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.
- 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.