Budgeting, working, managing a bank account, and credit education add to success in adulthood. Check out how to set teens up for financial success.
You show your teen how to do their laundry, teach them the importance of getting up on time, and how to hold a job. But what about their financial education?
The teenage years are formative for showing teens how to become successful contributors to society. Things like making a budget, keeping a job, managing a bank account, and educating them about credit are all important foundational principals to set them up for success in adulthood. Check out these ways to set your teen up for financial success.
Set up a bank account
This is a rite of passage for any teenager, and an exciting first step into financial adulthood. Start with a checking account for daily spending, and a savings account for future goals. Depending on how old your teen is, you may have to be a signer or joint accountholder on the account. Either way, finding a good balance of supervision and independence can be helpful while they learn about spending habits. Nowadays, it’s considered the norm to be able to manage accounts from your smartphone or online. It’s best to find an account they can manage and keep tabs on easily.
In addition to a checking and savings account, give them a debit card linked to the checking account. This will minimize the need to carry around cash, and provide a record of where they spent funds. Since a debit card pulls funds directly from the checking account, this can help keep spending in-check.
Set savings goals
Anytime your teen receives money, whether it’s from their job, allowances, or gifts, encourage them to “pay themselves first.” This is taking a portion of the income, and putting it in their savings account. Getting in the mindset their savings account is the first bill to pay anytime they receive money, can lead to building a large amount of wealth. Even starting small will make a big impact over time. This can open the door to discuss their short and long-term goals.
Short-term goalsare what they want to accomplish in the near future, typically within the next 12 months or less. For example, buying electronics or games, paying a cell phone bill, clothing, gas, or funding a new hobby.
Long-term goalsare usually achieved in the next five or more years. Including buying a car, saving for college, putting funds away for a trip, or starting their own business.
Have your teen consider what their highest priority is, and how they could accomplish it. Encourage them to stay focused on their goals, and regularly contribute toward that goal while managing any other usual expenses. Balancing saving and paying expenses is an important balance to learn, and one that will benefit your teen in their future.
How to create and stick to a budget
For most of us, it’s easier to learn something if we have a good example. The same rings true for teenagers. Have a family budgeting meeting, and show them how you handle finances. This will show your teen how to make a regular budget each month, before the next month begins.
Have them map out all of their expenses, setting aside money to give, save, and spend. A good rule of thumb is to follow a “zero-based” budget. This means when your teen maps out their expenses, there should be zero dollars remaining unaccounted for in their budget. Several different budgeting strategies exist, so it’s important to find the one that works for your teenager. Check out our easy Budgeting Template for Teenagers.
Teach insurance basics
If your teenager is driving, it’s a good time to teach them about insurance basics, and the associated costs. Explain how the purpose of insurance is to cover large costs that would be too expensive to handle on their own. Go over their policy, and explain the principal of deductibles. These concepts are helpful when exploring other types of insurance as well – health, renters, or homeowners. Consider if you want them to be responsible for helping cover deductibles for accidents they may cause.
Good credit habits
Starting early in managing credit is key to not relying on it later. A good credit score helps qualify for apartment leases, auto loans, lower insurance rates, and mortgage loans. With a lower interest rate, comes less in interest to pay over the life of any loans. Explain how credit works, the principal of interest, and how debt can add up if you’re not careful in managing it. Teach your teen not to fear credit, but rather use it as a tool for the reasons mentioned above.
Consider sharing a credit card with your teen, or adding them to your existing cards. Be sure to handle this responsibly, and explain how it will help them begin building credit history. Even if you decide not to hand them a plastic card, it can still help build their credit history. However, you will want to manage the situation carefully. There might be a possibility they purchase an expensive item without your permission. Also, remember if either of you don’t handle the credit responsibility, both your scores will take a hit.
Plant the seed of retirement planning
Retirement may not be on your teens’ mind, but it’s never too early to get them thinking about how they’ll support themselves after their working career. Explain the concept of compounding interest – how saving just a little bit of money in an interest-bearing account can grow into a significant amount. Right now, time is on their side. The power of saving early, means the more money they will earn. Also, if your teen earns regular income, consider opening a Roth IRA. Funds in a Roth IRA can grow tax-free, with no end date.
Overall, encourage your teen to think about their money habits, and how they would like to see their financial future. Being open and honest about how money works, and providing a good example, are keys to financial success for your teenager. As always, we’re here to help. If there’s any way we can assist you, please contact us.
7 Ways to Teach Teens to Manage Money, Military
How to Teach Teenagers About Money, Dave Ramsey
Can Teenagers Invest in Roth IRAs?, Investopedia
Can I Add My Teenager to my Credit Card?, Wallet Hub
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
The information provided in these articles is intended for informational purposes only. It is not to be construed as the opinion of Central Bancompany, Inc., and/or its subsidiaries and does not imply endorsement or support of any of the mentioned information, products, services, or providers. All information presented is without any representation, guaranty, or warranty regarding the accuracy, relevance, or completeness of the information.
Category: Family & Estate