For many teenagers, living on their own at college is a major reality check. While 71% of teens feel confident in their money-managing skills, many lack practical experience. Teach your child how to make sound financial decisions without your help. Here are three important lessons in money management for teens.
Lesson 1: Creating a budget
Help teens understand where their money is going with a basic budget.
- Track spending. Before deciding how to allocate expenses, teens should track where their money goes for a few weeks. Include items they might not pay for now but will in the future, such as clothing, entertainment or extracurricular activities.
- Do the math. Help your teen come up with an income total for each month, including allowance, gifts or after-school jobs. Then budget necessary expenses first. If there's a shortfall, discuss ways to cut discretionary spending or increase income.
Lesson 2: Saving money
Make setting aside income second nature for your teen.
- Be consistent. Teens should strive to put the same percentage of their income each month toward savings goals. This will help make savings a habit.
- Watch it grow. Once your teen is saving consistently each month, open a savings account and explain how compound interest can increase savings.
Lesson 3: Building credit
Teach your teen the benefits and risks of buying on credit.
- Use responsibly. By carrying a balance from month to month, your teen could pay hundreds of dollars in compound interest charges. Discourage teens from charging purchases they can't really afford.
- Explain how sales that appear to be a good deal at the store may be good if the amount is paid in full. But if the original amount and interest continue to accrue it will be much more than the original sale item(s) and you may regret those deals.
- To get your teen started on the path to building a strong credit foundation, teens can be added as authorized users to your accounts.
- Certain credit card companies will allow you to set a spending limit for authorized users, others will not. So before handing over the plastic to your teen, make sure they understand the ramifications of using credit responsibly.
- Set the expectation with your teen that they will be responsible for paying their charges each month.
- If your teen is older, 18 or 19, there are credit cards that cater specifically to that age group. These cards tend to start with smaller limits.
- Scores matter. Explain how to build a good credit history by avoiding late payments and keeping card balances low. Good credit will help your teen years down the road when securing a car or home loan.