Personal Finance

10 Tips to Help Teach Your Teenager a Sense of Financial Responsibility

Financial Education - Title of Book.Parents are faced with having typical discussions with their teenagers about things like the dangers of alcohol and drugs and the dreaded talk about the “birds and the bees”. While these are vital conversations to be had there is another that is usually overlooked, often to the detriment of our sons and daughters.

That topic is financial responsibility.  It’s a subject whose importance can’t be overstated in today’s consumer-driven society where acceptance by one’s peers is often determined by the type of gadgets you own and the clothes you wear.

Fiscal accountability isn’t something that is taught in many schools and it’s not a topic that teens are going to learn more about in another forum. The onus to teach teens about money falls on parents, tasked with giving them the necessary tools for proper financial education. When to begin that education is a point often debated by financial experts, but the prevailing belief is that it’s really never too early to start providing more comprehensive discipline in money management.

Most parents make an effort to teach their children about the value of a dollar when they are still young. It’s basic and often effective. However, once they’ve instilled that knowledge parents will sometimes neglect to provide their children with the rest of the story and that can lead to hardships later on.

Teaching the tenets of financial responsibility when they are in their teens is crucial to ensuring that they make the right choices which will set the stage for the rest of their lives. Teens who don’t learn the consequences of debt and poor credit can find themselves in a deep hole financially before they even get started with life.

The problem that’s most common among parents is that they don’t know how to broach the subject in an authoritative manner so that the message is effectively conveyed. Leading by example is often the best way to get through to your teenager.  It may not seem this way but they look to you for guidance even if they don’t always communicate that fact.

Group efforts are also important to getting your point across with options like watching or reading about financial news together and allowing them to participate in the building of the household budget. These are just some of the options we’re going to cover as we discuss a number of tips to help teach your teenager a sense of financial responsibility.

1. The Importance of a Budget

We all learn the concept of budgeting early on. Simple math provides us with the basics for budgeting as far back as elementary school. Remember when the teacher would ask how many oranges you had left if you took fourteen of them away from twenty-eight?

Kids are taught the fundamentals of budgets from the get-go, but applying those lessons to relatable, real world scenarios is crucial to teaching them how to be financially responsible later on in life. Experts say you can start introducing them to these concepts as early as 13 years old, when they are able to define how a budget works and understand how to create one. It also incorporates concepts such as prioritizing your finances and demonstrating the consequences that come from exceeding your budget.

There are a variety of opportunities for you to discuss budgets with your teenager. You can do it on a larger scale where you walk them through the realities of coming up with the family’s household budget. Show them the choices that need to be made every week or month when you compile the budget.  Ask for their input in where they would allocate funds, and quiz them on what constitutes an essential versus a luxury for household expenses.

A secondary option comes with giving your teenager an allowance. Letting them handle their own money and make decisions as to what they can spend it on and when provides a hands-on approach to budgeting, where they can experience the realistic implications of working within a budget to buy the things they need and want. It also imbues them with the cognitive skills for applying what something costs against the amount of money they have to spend. This can be relevant in helping to teach them the value of the things they wish to buy and forcing them to consider if spending their money on a particular item is really worth what it will cost.

2. Saving Not Spending

It’s not always about how you spend, it’s also about how much you save and the methods by which you do it. A large component of financial responsibility is learning how to save for the future.  While this may be the most foreign concept that you will introduce to your teens, it will also be among the most crucial.

For starters, it’s imperative that you impress upon them how important it is to begin saving early on. The sooner they get started the more money they will have later. The trick, however, is to convince your teenager to concentrate on the future when they’re focused on the here and now. The idea of putting money away for a later date might be a tough sell. So you may want to illustrate the picture with very real numbers.

The way to accomplish that is by keeping it simple. You know there are a variety of savings and retirement accounts available, but bypass that aspect of the conversation for now and just give them the basic facts. Explain to them how depositing a small amount of money today, when they’re still a teenager, can pay off big later.

For example, if by their 18th birthday they put away enough money in the $3,000-$4,000 range invested in an account with an interest rate at around 8% per year can blossom into an amount of $100,000+ by the time they turn 65. Admittedly, just about every 18 year old is thinking more about turning 21 than they are 65.

This is why you, as a parent, have to speak with your teenager about the virtues of saving money and how it can benefit them significantly later on in life. There’s just one main issue, how many 18 year olds have $3,000 to $4,000 lying around? This brings up the question of where this money will come from, which provides another teachable moment in our next tip.

