The downside of the public education system, teenagers aren’t taught the necessary life skills, like smart money management, that it takes to leave home and maintain their own residence. As a parent, I know how important it is to teach my children how to manage their own money so they don’t run into money problems as an adult. When your teenager gets their first job and brings how their first paycheck, it is a good idea to make a simple budget for them to follow and put away money in a savings account for a rainy day.
How to Teach Your Teenager Smart Money Management Tips
My goal of this opportunity is to teach my kids that they have to make conscious decisions before they head to the store and blow their money on those two-hundred-dollar headphones that they have been eyeing for a few weeks. Even though I may not agree with their financial decisions, now is the time to let them make money mistakes so that they don’t end up doing it after they move out.
Plan to Have a Meeting with Your Teen
You should plan to sit down and have a meeting with your teenager. It is best to have a conversation, after they start working or receive their first paycheck, so that you can have the opportunity to help them set up a budget and savings plan. Teenagers today will likely be responsible to fund their own retirement accounts.
As of right now, it is highly unlikely that the current government program, Social Security, will be around by the time they plan on retiring. Hopefully, the government can balance their budget but right now there are too many baby boomers retiring and families aren’t having as many babies. This equates to less money being contributed to the Social Security fund than they are paying out.
With the looming Social Security account drying up before their retirement years, now is the perfect time to explain why it is better to start a retirement fund while they are a teenager. If they start young, they will not have to worry about being broke during their retirement years. Plus, the earlier you start, you can let your money work for you and let it sit for several decades while accruing interest.
We recommend teaching them to use Dave Ramsey’s proven retirement savings plan. Dave Ramsey has helped millions of people get out of debt and how to build wealth. He recommends that teenagers start putting away $2,000 or more a year for 8 to 10 years starting at the age of 18 or 19. Of course, the more money that your teen puts back the more money they will have during their retirement years.
By implementing his proven method it is entirely possible for your teenager to have enough cash to retire by the age of 65 and be a millionaire. Like we mentioned earlier, the more you put back now the better. Do reiterate that the later they start saving money, the less money they will have by the time your teenager is ready to retire, even if they invest more money later. When you start at a later age, you don’t have the ability to let your money sit untouched for several decades in order to earn the interest that you need to retire a millionaire. Following this plan is smart money management and can help them in the long run.
How to Make Wise Big Ticket Purchases
Big ticket items like cars, furniture, appliances, and your teenager’s future home one day. It is important to teach your teenager to set aside money each month in case they need to purchase a big ticket item. Finance companies are banking on people not having the cash to pay for these items and they lure them to apply for a line of credit or loan to finance their purchase.
We all know that banks are about making money on any amount your purchase, even those no interest offers that you typically see at the furniture store. Even no interest offers, have a catch that can cost you several hundred dollars if you aren’t careful. If you absolutely have to take out a loan, it is very important to make all of your payments early or on time to avoid penalties. Also, make sure that your balance is paid off during the offer period too. You want to use smart money management when it comes to buying big ticket items.
Buying a car is a necessary expenditure that you need so that you can get around. However, financing a car for an extended period of time can add thousands of dollars to the purchase price of the car. If you must finance, it is best to save up and put down the most amount of money that you can so that you only have to finance your car for a short amount of time. The more you put down, the less interest you pay.
My older son, spent a little over a year driving my car back and forth to work so that you could save up enough money to purchase his first car. He walked into the dealership and was able to buy a 2016 Scion TC with low mileage. By saving up his money, he was able to put down a huge amount of money and he financed a small amount. Instead of paying just the minimum payment, he has been tripling his payment and plans to have his loan paid off by the end of summer.
After his car is paid off, I am going to suggest that you put back $200 or more a month so that he is able to repeat the process when it comes time to buy a new car, if he needs to buy new tires, or has to have work done on his car. This will prevent him from having to worry about how to pay for things that come up.
Plan for Emergencies
It never fails that something goes wrong the moment you seem to have a little bit of extra money left over at the end of the month, this sticks to smart money management. Don’t forget to teach your teenager that emergencies cropping up or there are always some type of unexpected expenses that happen. But if they are prepared and have a savings account to use, they don’t have to worry about how they are going to pay for this or that.
