Let’s say your thirteen-year-old has started mowing the neighbors’ lawns, or babysitting the neighbor’s kids, and is making a bit of money. Now is the time for parents to step in and coach their child about how to be responsible with money. How to make the money they earn work for them is important for a teen to know. See below for a few tips for teaching teens about finance.
Four Tips for Teaching Teens About Finance
Teens today are learning to make money in more ways than one. This is great, however, some teens don’t really know much about finance. Take a look at some tips to help when teaching teens about finance.
1) Teen Finance – How to Teach about Saving
It is not enough to simply instruct your teen that saving money is a good thing. You must demonstrate why saving is important in order to show them how useful it can be for them.
Let’s say your teen wants to purchase some item that costs more than they make in a week or even a month – or more! Mapping out a savings plan to be able to afford that purchase is a great way to effectively demonstrate the power of saving.
An Example of Teaching Teens the Art of Saving
For example, let’s say your teen wants a new cell phone. He or she has identified the desired model of cell phone and has consulted you about it.
You know you can get the phone at a discount through your family plan, but you:
- use the retail cost of the phone as the target
- tell your teen you are matching funds he or she saves (which in truth you are, since you’ve been paying for the current phone and thereby qualifying for a discount)
Your teen informs you the phone costs $700. He or she suggests that they pay you back from future earnings and you front the money now. Say no!
Sit down with your teen and work out:
- how much savings do you require to make this purchase
- how much time it will take to accrue that amount
Since you agree to “match funds” that means your teen needs to save up $350. Your teen makes $65 a week.
Map out different ways of saving – Save:
- $65 every week, the phone could be purchased in just over 5 weeks.
- $50 every week, the phone could be purchased in 7 weeks.
- $35 every week, the phone could be purchased in 10 weeks.
Discuss the pros and cons of each of these three plans. There are two competing interests here – the desire to have the phone as quickly as possible, and the need to have a bit of spending money each week. Chances are that after discussing it with you, your teen will opt neither for the most austere plan or the least austere plan, but the one in the middle.
The lesson here is, you can save for what you need but be realistic about how much you can put aside, given your income and expenses.
2) Teen Finance – Teaching about Interest Rates
Your teen can exercise his or her saving muscle by creating new target purchases. If nothing is needed in the short term, have them think longer term, such as saving for a car. If your teen is thirteen and will drive at age 17, he or she has four years to save.
At this point opening a savings account for your teen is a great idea. It gives you the opportunity to teach your teen about interest and how to make money work for you. Discounting the fact that your teen will likely make more money over time, show how saving $15 a week can grow to over $3,000 over four years. There are many online calculators that can help you prove your point.
Once the car is purchased, talk with your teen about saving for emergencies rather than a specific purchase. What sort of emergency might a teen experience? To extend the current example, the car will need regular maintenance and very well might require unexpected repairs. The teen will be motivated to keep the car in good shape. So, convincing him or her to start an emergency savings fund will not be hard.
General Rule for Saving
The general rule is to put 10% of income into savings. Have your teen include any cash gifts in this. Where does the rest of the teen’s income go?
Now is your opportunity to help your teen:
- open a checking account with a debit card, and then
- sit down and show him/her the mechanics of keeping and balancing a checkbook
Either a physical checkbook can be used, or, one of the many apps can be used to keep track of deposits and spending. The most important thing is that whatever you and your teen choose to use, it be accessible and easy to use and understand.
Getting your teen a gas card that he or she must pay off every month is a great idea. If they fail to pay, they will see for themselves what interest does to increase the amount of that debt.
Now let’s say your teen is 18 and going off to college. It is common for credit card companies to offer college freshmen credit cards in their name! Before this happens, sit your son or daughter down and show them how credit cards work. Talk about the dark side of interest, which works against consumers by helping charged debt snowball into unmanageable debt.
The best thing a parent can do when teaching teens about finance is to help their teen learn about credit is to maintain an open dialog about finance. Check in with them periodically to make sure they are not getting in over their heads with credit card debt.
Related: Do You Need a Credit Card?
4) Teen Finance – How to Teach Budgeting
This can be done early on in a teen’s earning life.
Why is the teen working, is it to:
- pay for social activities?
- purchase clothes?
- buy lunch for school?
Sit down with your teen and discuss what his or her money is for, and be sure to write it down. Prioritize whatever the teen needs to purchase.
A teen’s budget will be simple to start. Let’s say the teen wants to buy his or her lunch at school. You give permission. However, you have perfectly good groceries in the fridge at home, so you refuse to pay for that. Lunch costs $3.00 and so $15 a week in a typical week.
- Your teen makes $65/week, so if your teen thinks that buying lunch is a necessity then subtract $15.
- That leaves $50 for anything else the teen wants.
- If the teen is saving for something that amount will be subtracted from that $50.
- Let’s say the teen is also saving for that car. Subtract another $15, leaving $35 “discretionary” income.
- Your teen thinks that’s enough to go out with friends and is satisfied.
Teaching Teens About Finance – In Conclusion
You can then encourage the teen to revisit the budget anytime needs, wants, or income changes. Keep the dialog open and ongoing. Small financial lessons can start a teen on the right foot financially. Teaching teens about finance is vital since so many are going into the world without that knowledge. Increasingly incurring debt. So, it’s one of the most valuable lessons a parent can teach.
Have you sat down with your teen to talk about finance yet?
About the Author
Veronica Baxter is a blogger and legal assistant living in the great city of Philadelphia. She frequently works with David M. Offen, a busy Philadelphia mortgage foreclosure attorney.
AUTHOR LaTia Longuemire
My name is LaTia Longuemire. I enjoy writing, singing, and cooking in my spare time. My passion is helping others. At this stage in my lifetime, I'm primarily focused on my children. They are everything that keeps my world spinning.