3. Earning Money

Parents can teach valuable lessons in financial responsibility by stressing the importance of an honest day’s work for an honest day’s pay. It’s essential that children learn the value of a dollar and just as vital that they understand nothing comes free. If they want something, they have to work to make the money to buy that thing. Parents who want to instill better fiscal accountability in their teenagers will often give them options to earn money to put towards buying what they want or putting some of it away.

Working just a few hours a day can empower teens with a feeling of accomplishment in making their own money. It doesn’t have to interfere with school commitments, either.  Teens can pick up a part-time job with a local retailer after class or start a business doing something useful such as raking leaves, mowing lawns, or babysitting. Sometimes it can be as straightforward as pitching in on household chores around the house for some form of financial compensation.

There is a wide array of money-making ideas that are available to teenagers and each one can provide an entry-level foray into the job market. It not only gives teens an opportunity to earn money but it will also give them beneficial insight into holding down a job and learning responsibility as an employee. Both will go a long way in preparing your kid for his or her future career in the real world. Even better, teens won’t need to ask for money from their parents and the conversation about finances can go further than a request for a handout.

4. Avoiding Debt

Perhaps even more important a topic than saving, parents are strongly urged to warn teenagers against the dangers of getting too deep into debt. Too much of it can hinder many facets of a teenager’s life, particularly when they reach adulthood.

There are different types of debt, some of which are easier to manage than others and none of which are advisable to become mired in. The most common form of debt is that which comes from abusing credit cards. Millions of Americans are buried under sometimes insurmountable amounts of credit card debt which typically happens when a teenager applies and is approved for their first credit card. Far too many of them are ill-equipped to handle the responsibility of credit card ownership and they spend extravagantly without a thought (or the ability) for paying off the bills when they come due.

The result is thousands of dollars in unpaid credit card balances that are very hard to whittle down.  Interest rates continue to add more to the debt at a faster pace than the credit card owner can pay off. Before long, it gets to be that a teen who has maxed out his or her card is merely paying it off at the acceptable minimum payment which is enough to cover the interest without putting much of a dent in the principal.

That can be very costly over a long period of time.  Even after large sums of money have been handed over, there is still that albatross around the neck in the form of thousands of dollars in the initial debt. If any of that is going to get paid down, it will require even higher payments to scratch the surface as the interest rate, sometimes as high as 29.99%, keeps adding to the amount owed every month without fail.

illustration of two doors for good and bad credit

illustration of two doors for good and bad credit

5. Maintaining Your Credit Score

One of the consequences of high debt is a damaged credit score. Parents who warn their teens about the threat of mounting debt are going to want to explain how their credit can be adversely affected at the same time. It’s important for them to understand how credit works and that a low score can prevent them from getting the things they want out of life. Our scores are part of so many financial decisions being made today that maintaining it correctly is even more crucial.

Your teenager has plans on moving out of your home. They’re going to want their own place, their own car, and have designs on living a comfortable life someday. All of those things are going to be exponentially tougher to obtain with poor credit.

Trying to rent an apartment? They’re going to run your credit. Trying to get financing on that new car? Someone is going to look at your credit report to determine if you’re a high risk and that will affect your interest rate.

A higher interest rate means more out of your pocket. Maybe your teen wants to open a credit card or buy a home in the next five to ten years. Poor credit is going to stand in the way. Painting a bleak picture of the future with a low credit score should illustrate the importance of maintaining it properly and responsibly.

6. The Consequences of Frivolity

A poor credit score, mounting debt, and no savings. These are just some of the consequences of being frivolous with money. Spending is easy and it’s fun to do. It can also creep up on you when you don’t even realize, one swipe of the credit card here, a few bucks there, nothing too expensive just some small items, a little gift to yourself.

On their own, these minimal expenditures may not seem to have much of an impact until they begin to add up. Now those small purchases are turning into a big problem. These frivolous expenditures can do more harm than you think.  Even if you’re not spending a lot of money on big ticket items, you’re still doing a lot of damage to your financial situation.

Getting your teen to be more diligent about their spending can help to curb destructive behavior before it begins. It’s all too easy to overspend when you’re not aware that you’re doing it.

