By Vicki Cook and Amy Blacklock, Women Who Money
When talking to teenagers about money, you'll quickly learn that many believe they are experts on the topic. As teens, they understand you go to work to earn money and that it takes money to pay bills and buy things. Most teens also know that saving money and donating to causes, and those less fortunate is essential.
If your teen has figured all of that out, they' are on the right track to managing their money.
Us adults know, though, there's still a lot more for them to learn. As children mature and start making their own money and spending decisions, the stakes get higher. That's where we have to take our job as parents seriously. While your teen may think they know it all, becoming financially literate is a process.
Just like your child takes math, history, science, and language arts classes at school, there are essential concepts your teen needs to master about money.
Here are ten essential money lessons every teen should learn. The sooner they understand this information, the greater their chances of becoming financially healthy adults.
Needs vs. Wants
Spend Less Than You Earn, Save The Difference
Track Expenses and Start a Budget
Save, But Start Investing Early
Use the Power of Compound Interest
Understand Gross vs. Net Pay
Good vs. Bad Debt
Your Credit Score Matters
Big Loans Can Really Affect Your Life
You Can Be an Entrepreneur Without Taking on Much Debt
Ten Money Lessons for Teens
1. Needs vs. Wants
Your teen may think they need the latest smartphone, video game, or even a car. And be prepared for a well thought out rationale if you question why they think it's a need.
While your teen may have some good reasons to call something a need, make sure you are firm and give examples when discussing the difference between needs and wants.
- A smartphone might be a need, but the latest smartphone is a want.
- Without a new video game, they might miss playing with their friends online, but it's still a want, not a need.
- It might help everyone if your teen can drive to school or work, but in many cases, an extra car is wanted more than it's needed.
We don't want to send a message to our children that their wants don't matter, though. If they budget for their needs and have an emergency fund in case something unexpected happens, they can set up savings accounts (also known as "sinking funds") for their wants.
Practicing delayed gratification by resisting the urge to buy things on a whim will help prevent them from going into debt in the future.
2. Spend Less Than You Earn, Save The Difference
Your teen understands negative numbers from math class, so it shouldn't be hard to transfer that to money. When you consistently spend more than you make, you will end up with a negative account balance.
We need to teach our teens that if you spend every dollar coming in, you'll never get ahead.
When you spend less than you earn, you can pay your bills, avoid credit card debt, save for the things you want, and even invest for your future.
Your teen's goal should be to grow the gap.
The bigger the difference between what they earn and what they spend, the faster their savings will grow.
3. Track Expenses and Start a Budget
Whether your teen has a job, gets an allowance, or has money from gifts in an account, they should track what they spend and set up a simple budget.
Most teens are surprised to see where their money goes when they start tracking all of their spending. If your teen has a smartphone, they can use a free app like Wally or EveryDollar rather than saving receipts.
Once they have a better sense of how much they spend and in what categories, your teen can create a simple budget with the same money management apps.
In the budget, your teen should consider setting aside money to save, spend, and give. This helps teens put cash in the bank while still allowing them to spend responsibly. By creating a giving fund, they can donate to important causes without worrying about running out of money.
4. Save, But Start Investing Early
When your teen starts budgeting and works to grow the gap between earning and spending, they'll have more money to save.
Consider introducing your teen to high-interest savings accounts for funding short-term financial goals. While the interest they earn on small account balances might not be significant, teach them how .01% and 2.0% annual percent yield (APY) savings accounts compare.
For example, you'll earn $20 in interest if you have a balance of $1,000 in a 2.0% APY savings account for a year. The same $1,000 will only earn $.10 after a year in a .01% APY savings account. Teach your teen that you always want your money making more money!
Once teens have accumulated some savings, they should consider investing too. The longer their money is invested, the more wealth they will build over time - even if they deposit tiny amounts.
Introduce your teen to simple investing terms and help them open an investment account. At this point, you want them to use the "set it and forget it" investing strategy knowing that this is money for long-term goals in the very distant future.
5. Use the Power of Compound Interest
Your teen now understands why they should use a high-interest savings account. After all, teens love money! Why should they settle for a local bank only giving a few pennies of interest when an online bank lets you earn dollars?
Now it's time to show them the power of compound interest. When they invest money, and it starts making money, they'll keep earning interest on top of interest. If they leave the money invested over several decades, they'll see the "magic" or power of compounding - even if they never add more money to the initial investment.
Time is the critical factor in building wealth through compounding. The earlier your child starts investing money, the more they'll earn in the long run.
If they don't believe you, show them a graph from investor.gov of a $10,000 investment at 4% interest compounded monthly over 30 years by using their compound interest calculator. Without adding any more money to the investment, the $10,000 grows to almost $34,000.
Your teen can try out this calculator for themselves to see how different initial investments, interest rates, compounding frequency, and years invested affect how much your money will grow over time.
6. Understand Gross vs. Net Pay
When your teen gets a job, they'll count the days until their first paycheck. But the excitement of getting paid can turn to disappointment real fast.
When your teen calculates what their paycheck should be, they'll likely multiply the hours worked by their hourly rate. But kids don't realize, or they forget there are withholdings and deductions taken from earnings.
If you want to prevent your teen from being shocked by their first paycheck, make sure they understand gross vs. net pay.
Money will be withheld for federal income tax, Social Security tax, Medicare tax, and any applicable state or local income taxes. There may also be deductions for any retirement plans your teen may be eligible for through their employer.
Your teen should know they may receive a refund after filing a tax return if too much money has been withheld from their paychecks during the year. But they should get used to planning their budget on their net pay instead of the higher gross pay they anticipated.
