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 needs guidance on how to best use these funds. Before money starts burning a hole in your child's pocket, teach him or her a few financial lessons.
With your help, your teen will soon develop the self-confidence and skills needed to successfully manage money once adult life occurs.
Lesson 1: Handling earnings from a job.Teens often have more expenses than younger children, and your child may be coming to you for money more often. But if you are paying for all of their expenses, your teen may have difficulty making independent financial decisions. One solution? Encourage your teen to get a part-time job to earn money for expenses.
Here are some things you might want to discuss:
- Agree on what will be paid with your child's paycheck. Now that your teen is working, will those funds 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 savings?
- Talk to your teen about taxes. Show your child how FICA taxes and regular income taxes are deducted out of take-home pay.
- 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.
Lesson 2: Developing a budget.Developing a written or online spending plan or budget can help your teen learn to be accountable. 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 out all sources of regular income (e.g., an allowance or earnings from a part-time job). Next, have your teen brainstorm a list of regular expenses (don't include anything you normally pay). Finally, subtract your teen's expenses from his or her income. If the result shows that your teen won't have enough income to meet his or her 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 him or her to keep track of what's being 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 him or her money.
- Suggest ways your teen can earn more money or cut back on expenses (e.g., watch a movie with friends at home 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, he or she will never learn to manage money wisely. As they learn the importance of money management, your teen will inevitably make some spending mistakes along the way. Your child should know that he or she can always come to you for information, support, guidance, and advice.
Lesson 3: Saving for the 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, he or she is likely ready to focus on saving for larger goals, such as a new mobile phone, 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 put savings goals in writing or on a budgeting app to make them more concrete.
- Encourage your child to set goals that are based on his or her values, not on keeping up with what other teens have or want.
- Motivate your child by offering to match what he or she saves toward a long-term goal. For instance, for every dollar your child sets aside for college, you might contribute 50 cents or $1.00.
- Consider increasing your teen's allowance if he or she is too young to get a part-time job.
- Praise your teen for showing responsibility when he or she reaches a financial goal. Teens still look for, and count on, their parent or guardian’s approval.
- Open up a savings account online for your child if you haven't already done so.
- Introduce your teen to the basics of investing by opening 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 a reputable bank that supplies educational materials introducing teens to basic investment terms and concepts.
Lesson 4: Using credit wisely.Credible credit card companies require an adult to cosign before they will issue credit to someone under the age of 21 (unless that person can prove that he or she has the financial resources to repay the credit card debt), but you shouldn’t ignore questions regarding credit cards altogether.
Here are some things to discuss with your young adult before he or she starts using 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 happens if the bill can’t be paid on time.
- 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.
To find the right credit card for you or someone just starting out, check out First Bank’s credit card options.
With solid guidance and the right financial tools in place, your teen will quickly learn the A-B-C’s of prudent money management for their future.
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