One of the best things you can do for your children is to teach them about money.
Personal finance has been a taboo subject in many American homes and schools for a very long time. And perhaps that contributes to the list of reasons why so many people in America struggle with managing debt and saving money.
How can we prepare our children and help them avoid the same fate? We can start by talking with our teenagers about money. Here are some tips you can share with your teens as you help them learn about personal finance success.
What Does Your Teen Need to Know About Money?
There are several areas of personal finance management you can teach your teen about to help prepare them to establish a solid financial foundation. Some of the most beneficial might be:
Let’s go through the subjects individually and talk about some specific guidelines you can give your teens in each area.
The foundation for all other money decisions is always earning money. After all, without having earned the money in the first place, there is no money to manage.
Once kids learn that they have the power within themselves to earn money, life changes for them. Until they learn that important fact, they will depend on you for the money they need.
That’s perfectly acceptable when they’re younger. But a gradual transition understanding that they’ll eventually be responsible for their own financial needs will help make the transition to adult independence more successful.
It’s also important to teach your teens that they can earn money in a variety of ways:
- They can get a job
- They can do odd jobs around the house or for family or friends
- They can start their own side hustle or small business
As you share the options and encourage them to remember that work equals money (and thus freedoms), you help them create a foundation that can lead to healthy money management.
By showing your kids that the power to earn money lies in their hands, you give them the gift of knowing that they have the freedom to control their own income situation.
Budgeting and Saving
Once your teen has some money coming in you can teach them about budgeting and money management. And you really don’t have to wait: This education can start as young as kindergarten with your child’s weekly allowance.
Your budget management teaching session can be as simple or elaborate as you like.
You can have your child write down their income and expenses on a simple spreadsheet, use an evergreen printable budget management worksheet or sign up for one of the many available budgeting apps.
And as a part of teaching them how to budget, you can encourage them to save a portion of their income.
Money expert Clark Howard recommends making your savings a line item on your budget and paying yourself first. He says to start with a percentage of your income you can save comfortably and then increase your savings amount every six months or so from there.
This is a great tip to pass on to your teens to help them develop the habit of saving something out of every paycheck.
Here’s the thing: If you don’t teach your teen to budget and save, they may be tempted to blow all of their cash on miscellaneous expenditures. Teens, like adults, can get distracted by “New and Shiny Object Syndrome.”
They’ll see a new pair of shoes or a new game for their gaming system and then BAM!: no more money in their pocket. However, if they learn to budget and include line items for their spending and savings goals, they can begin to understand smart money management.
Teaching them to implement a weekly or monthly budgeting system that includes a line item for savings will accomplish two goals at once: It will teach them how to manage money well and how to save money regularly.
Investing and Retirement
What should you teach your teen about investing and retirement? I'm going to say right off the bat that this financial goal might be tough to teach at this point. Teens tend to view retirement as very far off, as if it will never arrive.
It can be difficult for teens to think so far into the future. And since old age is so far away, why not use their money to eat, drink, and be merry? But you and I both know that time passes in the blink of an eye and that retirement age comes much faster than you expect it to.
On top of that, taking advantage of compound interest at an early age will make saving for retirement and non-retirement investing much easier — and potentially much more profitable.
One idea for getting your teen on board with investing might be to start by explaining why compound interest is so incredibly valuable. In other words, show them the numbers.
Use an investment calculator to show them how starting a small savings plan now can add up to a large net worth later on.
Show them how making retirement and non-retirement investing a line item in your budget can result in big rewards down the road. Encourage them to start young, save early, and avoid having to struggle for money in the future.
Responsible Debt Management
If you've ever struggled with debt management, this section will likely resonate with you. Having a lot of debt payments can cause unnecessary stress and financial hardship.
Help your teens avoid this stress, and teach your kids to either pay for everything in cash or, at the very least, to take on debt responsibly. What are some tips you can give your kids for handling debt responsibly?
- Keep your debt payments to no more than 30% of your take-home pay
- Pay debts off faster than the loan term requires
- Pay your credit cards in full every month
- Put a large down payment on loans
- Save up and pay cash if you can
The last tip can be especially helpful when it comes time for your teen to car shop. You could co-sign on a car loan for them as many parents do. Or you could encourage them to save their money and pay cash for a car, avoiding the stress of car payments.
There are differing philosophies on whether good personal finance management includes taking on debt, and there’s no one-size-fits-all answer.
If you do decide to teach your teen that debt (or certain types of debt) is OK, be sure they understand the commitment of the payments and how long those payments will last.
You could possibly do a trial run with them on a smaller purchase to give them an idea of how carrying debt feels.
Lastly, be sure they understand how a credit score works and what impact being late or defaulting on a loan will have on it.
Finances and College
It's important to teach your college-bound teen the importance of managing college expenses well. In 2019, college graduates who carried student loan debt had an average loan balance of $29,900.
That’s a lot of debt for a 21-year-old to have to manage. And if they’ve got additional debt due to that well-promoted college credit card, that “average” college graduate might be feeling even more stressed.
This is why talking with your teen about college and finances is important. Do your best to help them understand the true cost of the college degree they want.
Assist them in finding out if they qualify for financial aid or college scholarships. Help them find the best student loans. Or talk out their career goals and interests with them. Maybe college isn't the right choice for them.
Maybe they’d rather pursue a trade or go straight into the workforce. As a professional tutor, I’ve met many students who spent years in college only to figure out they’re much happier working in a trade or working at a non-degreed job.
That’s why making an informed decision about college is important. Visit colleges and go over all of the financial and other details with your teen. Have them take a skills assessment test at school to help determine their potential career interests.
Find local career day events in your area and bring your teen to visit. In other words, be sure that if they are spending money on post-secondary education that they’re doing so with intent and purpose.
Giving and Charity
Last, but certainly not least, teach your teens the importance of giving back. For many people, one of the biggest benefits of good financial management is the ability to spend some money to make a financial impact for good.
Encourage your teen to make a line item in their budget for charitable donations. Then help them find causes that tug at their heartstrings. For example, your animal-loving teen could make a donation to the ASPCA or the humane society in your area.
The teen who has a heart for the homeless could make a donation to a local homeless shelter. And giving doesn’t need to involve money alone. You could encourage your teen to give their time as well.
Teaching your teen some well-rounded personal finance basics can go a long way toward preparing them for adulthood. Give your teens the gift of smart money management by sharing the tips above and encouraging them to manage their money wisely.
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