You’re going to want to get them started on smart monitoring practices early. That means checking their bank account regularly so they’re always aware of their bank balance and how much they’ve spent from it in any given week. Keeping track of spending habits is the best way to prevent overspending. Not doing so is how you get into trouble.

7. Responsible Credit Card Use

We’ve discussed how credit card debt can sometimes lead to big problems and years of debt. Poor budgeting and frivolous spending practices have also been touched upon here and all three can spell big trouble for teens.

Many parents are reluctant to even entertain the idea of giving their teens a credit card for these very reasons.  They are just not entirely comfortable with their teens’  level of responsibility and parents aren’t willing to play fast and loose with their teen’s credit score much less their own.

Due to the number of young people racking up so much credit card debt over the years, Congress passed the The Credit Card Accountability Responsibility and Disclosure Act of 2009. It provides restrictions on anyone under the age of 21 owning a credit card unless they get a co-signer on the card or have proof of sufficient income to pay the bill each month.

However, teens can establish good practices and demonstrate responsibility through the use of debit or prepaid credit cards. These work differently from typical credit cards in that there is a finite balance available, determined by how much money is in the account tied to that card.

Many banks issue ATM debit cards to customers which can be used like any credit card when they open a checking account. The advantage to these types of cards is that teens can’t pile up credit card debt from their use. The flip-side to that is the potential for emptying out a checking account if they aren’t responsible with their card use. Prepaid cards negate both of these problems in that once the stored value has been expended, the card no longer works. It’s the same as a debit card without the risk of cleaning out a checking account. Many parents turn to these prepaid cards as a way to get their teens to practice fastidious credit card use to prove they can be trusted with the real thing.

hight risk hight return8. An Introduction to Investing

Financial responsibility isn’t just spending dollars and cents, it’s also about knowing how to make your money work for you. That means putting that money into investments.  With so many different investing options out there, you’ll want to introduce your teenager to this complex and lucrative world earlier than later.

The stock market can be complicated with all of its rules and abbreviations.  However, showing them how it all works when they’re still in their teens will give them the ability to make smart decisions on how to invest when they’re older.

Explain how investing works in simple language and have them select some stocks from the ticker. Pretend to invest in those stocks by writing down how much they wish to theoretically invest in a real world scenario. Then you and your teen can track the progress of those stocks and calculate how much they’ve made or lost over a period of time. Seeing the numbers on paper in a hypothetical situation will not only teach them how the market works but get them interested in pursuing these avenues for financial management later on.

9. Comparison Shopping

We do it with just about everything we wish to buy. Searching out the lowest price for the things we want is just basic common sense. For some items it might be a few bucks, maybe just 50 cents, but when it’s the difference between spending or saving a couple hundred or couple thousand dollars, that’s not chump change. So it’s critical for teens to understand that the first price they find isn’t always the one they need to pay.

Show them how to do effective comparison shopping on all the things they buy. If they want that new video game, have them research all of the online and storefront retailers where they can find that game. Chances are they’ll come across slightly disparate prices but, even a dollar or two is still saving money.

This is a good practice to get into for later on in life, when they’re pricing out a new car or other big-ticket items offered by multiple retailers eager to make the sale. This is also a good time to introduce the concept of negotiation, which can also help reduce the cost of something they wish to buy.

10. Charitable Donations

Money management encompasses many facets. Charity should be one of them. Giving money to charitable organizations can provide useful life lessons beyond instilling the virtues of financial responsibility. This practice teaches social responsibility as well as the value of conducting thorough due diligence.

Have your teen research some charitable organizations that might interest him or her so they can learn how these groups work and where the money goes once it’s donated. It also helps your teen understand how charitable donations work and it might inspire them not only to give but to get involved in other ways beyond financial assistance.

You can have your teen select a few organizations as possible recipients of a donation.  Once he or she decides on which ones they prefer, they can send in an amount either from their own account or yours.

Our Final Thoughts

Teens and money can be a scary proposition. It doesn’t have to be, however, as long as you introduce responsible practices and lessons early on. Teens want to learn how to manage their money properly so they have more of it to spend on the things they need and want.

They will look to you for those lessons more often than any other place and it’s up to you to provide them with the right tools and know-how for making the best choices. The alternative can be disastrous, not just for them but for you when the duty of bailing them out of the financial hole they’ve dug for themselves falls upon your shoulders. Avoid that from happening by teaching them smart financial responsibility as soon as possible.

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