As high school students prepare to make their grand entrance into the “real world” one of the many valuable lessons they need to learn is how to manage their money. You may have said to them, “Money doesn’t grow on trees,” but learning how to handle their own finances goes beyond that time-honored saying. Money management is about planning, analyzing and assuming responsibility for one’s finances. Whether your teen is going to attend college in the fall, start their career, travel the world, or simply hasn’t made up their mind about life after high school, an understanding of money beyond the “Bank of Mom and Dad” is important.
According to the Consumer Financial Protection Bureau’s report, Building Blocks to Financial Capabilities, establishing good financial decision-making habits in the teen years helps people better navigate their day-to-day financial lives as adults. They are better able to set goals, control impulses and follow through on financial decisions. Here are four ways to get started:
Talk with your teen about wants, needs, and tradeoffs
According to a 2016 study by T. Rowe Price on parents, kids and money, 56-percent of parents said that they have held conversations about money with their kids. So still nearly half of all parents have room for improvement! Brian Page, an educator and Financial Literacy Consultant, suggests that there are certain financial values that can only be instilled in teens through their parents. When it comes to money, he says it boils down to values. “The most important conversation to have with your son or daughter is on what your values are and why it’s so important to spend your money on what you value,” says Page.
Tell your teen why you’re spending your money on a college education or on memorable experiences, rather than on stuff. Discuss the difference between wants and needs to help teach them about controlling impulse-buying. Talk to them about making tradeoffs to help them choose less expensive alternatives. For example, if your teen wants to see a movie, urge them to consider renting it and watching with friends, splitting the cost that way. Page encourages parents to talk with their kids about money decisions so they can learn how to use it as a tool to build wealth.
Get them to start budgeting
When it comes to budgeting, Page says the focus should be on cash flow management, or the ability to monitor, analyze and adjust one’s personal budget. That knowledge can help create financial security, even when times get tough. “Life is not oftentimes as simple as one line after another, it’s more of a rollercoaster,” he says. When you create a budget, Page recommends first picturing what you want your life to look like. It’s sort of like mapping out your life, but through your finances. Once you begin budgeting, you will be able to track your spending and see where your money is going, and see if it is helping fulfill that initial image. Page says that when you pass this skill on to your teen, they should be able to see how their financial choices impact their dreams and goals.
A good way to get your teen into the habit of tracking their spending is by having them print out their bank statements. Susan Beacham, CEO of Money Savvy Generation and co-author of Official Money Guide for College Students, says that when students highlight and jot down what they are spending their money on, it helps them get an idea of how they can budget better. She encourages parents to hold meetings with their teens to go over expenses, budgets and expectations to ensure that they are set up to succeed.
Teaching Teens to Budget
One of the most powerful things to be able to do is to track where your money goes, and that starts with budgeting. Explore some of the key budgeting basics.
Save, save, save
The more young people save the more cushion they will have. Saving allows them to have money, even when they don’t need it, as opposed to needing it and not having it. Another way to encourage them to save is by discussing financial goal-setting. Tiffany Aliche, Founder of CLD Financial Life LLC, says, “When young people save for something, it changes their thinking about how they spend their money.” Just like with any goals, saving can be for the short, middle, or long-term.
Talk with teens about credit and credit cards
If your teen hasn’t received a promotional piece of mail from a bank with a credit card offer, they will soon. Page says that it’s best to talk to kids about credit cards and about the importance of building up a credit score before they have a physical card in their hands. “Building credit is a wealth building strategy,” says Page. Your credit score is essentially how trustworthy financial institutions think you are based on your prior credit experience. Meaning if they give you money, are you likely to pay it back? It’s how banks decide if they will loan you money and the total amount they’ll give you to spend on your credit card. Often, for young people who have no credit history, a parent or guardian can add them to their credit card to help them build a credit history.
If your teen does decide to open a credit card account, the best way to manage their accounts is to keep their credit card use low. Building good credit involves not using all the money that is available to you on the card. 30-percent is the ideal usage to maintain a high credit score. So if they have a limit of $200, they should only have $60 worth of charges. Paying the balance in full every month also helps build a stronger credit score, since it shows that you are able to repay the loan.
Here is a list of credit scores and how they rank:
300 – 600 is considered to be poor
630-698 is fair
690-719 is good
720 - 860 is excellent
Also make sure teens know the importance of paying their bills on-time and in-full in order to avoid interest charges. Interest is a loan expense charge that borrowers pay lenders. If you have a credit card, that’s basically a loan the bank gives you on a monthly basis. The interest amount is calculated as a percentage of the unpaid amount of debt. So if you only make a minimum payment and don’t pay off the credit card in-full each month, they will charge you interest on the remaining amount of charges. Therefore if your teen buys a cheeseburger on their credit card for $6 and they don’t pay their credit card, and their interest rate is 19-percent, that burger actually costs them $7.14. Credit cards also often charge late fees if no payment is made on time, which is a charge on top of interest charges.
As mentioned above, teens just starting to build their credit can often use the help of parents or guardians. Aliche recommends “credit card piggybacking.” Credit piggybacking, also referred to as credit sharing, is when a parent or guardian adds a teen as an authorized user to a credit card account to help them establish and build credit. Aliche says that it works best with secured credit cards. A secured credit card is a line of credit that is secured by a deposited amount of money into an account by the card issuer. Therefore, if a parent deposits $500 into the account, the student will have a spending limit of $500. The money in the account ensures that your teen does not over-spend. You can help them manage their spending by tracking their spending since they will be on your account.
Think of money management as a tool. Aliche says, “It is like a hammer, therefore you can build or destroy with it.” Remember also that your kid takes their cues from you, and it is important at this stage to show them how to build.