Revised May 2024
Unlock essential money management skills for teens, from smart spending to managing loans. Get tips to guide your teen toward financial independence.
As teens transition from middle to high school, and on to young adulthood, understanding personal finance is an extremely important skill. It's not just about managing earnings from a part-time job or babysitting; it's about developing good money habits that pave the way for financial success.
The sobering reality is a misstep at this early point in life can cause serious repercussions that last for years, if not decades. Whether it's managing a debit card or making wise financial decisions, teens need financial know-how early on before they’re managing household budgets and navigating student loans. And as parents, it’s our job to help our kids learn the following lessons.
- Understanding Needs vs. Wants
- Spend Less Than You Earn, Save The Difference In A Savings Account
- Track Expenses And Start A Budget With A Budgeting App
- Save, But Also Invest: Introducing Compound Interest
- Understanding Gross vs. Net Pay
- Good Debt vs. Bad Debt
- The Importance Of A Good Credit Score
- Managing Big Loans Responsibly
- Entrepreneurship And Financial Responsibility
- Preparing For Financial Success In Young Adulthood
10 Financial Literacy Tips for Teens
1. Understanding Needs VS. Wants
Good spending habits start early. Help your teen recognize the difference between what they need (like a basic phone for safety) and what they want (the latest credit card-funded smartphone). This lesson is the foundation for wise money management and prevents overspending.
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, buying something they want (and that’s within their means) is a great reward!
2. Spend Less Than You Earn, Save The Difference In A Savings Account
Your teen understands negative numbers from math class, so it shouldn't be hard to transfer that same principle 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.
So, stress how important it is to save part of their earnings from a summer job or other income sources in a savings account. This will solidify the habit of living within one's means, a fundamental aspect of personal finance.
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3. Track Expenses and Start a Budget With A Budgeting App
Whether your teen has a job, gets an allowance, or has money from gifts, they should learn how to 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 budgeting 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.
Learning how to manage their bank account and tracking expenses is a huge first step toward building money management skills, financial literacy, and making informed financial decisions.
4. Save, But Also Invest: Introducing Compound Interest
Discuss the advantages of a savings account with a higher interest rate with your teen. For instance, show how choosing an account with a 2.0% annual percent yield (APY) could earn $20 on a $1,000 balance in a year, compared to just $0.10 with a 0.01% APY.
As your teen learns to budget and save more, introduce them to the concept of compound interest. This is where their money not only earns interest, but the interest itself earns additional interest over time. It's like a snowball effect: the longer the money is invested, the more it grows, which will help your child build wealth for long-term goals.
This "set it and forget it" strategy, especially started early, can greatly increase savings over the years, demonstrating the real power of compound interest in growing wealth. Explain how these can contribute to long-term goals like retirement savings or an emergency fund.
5. Understanding Gross VS. Net Pay
When your teen gets a part-time job, they'll count the days until their first paycheck. But the excitement of getting paid for the first time can turn to disappointment really quickly.
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 keep your teen from being shocked by their direct deposit of their first paycheck into their checking account, 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. This will help set good habits that lead to a healthy financial situation for life.
6. Good Debt VS. Bad Debt
Teens also need to learn about different kinds of debt. While all money a person owes needs 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 2024 is over $35,000.
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. Satisfying those wants might feel good in the short term, but swiping a credit card too often can put teens in a cycle of debt that's hard to recover from.
Understanding this will help your teen maintain a good credit score and a positive credit history which can help them attain good debt for future endeavors.
7. The Importance Of A Good Credit Score
As young adults age, they may be able to open up credit cards, or you can make them an authorized user on your credit card to help them build a good credit rating.
But 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 good credit score can save them money on costs like car insurance or cell phone contracts. When your teens are 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. It may also get them lower interest rates on future loans.
Teach your teen that their credit score can be damaged quickly by irresponsibility, and the results can affect them for years. 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.
8. Managing Big Loans Responsibly
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 may 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.
9. Entrepreneurship and Financial Responsibility
Some teens are natural entrepreneurs and have terrific ideas for starting small businesses.
So, teaching them to start small business ventures using funds from a summer job or personal savings, instead of using loans or credit cards is wise. It may also be a good idea to get some financial advice from an expert.
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 spend too much of their own money, or take on too much debt, before you know that they'll stick with the business ... and that it will be profitable.
Want to help your teen figure out ways to market their business, get the equipment they need, and find customers for as little money as possible? Helping them apply these tips and tools 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.
10. Preparing for Financial Success in Young Adulthood
Focus on the importance of financial independence and setting savings goals. Discuss the role of a financial advisor in making smart decisions and how habits formed now can lead to financial success.
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 at every stage. 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.
- 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 is Cary Siegel's popular money book that 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.
It’s Time To Get Started
Instilling good financial habits, early on, is key to your future success. From understanding the basics of a savings account to making smart credit card choices, these lessons lay the foundation for a secure financial future.
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