So your teen might have passed their driver’s test with flying colors and aced their latest history test, but what about money matters? While you might get an eye roll from your teen when it comes to teaching them about, say, the importance of saving their money, it’s essential that they have a solid understanding of core financial concepts that will set the stage for their success as adults. Here are six things about money that every teen should know, and a few savvy ways you can help give your teens a financial education:
1. How to create a budget.
As we all know, budgeting is an essential part of managing our finances. One way you can teach your teen how to track their expenses and cash flow is by a system of envelopes, suggests Paul Vasey, founder of CashCrunch Games.
“Teens need to realize that they can only spend a dollar once,” explains Vasey. “They have infinite wants and finite resources, and therefore need to make choices. Once their money has been spent, it cannot be spent again. By getting them to realize that they have choices, and also, if they do not buy the product that day, their lives will probably not come crashing down around them.”
You can work with your teen on saving for a family summer trip. How much will they save for shopping and eats during the trip? How will they allocate their spending?
2. How to save for a rainy day.
Instead of treating you as the bank, have a chat with them on how they can save for unforeseen expenses, or maybe just for things they’ll need to save up for. Bill Dwight, founder of FamZoo.com, requires that his kids set aside a few hundred dollars in a separate account. “That way, they can cover that first parking ticket, stolen bike, or broken iPhone without relying on a bailout from mom and dad,” Dwight explains.
If you’re a member of a local credit union, can contact your local branch to look into opening a savings account for your teen. It’s a great way to introduce them to the world of tracking their spending and managing their money.
3. The differences between credit and debit cards.
Knowing the major differences between how credit and debit cards and how to go about applying for one. This can also introduce them to how interest works, and what happens if they don’t pay a credit card on time.
You can show them how to track their spending on their phone, and how to set limits and alerts on their credit card spending through apps such as CardNav(sm) by CO-OP.
4. How student loans work.
Even if you opened a college fund for your child, with the soaring costs of higher education, there’s a good chance that your teen will need to sniff out funding on their own. Talk with them on expectations on who will be paying for what, and what they’ll be responsible for.
Teaching them about how student loans work, the different options and plans for repayment, and their responsibility on paying it back will also help them be prepared for when they are full-fledged adults and have to make major purchases that require good credit.
If you currently have student debt, you could talk to them about your personal experience with paying off your loans. Opening the doors to communication could help them not only have a firmer grasp on student debt, but also your teen will know they can come to you with any questions.
5. How to earn a buck.
Get them started on earning their own money by getting a summer or afterschool gig. It’s a great opportunity to teach them how to read a pay stub, so they understand how income taxes are deducted.
If your teen has a passion for something, such as crafty wares, programming, or woodworking, you can work with them on potentially starting their own business. Being a young entrepreneur will teach them valuable skills that will help them down the road.
6. How investing works.
While you might not necessarily get into specifics and do a deep dive on investing, understanding how the economy and stock market works and learning basic terms such as “bull” and “bear market” will help your teen be more educated when it comes time for them to invest.
If you can afford to do so, one thing you can do to give your teen a jump-start on investing is to play what Dwight of FamZoo calls the “Family 401(k),” where after your teen gets their first summer job, you can work with them on opening a Roth IRA. You can sweeten the pot by offering to match their contributions. One thing you can also do is invest the money in a low-cost, diversified index fund. “This practice rewards hard work while teaching your teens the power of matching opportunities, compounding, index funds, long term investing, dollar cost averaging [if you do it each year], and tax-advantaged savings,” explains Dwight.
For more information and ways on teaching your high schooler about money, you can also check out Biz Kid$, which is a free educational resource for parents, teachers, and community leaders.
By taking the time now to teach your teens fundamentals about money, they’ll have the financial smarts to succeed as adults.