Do you have a teen who can’t tell the difference between a debit and credit card or who does not know what is risk and return? Although learning basic money lessons may not be a priority for your teen right now, you should try and teach them financial management skills. You want them to grow up to be independent, successful, and debt-free. So here are a few tips to try:
1. Start with the key terms
Even adults sometimes have trouble grasping key terms and concepts of personal finance. You may believe you don’t need to know them since you’re not an economist. But nothing could be farther from the truth. Not just you but even your teen should know and understand the basic meaning of some everyday financial terms. Terms such as debit, credit, annual percentage rate (APR), debts, payday loans, savings account, risk and returns are crucially important. They may sound complicated or overwhelming at first, but once you know how they apply to your personal money matters, you will eventually realise the importance of being familiar with them.
2. Money must be earned, not taken
Nowadays parents work hard to provide their kids with the best of things available today. Need a new smartphone? Here you are. Need extra pocket money? Here you go. Want to buy a new pair of jeans? Okay, let’s go shopping. Overindulgence is a wrong approach that teaches your teen that money can be easily had. Doling out cash to your teen whenever they need it is ruining their future.
If your teen needs extra pocket money, encourage them to find a part-time job or at least delegate a part of the household chores to them. You can even agree on a monthly paycheck for their regular work. From lawn mowing to house cleaning, your teen will learn that money is earned with hard work, skill and time.
3. The importance of having good credit
Whether your teen already has a credit card or they own one in the future, they should understand the importance of having a good credit score today. Lots of teens with credit cards cause trouble to their parents because they have no idea how to use them correctly. Explain to your teen that having a good credit score ensures:
getting a mortgage on a house;
renting a home – depending on where you live, many renters can request your credit history to make sure you’re able to pay the rent;
purchasing a car – a poor credit score equals high interest rates and a bigger down payment on a car. Plus, all insurance companies take your credit score into consideration when calculating your payments.
getting lower interest rates;
starting a business.
4. Budgeting is essential
Give your teen weekly or monthly allowance and ask them to write a budget plan on how they are going to spend it. Then, ask them to record the amount of money they spend daily. You can even encourage them to list each item they spend their cash on so that they know where exactly their allowance is going, no matter how small it is. At the end of the week/month, sit together and analyze the initial budget plan and the actual spending during the week/month. This is a great way to teach your teen how to budget correctly and how to stick to one. Make sure you don’t give any extra pocket money, unless it’s really needed.
5. Saving is rewarding
Does your teen want a new smartphone? Don’t run into debts to satisfy their desire. Let them know that they already have their own budget so if they want something they must save for it. This won’t be easy, so stay resilient and don’t give in.
Eventually, they will start saving and once they purchase that smartphone, they will realize that saving is rewarding. This will give your teen the power to choose between blowing all their money on entertainment and impulse purchases or spending more carefully and saving for the more important things.
6. Vintage stuff can be great too
Provide your teen with all the possible ways to reduce their expenses so that they can start saving more. New clothes are money draining. Unlike younger kids, you can’t dress your teen the way you want or can afford. But show them that thrift shopping is fun. Not only is it one of the best frugal buying habits to acquire, but it may also give your teen a larger choice. It’s not about clothes only. They can also buy recycled books, accessories, and jewelry. Old is indeed gold!
7. An emergency can happen anytime, anywhere
Teens don’t usually experience drastic emergencies, but teaching your teen how to plan for and survive them is critical. Broken glasses? Ripped sweater? Cracked phone? Stolen watch? Lost wallet? Don’t allow your teen to rely on you in case of an emergency. Let them know that they should budget for it in advance.
They should also save a tiny amount of their allowance on good emergencies, such us an unexpected school trip, birthdays, holidays, etc. Your teen may feel overwhelmed at first. After all, there are so many things they have to save for, but explain to them that starting with something as little as $10 is enough.
8. Paying the bills
Whether it’s car insurance, electricity, or mobile phone bill, assign one bill to your teenager and make sure they pay it on time. Send them a message or an email at least 3 days before the due date. Let them know that if they pay it late, they will also have to pay the additional late fee from their pocket. Since your teen already has a small budget and so many things to save for, they are less likely to default or delay. This will also teach them the importance of discipline.
9. The dangers of a credit card
Your teen should know about the burden called credit card debt. It’s not free money and the interests are dangerously high. If you had trouble paying off your credit card debts in the past or you are struggling with them now, involve your teen in the process. They will see how debts can adversely affect their life.
10. The concept of compound interest
It seems like it’s too early for your teen to think about opening a savings account and learning the concept of compound interest. However, it’s never too early to experience the magic of compounding. Explain the concept of compounding and how a tiny bit saved today could add up to hundreds if not thousands of dollars in the bank later.
Your teen is sure becoming more independent, but still needs plenty of advice from you. With more money to spend and increasing opportunities to spend it, your teen can easily get into financial trouble. So before money burns a hole in your child’s pocket, teach him or her a few financial lessons. With your help, your teen will soon develop the discipline and skills he or she needs to successfully manage money in the real world.