A good foundation in financial literacy can be taught from a young age. In the years before your teen goes away to college or moves out of your house, it's important to establish healthy financial habits. Read on to learn how to start your teen on the path towards a strong and independent future.
Start a Budget Together
Tracking both income and spending is the first step in learning to balance a budget. There are plenty of phone apps that make it easy (and even fun) to start a basic budgeting plan. Find one that works for your child, or you can begin with a simple spreadsheet. Sit down with your teen and discuss their income, whether it's from an allowance or a job. Then talk about what expenses they have. While they may not have to currently pay bills or rent, the 50/30/20 plan can still be a great jumping off point. In this plan, 50% of income goes to needs, 30% goes to wants, and 20% goes towards savings. Because your teen may have most of their needs taken care of by you, you can allocate even more towards savings.
Setting a goal can help your teen see the benefits of saving money. Is there a more expensive item that they've had their eye on? Talk about how much they can save monthly to reach their goal in a certain amount of months.
Discuss Checking and Savings Options
Understanding how interest on savings accounts works is a great piece of knowledge for your teen to have. Head to your bank and sit down with your child and a bank employee to discuss different types of savings accounts like money market accounts and CDs. From there, you can talk about how to calculate how much interest you'll make over time, and how savings accounts can help people reach their long term financial goals. Once your teen secures their first job, it's the perfect time to discuss why saving for retirement early is key.
Opening a checking account too, and teach them how to check their balance, avoid overdraft fees, and automate billing. With their first debit card, you can give them a lesson in ATM usage, and show them how to make deposits and withdrawals to their account online or in an actual branch of your bank.
Talk About The Differences Between Needs And Wants
While getting the latest phone, gaming console, or computer is nice, knowing the difference between items your teen wants versus items your teen really needs can help them make smart financial decisions later down the road. While it's perfectly acceptable to save money to buy wants in the future, it has to be a balance between paying for needs first.
And this is also a great opportunity to teach them to compare prices on items they want, so they're a smart shopper. Download coupon apps to make this fun. And before they make any large purchase, tell them how helpful it can be to wait at least 30 days to see if it's something they still want. This can help manage impulsivity that teens are often notorious for.
Setting Up A Strong Financial Future
Because teens usually have a relatively small amount of money to manage, it's a great time for them to become confident and responsible with their money. If they make any mistakes at this point in their lives, it's unlikely to have a serious impact on their financial future, but be sure to monitor them closely to avoid any serious damage. And talking openly about finances can prepare your child for their entrance into the real world.