Teach them that it is not wise to spend any extra money they have at the end of the month on frivolous items or things that aren’t considered necessary. They need to always keep an emergency stash of money set aside to plan for those unexpected bills. Here are a few examples: unexpected medical bills, to fix the air conditioner in their home (unless they rent), for a car accident, other types of insurance claim (ie hail damage or bird hitting the windshield), etc.
Teach Your Teenager Useful Budgeting Skills
If your child gets an allowance, you should begin teaching them how to budget their money at an early age. This allows you the opportunity to teach them to save up their money. If not, your child’s first paycheck is a great way to start teaching them how to stretch their money and learn how to prepare a monthly budget. Here are some examples of real-life budgeting skills:
- Practice grocery budget – Pick up a newspaper on Wednesday and hand them a grocery ad. Give them your currently weekly budget that you would typically spend to spend in order to buy a week’s worth of groceries. Then have them help you plan a week’s worth of meals. The goal of this exercise is to teach them how to plan meals for the entire week using the ad and a set budget. You can also teach them how to stretch your grocery budget here.
- Teach them how to find and use money-saving opportunities – Next time they want to go see a movie at the theater with their friends, why not explain to them that it would be better to go to the grocery store and purchase a few snacks, rent a movie from Redbox, and invite their friends over for a movie night.
- Use coupons whenever possible – Using coupons on things that you were already planning on buying or doing is an excellent way to save money. Show them how the coupons are saving money and adding more money to your budget. Don’t forget about money saving apps too, like Ibotta!
- Do resist the urge to bail your teenager out – I know as a parent that you want to help bail your child out when they experience their first money failure. However, it is important to let your teenager experience a money mistake now; instead, of when they move out. They need to learn that they can’t rely on other people to bail them out every time they make a poor financial decision. So next time your teenager is out of money, it is better to let them face the consequences now. You want this to be a learning lesson and teach them how to manage their money more closely. Of course, if it is a true emergency you might consider loaning them the money so that they have to work hard to pay it back.
- Instill it in their minds that they need to think about their purchases – Often times when teenagers have extra money, they have the tendency to go out and blow it or purchase things that they don’t really need. So next time your child wants to buy that hot new video game, talk to them about waiting or delaying their purchase. This is a wonderful teaching opportunity because it is a great way to teach your child about wants vs needs. Make them go home and take a deep look at their budget. This will help them determine if they really can afford to purchase something they want. Also, if they can afford the purchase show them how to comparison shop so that they make sure that they are getting the best deal for their money or save their money to wait for it to go on sale.
Credit Cards 101
Credit is a great tool when it is used properly. Chances are your teenager will start seeing credit card applications whenever they enroll in college or perhaps when they open their own bank account. Credit cards can be very tempting many students and young adults because they generally see it as free or extra spending money. And credit cards can stomp out all of the smart money management if your not careful.
Credit card companies lure them with that mentality when they send out those pesky credit applications. They want people to rack up debt and get them in a cycle of paying only the minimum payment for years to come. As long as they have you trapped in debt, they will continue to make money off of your account.
You want to teach your teenager to use credit cards wisely so that when the bills start rolling in that “free money” will now cost them more money in the end. If your teenager must use a credit card, teach them that it is best to pay it off entirely or make more than the minimum payment so that they aren’t trapped in an endless cycle of debt.
How to Help Your Teenager Build Credit Without Credit Cards
A credit card is a great way to build up to help your teenager establish credit. But are you aware that credit cards aren’t the only way to help your teenager build their credit score? Most banks have several different options that can help establish or even rebuild your credit. These options are also a great way to teach them how to be responsible for paying back a loan while getting credit too.
Do schedule a time to go and determine if your bank or credit union has more than one options available. You would much rather your teenager to build their credit without a credit card. Here are a few examples of what to ask your financial institution:
- Ask for credit builder loans
- Passport or CD loans
As a parent, it is your responsibility to teach them how to effectively budget money. This is a lesson that I wish that I paid closer attention to growing up even though I have always been good at saving money and sticking to a budget, even as a teenager.