Money Talks: Teaching Your Teens about Money
“Do you think that money grows on trees?” is a question many parents pose to their teens when they ‘need’ the newest fashion or item trending on social media. Because most schools don’t teach general financial skills to students, many don’t have a strong concept of money. This may turn into a problem when they are young adults struggling to stick to a limited budget and possibly juggling student loans. Talking about money can be challenging and sometimes uncomfortable, but like many other life lessons, it is a parent’s responsibility to set their children up for success. As the new school year begins, take some small steps to help your high school student, or college freshman or sophomore, learn good financial habits:
Delayed Gratification: If you give them an allowance, or if they have a part time job, help them identify a large goal that they want to be able to afford by the end of the school year. Work with them to determine how much they need to save each month to be able to make that purchase, and check in with them regularly as they move toward that goal.
Prioritizing Spending: For the remaining funds, get them in the habit of deciding whether something is a “need” or a “want” prior to spending. For example, filling the car with gas would fall into the needs category, while a new dress or sneakers might fall into the wants category. Help them to decide what percentage of their monthly spending should be needs vs. wants. Have them keep a list to tally up as they go along, and see if they are sticking to that percentage. It also could be helpful to set a maximum spending amount for them, and then review it monthly to teach them accountability.
Making Money “Work”: Put that monthly amount they are saving into a high yield savings vehicle, so that they can see how the money can “work” for them over time. At the end of the year, they should be able to afford that purchase and even have a little leftover, if they stayed on track with their savings habits.
Only Taking out What You Put in: Help them open a checking account in their name. If they are under 18, there are options such as custodial accounts and cosigning. Set up the account without overdraft protection, so that they can experience the damage of an overdraft and understand that a debit card only works if you have money in the account.
Importance of Good Credit: Assist them with building credit by adding them as an authorized user on a credit card you have that has been open for many years. You may want to hold onto the physical card for the most part, so that you retain control, but let them use it as you see fit. Explain to them how their credit score will impact whether they can get a loan when needed for a large purchase and often the rate on that loan. For example, when they buy a car for $30,000 at some point in the future, a special financing rate offered might be 4% for those with great credit, but 8% for all others. This would mean their payment would be over $100 more PER month if they didn’t have great credit. Wouldn’t they rather spend that $100 each month on something else? Also, make sure they understand that the total balance on a credit card should be paid in full each month, not just the minimum balance due, to avoid interest accruing on that total balance.
Exposure to the Stock Market: UTMA accounts with relatively low minimums can be opened for children under the age of 21. These can be used as an opportunity to introduce your teens to investing. Have a discussion with them, and work with them to buy a few well-known company stocks that they can follow on their own. This can give them a sense of having a vested interest in the investments and watching how they do. It doesn’t have to be (and probably shouldn’t be) much, but just something to get their feet wet. The account does become theirs when they turn 21, so you may want to come up with an agreement on how they intend to use the funds upon graduation, perhaps to pay down student debt or contribute to the security deposit of their first apartment.
Working with your children, while they still have you as a safety net, to develop these good financial habits and skills is so important and often overlooked. Seemingly small choices can have a significant impact on their futures. Get them on a good path today, so that they can be confident in their financial decisions as adults.