Financial Education for Teens

You want your teenager to have the best possible financial start. This means that you need to be responsible for teaching your kids about money, and how they can properly manage it. If possible, it’s best to start before your children are teenagers. You can begin helping your younger children learn money basics by giving them money to save, give to charity, and spend on things they want. Help your young children learn that they need to make decisions with their money, and as your younger children turn into teenagers, it will make more sense to continue the lessons.

Some Important Things to Keep in Mind as You Teach Your Children

As you teach your teens about finances, it is important to consider what they can handle, as well as a few other items. Keep the following in mind during your efforts to teach finances to your children – no matter their ages:

  • Set a good example: Teens, especially, will be paying attention to what you do. This means that you will need to set a good example for them. If you have made money mistakes in the past, make sure your kids see you working to correct the problem. Going forward, be a good example of best money practices.
  • Consider age and maturity: Remember that teens learn at different paces. Be mindful of the age and maturity of your teen, and teach concepts that he or she is ready to understand.
  • Build on basic concepts: Start out with the basics, and build from there. It is important make sure your teenager understands one concept before moving on to the next. It can help to have a plan to teach teenagers in a way that allows them to progress naturally from concept to concept.
  • Let them make some mistakes: Would you rather have your teen make smaller mistakes now, and learn from them early, or make bigger mistakes later? Let your child make occasional mistakes and turn those mistakes into teaching moments. This can include allowing your child to borrow money from you, and then garnishing his or her allowance until the principal – plus interest – is paid back. Or, you might let him or her spend all of his or her money, but then point out that now he or she doesn’t have enough to buy something really wanted.
  • Hold your child accountable: Your teenager should be accountable for his or her money decisions. Make sure that you encourage responsibility, and that your teen experiences the consequences of his or her money decisions. This can reinforce positive experiences when good choices are made, as well as help your child understand the problems associated with making poor decisions.
  • Don’t be an ATM: One of the worst things you can do is just hand out money each time your child asks, or buy what your teen asks for. Beyond providing the necessities – food, adequate clothing, shelter, transportation – that parents are expected to pay for, set clear rules about what you will pay for (some extracurricular activity costs, part of a student exchange program) and what you won’t pay for (designer clothes, concerts). Then, stick to it. Your child has to do without when he or she blows the budget, or your teenager has to pay you back with interest.

Teaching moments occur all the time. Be on the alert for these opportunities to help your teen understand more about money. Give your child ample time to practice making good money decisions; with time, these decisions will turn into good money habits that will remain with your teenager through college and beyond.

What Your Teen Should Be Taught About Money

Depending on the age and maturity level of your teenager, there are a number of topics that can be addressed. By the time your teen graduates from high school, though, he or she should have a basic understanding of the following concepts:

Budgeting: One of the most important money concepts anyone can learn has to do with budgeting. Your teenager should learn the basics of budgeting. This includes having a long-term financial plan for his or her money. Emphasize the importance of living within one’s means. Basic concepts that can be approached as you discuss budgeting include:

  • Income: Explain the importance of work, and earning an income. You can encourage your teenager to hold a part-time job, or to do odd jobs around the neighborhood as a way to earn money. You can provide an allowance if you wish, or consider paying your child for chores done around the house. (Many parents don’t pay their children for basic household chores, such as light cleaning, dishes and helping in the yard. They consider basic family chores as jobs everyone should do; the lesson is that we sometimes do things because we should – not just because we’re being paid.) The important thing is that your child learn the value of work, and receive some money so that budget principles can be practiced.
  • Needs vs. wants: Next, your child should learn the difference between needs and wants. Budgeting lessons should include information about paying for needs (clothes, food, housing, transportation to work, etc.) before spending money on the fun stuff. Make it clear that obligations need to be met before fun purchases can be made.
  • Giving: Help your teenager understand the importance of giving. Budgeting in money to go to your local church congregation can be helpful. You can also encourage your child to look for a charity that means something to him or her, and then send in regular donations. Also encourage your child to volunteer his or her time. Charitable giving is part of well-rounded personal finances.
  • Savings: Your teen should understand the importance of budgeting for the future. A portion of his or her money each month should go toward future events. Encourage your teen to start saving for retirement, as well as for college. You can also teach your teenager how to save for short-term goals, such as school clothes shopping, or a fun trip or a concert.

