With more money to spend and more opportunities to spend it, your teen can easily get into financial trouble. Before money burns a hole in your child's pocket, teach them a few financial planning 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: Being Honest About Money and Personal Finance
Money is still often seen as a taboo subject, and young people may learn these habits early on from you. Help your teen establish a healthy relationship with money by intentionally addressing the topic head-on. Use these tactics:
- Talk often about money, savings and retirement both in everyday conversations and formal settings, like family meetings.
- Be as transparent as you feel comfortable. It’s easy to talk about our wins, but your teen can learn just as much from your financial missteps. What do you wish you did differently in your 20s? How can you help set your child up for success?
- Talk openly about topics relevant to them now, like paying for college. If you have college savings for your child, break down what that will look like and how they might need to supplement it.
- Be neutral in your conversations. Try not to impart your own feelings, anxieties or opinion about money. It’s important for your teen to not feel awkward or embarrassed about the topic.
Lesson 2: Handling Earnings from a Job
Teens often have more expenses than younger children, and they may be coming to you for money more often. But 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 them to earn money for expenses. Here are some things you might want to discuss with your teen when he or she begins working:
- Agree on what your child's pay should be used for. Now that your teen is working, will they 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?
- 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.
- Help your teen schedule out their responsibilities. Take school, clubs, sports, familial responsibilities and hobbies into consideration — how many hours a week can they reasonably work? Building these time management skills is critical, especially when they’re on their own in college.
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, 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 3: Creating a Budget for Teens
Writing a spending plan or budget can help your teen learn accountability for his or her finances. Your ultimate goal is to teach your teen how to achieve a balance between money coming in and going out. To develop a spending plan, have your teen start by listing out all sources of regular income. Next, have your teen brainstorm a list of regular expenses. Finally, subtract your teen's expenses from their income. If the result shows that your teen won't have enough income to meet expenses, you'll need to help your teen come up with a plan for making up the shortfall.
Help your teen learn about budgeting with these tips:
- 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 spending decisions through, rather than buying items right away. Show your teen how comparing prices or waiting for an item to go on sale can save money.
- Suggest ways your teen can earn more money or cut back on expenses (e.g., choose a movie to stream 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 will never learn to manage money wisely.
Lesson 4: Saving for Your Teenager’s Future
As a youngster, your child saved up for a short-term goal such as buying a favorite toy. But now that your child is a teen, they are ready to focus on saving for larger goals such as a car and even college. Here are some ways you can encourage your teen to save for the future:
- Open up a savings account for your child if you haven't already done so.
- Have your teen put savings goals in writing to make them more concrete.
- Encourage your child to set goals that are based on their values, not on keeping up with what other teens have or want.
- Motivate your child by offering to match, dollar for dollar, what they save toward a long-term goal.
- Consider increasing your teen's allowance if they are too young to get a part-time job.
- Praise your teen for showing responsibility when they reach a financial goal. Teens still look for, and count on, their parent's approval.
Lesson 5: Investing Basics
A savings account is necessary, but savvy savers know the return on investment is minimal. Help your child get ahead by introducing the concept of investing as a teen. It may seem complex, but this is more about laying the basic foundation early on. Here’s how you can help them start:
- Open 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.
- Look into micro-investing apps that use the round-up method. In addition to weekly or monthly contributions, the app will round up purchases to the nearest dollar and invest those cents. These apps help demystify investing with education and easy-to-read performance and potential graphs.
- Calculate how much your child’s contributions could be worth after five, 10 and 20 years. While it might be difficult for them to see that far into the future, they’re sure to be amazed at the huge sum!
Lesson 6: Talking About Taxes, Credit Scores and Insurance
As your child works, budgets and saves money, take the opportunity to chat with them about often-ignored financial subjects and these money-adjacent topics:
- Go over your teen’s paycheck and taxes. Show your child how FICA taxes and regular income taxes can take a bite out of his or her take-home pay. Add in a civic literacy element and dig into what those taxes are used for — chances are they’re learning about this in a government class!
- Include your teen in your own budgeting for things like car insurance. It might be helpful to walk young drivers through how to get multiple quotes, and how age, driving history and vehicle can impact premiums.
- Have your teen research credit scores and discuss your own. How has it changed over the years? Walk through factors that affect your credit score, like payment history, amounts owed and credit history.
Lesson 7: Using Credit Wisely
Many teens today use credit cards, and it probably won't be long until your teen asks for one too. 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, but you can't ignore the credit card issue altogether.
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 first-time credit card holder:
- 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.
- Review the statement monthly with your teen and be sure to reference back to the budget you created together.
Get Help with the Big Questions
As your family situation changes, you may want to review your financial plan to ensure it provides for all your goals — including education funding, retirement and other events. Contact a Farm Bureau financial advisor to set up a time to talk about your financial future.