
Start building credit
Once kids have proven themselves with debit cards and reach 18, they are eligible to open a credit card account, which is one of their first steps toward building a credit history. Whether teens are ready for this responsibility depends on various factors, including how well they’ve done with a debit card and if they’ve managed to save money.
Use the opportunity of opening a credit card account to discuss credit scores and how credit standing affects your life as an adult.
Stress financial freedom
While it’s good to warn teens about the perils of overusing credit and not saving, it’s best not to overstate the negatives. Take a positive approach and give your child something to aspire to by pointing out young adults who live financially responsible lives and are reaping the benefits. Share the story of a young person who amassed savings and, as a result, was able to take the summer off to travel around Europe. Have them follow a few personal finance blogs for more real-life tips and stories.
Now that you have a plan of action, you can get started teaching your teen to live a financially rewarding life.