You can help your teenager learn about allocating money by using an envelope/jar system that allows him or her see where the money is going each month. You can also open different savings accounts with your teen, or help him or her contribute to an IRA or 529 college savings plan.

Go through account statements each month, and show your child how to read financial statements, and reconcile them with the information he or she has. As part of the budgeting lessons, encourage your teenager to use a personal finance application. You can use a software application run on the computer, or help your child set up with a web financial application. This can be a great way to introduce your teen to expense tracking so that he or she can see where the money is going – and use the information to make changes. Taking the time to touch base with your teen and his or her spending regularly can ensure that you continue to provide coaching and guidance.

Banking: Opening a bank account is a great way to help your teenager learn the basics of money. Your teen can learn about the banking system, as well as understand how to use money responsibly. Check with the bank to find out your options for checking with your teen. It is usually a good idea to open a joint bank account with your teenager so that you have access: You want to be able to keep tabs on what is happening.

You can set up the joint account so that your teen can write checks and withdraw money without your presence. This will give him or her a little freedom, and some good experience. However, you will want to be careful. Make sure that this joint account does not have “standard overdraft services.” Opt out of these services. This way, if your teen tries to use an ATM to withdraw more money than he or she has, or if he or she tries to use a debit card for a purchase that is too large, he or she will be denied. This is one of the best ways to teach a very strong lesson – and avoid overdraft fees.

A checking account is a good way to help your teen learn smart spending habits, and a savings account can be a good way to help your teen save up. Instead of just opening a savings account at brick and mortar bank, you can explain interest, and look for high yield savings accounts online. Encourage your child to use automatic debit to move money from a checking account to a savings account regularly.

Many banks will issue a standard debit card to anyone 16 or older. This is especially true if you have a joint bank account. If possible, try to avoid pre-paid debit cards, which come with high fees. Yes, you want your teenager to learn how to manage his or her money in a world where plastic is the main payment medium. However, this can usually be accomplished with a regular debit card; no need to pay outrageous fees for a prepaid card.

Investing: Now that your teenager has a grasp of budgeting basics, and understands how to properly use a bank account, it’s time to learn about the power of compound interest, and introduce him or her to investing. You can do this by explaining that it is best to start earlier. There are a number of calculators available online that can provide insightful information that can be used to illustrate the advantages of starting early.

To encourage your child to learn about investing, and become interested in investing, you should let him or her take an active role. Start out by putting together a sample portfolio. You can construct a portfolio using Google or Yahoo!, or participate in a number of stock portfolio games and demos offered online. Let your teenager decide what should be held in the practice portfolio. You can talk about researching investments, and choosing solid investments. For teens, some of the easiest investing products to cover include:

  • Cash, including CDs, and CD laddering techniques.
  • Bonds, which are loans you make to other entities. Your teen can invest in bonds, and receive interest, plus the principal back.
  • Stocks, which represent a certain amount of ownership in a company. Stocks, including dividend stocks, are fairly easy to understand, and most teens aged 16 and up can begin learning about stocks.
  • Funds, which are collections of different investments. Encourage your teen to start with cash, bond and stock funds.

If your teen appears ready at age 18 to learn about “riskier” investments, you might talk about commodities, currencies, options and other investment choices. But the basics are good for starting out.

Track your practice portfolio, and help your teen understand which investments have been beneficial, and which might have been poor decisions. When your teen is ready, you can open a brokerage account for your teen’s use. Understand that you will have to open an account for your teen. Many parents open a custodial account. This means that the money put in the account is your child’s. If you put some of your own money in the account, it is considered an irrevocable gift. Once your teen comes of age (usually 18 or 21, depending on the state), the money automatically falls under his or her control. It is worth noting that you can open a custodial IRA for a teen who has earned income. This can be a great way to get your teenager started with a tax advantaged retirement account.

Let your child make decisions about the portfolio, and make regular investments into the brokerage account. You can be on hand to offer advice and suggestions, as well as prevent huge mistakes on the part of your teenager.