7. Good vs. Bad Debt
Teens need to learn about different kinds of debt. While all liabilities need to be repaid as a part of every budget, one type of debt can move you forward while the other holds you back.
"Good debt" is money you borrow that helps you reach your goals. Student loans can be considered good debt if they help your child earn a degree leading to employment.
But the amount of good debt someone takes on can also be a real problem. The average student loan debt per person in 2019 is over $30,000.
Teens should consider all of their options before taking out massive student loans to fund their education. Is community college for two years an option? What about living at home or graduating from college in three years instead of four?
You want them to avoid "bad debt" at all costs. Bad debt usually carries high-interest rates and is often used to purchase our wants instead of needs. Swiping a credit card too often can put teens in a cycle of debt that's hard to recover from.
8. Your Credit Score Matters
As young adults age, they may be able to open up credit cards. Even with small lines of credit, your teen can make mistakes such as making late payments, keeping high balances on their account, or only making minimum payments.
This can prevent them from paying off their debt and negatively impact their credit score. A cycle of financial problems results when credit card debt grows.
Teens need to understand that building a high credit score can save them money on costs, including car insurance or cell phone contracts. When your teen is ready to leave the nest for their own apartment, having a high credit score can increase their chances of approval on rental and loan agreements and may save them money on utilities.
Teach your teen that their credit score can be damaged quickly by irresponsibility. Also, consider talking to your kids about reviewing their credit report each year to make sure no one has opened an account in their name.
Tell your teen to watch out for sites that want you to pay money to get your credit report. Everyone has access to a free copy of their credit report from each of the three credit bureau's once a year from annualcreditreport.com
9. Big Loans Can Really Affect Your Life
Teens can be faced with adult-level decisions when it comes to taking out large sums of money for things like cars and college. Before they earn a steady paycheck, they can be thousands (or tens of thousands) of dollars in debt without understanding how long or difficult it will be to pay the money back.
A car might only cost $10K to them - or a few hundred dollars a month. But young adults forget that's only one expense they'll have as they become more independent.
When teens consider college loans, they're thinking about their first "real" job and how big their paychecks will be. They may not realize they could be paying back loans for decades - even if they have good jobs.
Teens considering big loans need to use student loan calculators and look at loan amounts, terms, and interest rates to better understand the debt they want to take on.
If they've already tracked expenses and started using a budget, have them project all of the expenses they could have as a young adult and compare it to their net pay from a career that interests them. When you add in a student loan payment, the idea of taking out a big loan may not seem like such a smart decision.
10. You Can Be an Entrepreneur Without Taking on Much Debt
Some teens are natural entrepreneurs and have terrific ideas for starting small businesses. But they may spend time online trying to figure out how to grow their business - including spending too much money to get their business started.
You don't want to dampen your child's enthusiasm by only talking about money. But you also don't want your teen (or yourself) to take on too much debt before you know that they'll stick with the business. And that it will be profitable.
Help your teen figure out ways to market their business, get the equipment they need and find customers for as little money as possible. This will also help them make money faster because they won't have a debt to pay off.
If their business takes off, they can put their profits back into their company to help it grow. Or they can find other low-cost options to help scale their business.
Helping Your Teens Build A Bright Financial Future
Teaching your teens about money is a process. Some of the lessons work well with younger teens, while others won't be appropriate until after they get their first job or graduate from high school.
The more you talk openly about money in your household, the easier it will be to talk to your teens about their financial future. Luckily, there are plenty of great resources available if you aren't confident with money yourself, if your teen wants to learn more on their own, or you want to learn about money as a family.
- The Jumpstart Coalition for Financial Literacy is a free clearinghouse of publications, games, teaching plans, and other resources designed to teach financial responsibility.
- SaveAndInvest.org is a project of the FINRA Investor Education Foundation. It offers free, unbiased resources dedicated to improving people's financial health.
- Moneytopia is a free immersive game helping teens learn more about managing their money while having fun online. There is also a page of short video guides for teaching your teen more about topics including the power of compound interest and how much apartment living will cost.
- FamZoo is an award-winning app acting as a private family banking system. It's designed to help parents teach kids to earn, save, spend, and donate money wisely in a safe, friendly environment.
There are also some great books available for parents who want to help their kids learn to manage money and for teens to take control of their finances.
- Beth Kobliner's, Make Your Kid A Money Genius (Even If You're Not): A Parents' Guide for Kids 3 to 23, is a step-by-step look at developing financial literacy skills throughout childhood.
- What All Kids (and adults) Should Know About Savings and Investing is a favorite book by Rob Pivnick.
- Why Didn't They Teach Me This in School?: 99 Personal Money Management Principles to Live By. This is Cary Siegel's popular money book helps teens take action and improve their financial future.
- Sarah Newcomb's, Loaded: Money, Psychology, and How to Get Ahead without Leaving Your Values Behind.
- Kara McGuire's, The Teen Money Manual. Reviewers describe it as very "approachable" and "accessible" with lots of charts, graphs, and checklists.
We all love our teens and want to help them grow up and become financially independent adults. One of the most important things you can do as a parent to help them meet those goals is teaching them valuable lessons about money.
Vicki Cook and Amy Blacklock are the co-founders of the award-winning personal finance website Women Who Money. Vicki, a 30-year educator, and Amy, an administrative professional and entrepreneur, joined forces in early 2018 to pursue passion projects in the personal finance and health & wellness spaces. Together they've launched two new websites and are currently plotting numbers 3 and 4.