Your teens are growing up. Before you know it, they’ll be out in the world, making their own financial decisions.
So, now’s the perfect time to see how they’re handling the money they have as teens. What are they doing right? And what missteps are they inadvertently making?
We’re delving into seven of the most common mistakes teens make when it comes to money. And we’re sharing ways that you can guide your kids to make great choices now so they’re ready to face adulthood with confidence.
Even though they’re a vital element of adult living, financial skills aren’t frequently taught in school. As a result, teens may mature without essential knowledge and even with misinformation. So, it falls to parents to ensure that their kids learn good money habits before they leave the nest.
Fortunately, there are plenty of free resources to help. The Treasury department prints such a list, as well as the Consumer Finance Protection Bureau. Plus, you can point your teen to reputable, paid courses as well.
Be sure to look at the abundance of free content available on finance-focused websites. These sites offer not only general information but easy-to-understand answers to most common questions about money.
And don’t forget about your local library! You can find introductory books on finance, as well as subject-specific guidance on saving, investing, college planning, debt management, and more.
As an adult, you generally don’t have a fairy godmother when it comes to money. It’s up to you to ensure you have enough coming in to cover expenses, to save for the future, and to meet your financial obligations.
But teens often find themselves in a unique position — having money in the bank, earning an income from a job, and having few (if any) expenses.
That set up artificially inflates the percent of their cash that’s actually available for fun money. With discretionary cash in abundance, it’s easy for teens to learn habits that lead to overspending on extras as adults.
So, what can you do? Give them a real-life example of adult finances.
Be as transparent as you’re able. Show them your paystubs, your bills, the sizable chunk of your income that goes to Uncle Sam. Highlight the balances of your saving and investment accounts and show the contributions you regularly make.
Then, to better mimic adult responsibilities, consider requiring your teen to cover some of their own expenses — particularly the non-necessities your kid wants to have. That might be a cell phone, costs for a car, or a spring break trip with friends.
And consider enforcing a rule that your employed teen must save a portion of each paycheck. That way, they’ll start early with the notion of spending less than they earn.
What’s the greatest financial advantage your teens have over you?
With roughly five decades until retirement, your kids have an amazing opportunity to harness the power of compound interest with their savings and investments.
And starting now makes all the difference.
If your kid begins investing at age 25 with a monthly contribution of $100, they’ll have $145,000 by age 65 (assuming a 5% annually compounded interest rate). But, if they start saving that same amount at age 18, they’ll have more than $213,000 at 65 — 44% more money!
Consider opening a Roth IRA for your teen. It takes just minutes, it’s free to do, and your kid is usually eligible if they earn an income. Plus, contributions to a Roth IRA are shielded from consideration on the FAFSA. So, your teen’s deposits and earnings don’t count toward the student’s reported assets.
Beyond investing, help your teen set up a dedicated account to save for a long-term goal. Maybe that’s a first car, college costs, or a deposit for their first apartment. And talk to them about the importance of an emergency fund in adulthood.
After all, saving is a tough habit to start later in life. It’s better to acclimate to it as a teen so it can easily become a lifelong practice.
As an adult, you likely recognize the benefit of planning proactively instead of spending reactively with your money. A budget is an invaluable tool in ensuring you have the cash to buy the things you need now and save for your future goals.
Adults typically have far more complex finances than older kids. So now is the perfect time for your teen to get their feet wet with budgeting — while their money matters are relatively simple.
Start off with the most basic budget format of all — the 50/30/20 budget. It calls for 50% of your income to go toward needs, 30% toward wants, and 20% to savings. Now, this framework was designed for adult living, so you may want to tweak those percentages to better fit your teen’s money.
Or add a powerful but simple budgeting app to your teen’s phone. Some apps work beautifully for young adults. And they’re an excellent jumping-off point for your fledgling budgeter.
Of course, your teen won’t know how well their new budget is working if they don’t actually track their income and expenses. Getting into the habit now can save your kid plenty of trouble down the road when they become a financially independent adult.
After all, not watching your money can lead to overdrawn balances, missed payment due dates, maxed-out credit cards, unnecessary fees, damage to your credit score, and even fraud that goes unnoticed.
Fortunately, technology makes tracking your income and expenses easier than ever. Most solid budget apps allow you to link directly to your bank accounts, credit cards, and investment accounts. So, you can track your balances, see where your money’s being spent, and make adjustments as needed.
It takes years to build a truly excellent credit score. But it doesn’t take that many mistakes to drive your score down. And teens with access to credit might unknowingly make some financial missteps without realizing the potential implications.
Great credit matters — and not just for adults. Your teen might be looking to take out a student loan, borrow for a car purchase, rent an apartment, or even apply to some jobs that require a credit check. And poor credit can translate to higher interest rates, less favorable borrowing terms, and even missed opportunities.
So, if your teen is preparing to get a credit card or loan, spend some time teaching them good credit habits now:
Always pay on time. Late payments for bills or credit cards may be reported negatively to credit bureaus.
Keep credit usage to a minimum. Whenever possible, borrow — at most — 30% of your credit limit.
Apply for new credit judiciously. Multiple credit applications can temporarily lower your credit score.
Oftentimes, teens have relatively little in savings while facing some major expenses. They may need to buy a car, pay for advanced education, or cover the costs of setting up their first apartment.
And — while some of those expenses qualify as “good debt” — it’s easy for teens to take on too much debt without realizing what that looks like.
Help your teen assess any loan or line of credit they’re considering:
Is it necessary to borrow the money?
Is there a way to reduce the cost (e.g., scholarships, a cheaper car, getting a roommate)?
What financing options are available?
Does the amount you’re borrowing fall within recommended guidelines?
Do you have a plan/budget for repaying the debt?
No one’s born with the financial knowledge they need to succeed as adults. But, with your guidance, your teen can start preparing now. And you can help them develop strong money habits that will last them a lifetime.