Consumer Debt: Address the pitfalls of debt with your teenager. Be wary of giving your child a credit card too early. It’s usually best to see how he or she behaves with a debit card, and judge his or her ability to meet other obligations first. There are some strategies you can employ to help your teenager learn about loans and debt:

  • Loan from you: You can loan your child money for something. Work out an interest rate for the loan, and sign loan papers. You can find templates for loan agreements online, and you can also use online calculators to figure interest. Many parents prefer to use simple interest, charged monthly, and keep it quite low, since the exercise is supposed to be educational. Put your teen on a repayment schedule, and make sure that he or she understands that interest means that you always repay more money than you borrowed. Also, show your child that he or she can save money in interest by paying back the loan early.
  • Co-sign an auto loan: Some parents are willing to co-sign on a child’s auto loan. If you expect your teen to be responsible for his or her car, you can agree to co-sign on the loan. Make sure that your teenager is making regular payments, though, or your credit will be impacted. Explain to your teen the importance of paying on time. If your teen misses payments, you can decide to “repossess” the car for your own use, not allowing your teen to drive.
  • Borrow from your teen: To further impress upon your teen the advantage of earning interest over paying it, you might borrow from your teen – and repay the loan with interest. This can be a powerful lesson, especially after they have been on the paying end of interest.

If you have a great deal of debt, make sure your teen understands that you are trying to repay it, and you regret your decision. If appropriate, you can show your teenager how much interest you are paying. Seeing how much credit card interest is paid can be a real eye-opener for a teenager. You can also take him or her down to a payday loan or car title loan company and figure the annual interest rate on these loans. Exposing your teen to some of the consequences of poor money decisions and debt spending can help him or her really see what could happen.

College and Student Loans: How you decide to handle your child’s college expenses is up to you. Some parents pay for the whole thing. Other parents insist that the child be wholly responsible. Still others are willing to pay for part of college, while the child bears some of the costs. One common arrangement is for the child to be responsible for tuition, while the parents pay for housing, books, and a meal plan (or provide a monthly grocery stipend). In many cases, though, student loans are a reality.

Even though you can encourage your child to reduce his or her costs with scholarships, some student loans are likely to be required at some point. As you discuss college choices, encourage your teen to consider modest and affordable options. Remember that $40,000 and $90,000 for total college costs are numbers beyond the grasp of your teen. It’s hard for a teenager to see that a smaller amount is preferable, when he or she really doesn’t have any idea how any of the money will be paid back. Instead, use student loan calculators to help your teen see the monthly repayment impact on a budget. You can find information about average salary for different jobs your teen might do upon graduation from www.bls.gov, and then show your teen how monthly student loan repayment will affect him or her directly. This demonstration can be effective in helping your teen limit his or her borrowing for education.

Is Your Teenager Ready for a Credit Card?

Some parents want their teens to begin learning about credit early on, when they can be closely monitored. As a result, they are interested in providing a credit card for their teens. (Realize that, in the U.S., anyone younger than 21 must have a co-signer on a credit card, unless he or she is at least 18 and can prove that his or her employment is sufficient to make payments on the credit card.) Before you give your teenager a credit card, you should evaluate his or her behaviors:

How does your teen handle money right now? Before handing over a credit card, consider your teen’s current money habits. Does your teenager save up for upcoming events, or are you always being asked for a loan? If your teen habitually asks you to make up for a budget shortfall, it’s clear that he or she isn’t ready for a credit card. Also, consider the expenditures. If your child is always paying for wants, and neglecting to give to charity and save for the future, it is clear that your teenager isn’t concerned with developing good money habits; adding a credit card to the mix could be financially dangerous.

Is your teenager responsible in other areas of life? How your teen behaves with regard to non-monetary obligations can tell you a lot about his or her general level of responsibility. You shouldn’t provide a credit card to a teen that isn’t responsible. If your teen studies for class and works to get acceptable grades, if your teen practices instruments or sports to gain proficiency, if your teen fulfills responsibilities at an after-school job, and if your child does his or her chores at home, these are indications that a credit card would likely be used wisely.

If you do decide to give your child a credit card, make sure you monitor its use, and teach your teen to pay it off every month, and to avoid buying items that he or she does not already have the money for. Show your teen how to use financial applications on the computer, mobile device or Internet to track spending so that he or she does not go over the monthly budget. Teaching teens how to incorporate a credit card into a budget can be a good way to help them build credit habits that can carry through for the rest of his or her life.

Bottom Line

The lessons you teach your teenager now can make a big difference later. You don’t need to try to cram all these financial lessons in at once; you have from the time your child is 13 until he or she leaves home at 18 or 19 to teach these lessons. Incorporate them into daily life, and your teenager will develop good money habits that will lead to financial freedom.