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While many moms and dads often give advice to their teenage children about school, sports, and clothes, very few feel comfortable educating them about finances. But, parents are the best source for teaching teens about money.
Most schools don’t teach students how to save, balance a checkbook, or make personal finance goals. If teens don’t learn the basics from their parents, they’re at risk for making lifelong money mistakes. Don’t let your teen learn about personal finance from the school of hard knocks. Instead, here are ten vital tips for teaching teens about money management.
1. Teach the value of saving early
Teenagers may not have money making power early on, but they have one huge advantage over nearly everyone else—the advantage of time. The money they save today can turn into big bucks when they’re ready to retire because of compound interest.
For example, say an 18-year-old has $3,000 to put into a retirement account today. If they deposit it and the account earns an average annual interest rate of 8%, that teen would have over six figures in their account (about $111,000) by the time they turn 65.
However, if they wait until they’re 30 years old to deposit the money, they’d only have about $44,000 by age 65. Visit our interactive savings calculatorsto review more saving scenarios.
2. Promote goal-setting
Talk to your teen about what their goals are for their money, and how they plan to get there. If they really want an iPod®, help them learn to save for that goal, (even if you’d rather they save the money for college books). You can always talk about adjusting goals later, but the key today is to give them a sense of control and responsibility.
3. Establish a set budget
Once teens have set their goals for their money, help them establish a budget that allows them to pay for the things that are important to them, and provides a cushion for unexpected expenses.
Teens can even budget money that’s not “theirs”. For example, a parent can give them a budget for back-to-school shopping, even if the parent is the one funding the expenses. The teen would be responsible for choosing the supplies and clothing needed, but they would have to stay within the budget that was set for them. If the teen manages this task well and comes in under budget, the parent could reward the teen by letting them pocket the difference.
4. Encourage teens to earn their own money
All too often, the only time parents and teens discuss money is when the teen is asking for it. If this is a problem in your household, encourage your teenager to earn their own way. This could be with a part time job or a seasonal side business.
5. Establish a bank account
Checking and savings accounts are important parts of building a financial history. Either the account can be in the teen’s name, or it can be a joint account with a parent.
Ask your financial institution if they have special options for teens. Many banks allow high school age students to open an account with no minimum balance that offers fee “forgiveness” for the first bounced check, and has reduced service charges.
6. Talk about the debt trap
The Credit CARD Act of 2009 limits the ability of people under age 21 to obtain credit cards on their own, so parents have more ability to monitor their usage and help them stay away from the debt trap.
Even so, many teens don’t fully understand that credit cards and other easy financing options have to be repaid, and interest charges can send cardholders further and further into debt. If a person takes out credit for an immediate want, then they may be paying for it out of future earnings for a long time. Read our article on Teenagers and their Credit for ways to talk to teens about debt.
7. Talk about taxes
If your teen has a job, they will probably have to pay taxes. Help them understand how to calculate what they owe Uncle Sam. They’ll need to know about W-2’s, 1040’s, and, if they earn money from their own business, 1099’s. (If you need a refresher on what these tax forms are, visit the Internal Revenue Service web site at IRS.gov. Or better yet, review the site with your teen.)
8. Teach your teenager the value of a dollar
Help kids learn how to hunt for the best deal. For example, if they want a new cell phone, show them how to comparison shop for the best mobile service plan, depending on their habits. Our article library has several tips for spending wisely.
9. Establish rules before allowing a parental “bailout”
When a young person is just beginning their personal finance journey, they will probably make mistakes. They may overdraw an account, or not have enough money to pay a particular bill, and need emergency cash from mom or dad.
Before the need arises, parents should decide under what circumstances they will dole out cash. It may be that they’ll only help if there’s an emergency, such as providing money to fix a broken car. But if the teen simply spent all their “eating out” money on clothes and music, they may not get any help at all.
10. Tell teens where to go to learn more
According to a recent JumpStart Coalition survey, high school seniors received an average score of only 48.3% when asked basic financial questions. Even if a parent teaches everything they know about good financial discipline, it’s important to help students learn where to go for more information.
Ask your local bank or credit union if they have financial education classes. In addition, tell your teen about finance web sites that are designed to help kids learn about finances. They include the Teen Consumer Scrapbook (from the state of Washington Attorney General’s office), the US Mint (which has lesson plans for parents and teachers of teens), and Investing for Kids.
Moms and dads need to talk to their teens about finances. Money may not be a comfortable topic, but it’s one that’s on everyone’s mind. Talk about spending values now, this way your teen has the tools to make smart financial decisions into adulthood.
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