Knowing how to manage money is the most critical key to financial success and living a life of financial freedom. Even if you have a modest income, you can have financial freedom, because being financially free means being mindful of how you spend your money. It means budgeting, saving and minimizing debt, especially credit card debt. These skills do not come naturally to most people, and some of us have to learn them the hard way. If we can imbue our children with these skills, we can protect them from financial stress later in life.
Hopefully, you have been teaching your children about money from an early age. Once your children arrive at their teen years, it is a good time to review everything and to implement some strategies that will give them hands-on experience with managing money. Many teens begin to work, open their first checking accounts and join friends for shopping expeditions. Soon they will head out the door and everything they learned from you will be carried with them as they grow into adults, for good or not. Here are 5 tips for making your teen money smart.
- Credit cards. The best place to begin is with credit cards because this is the most dangerous debt trap. Credit cards are popular, they are accepted everywhere, some are even designed to attract young consumers, and it is easy to forget about the money that has been spent. For certain, if your kids’ friends have a credit card, they will want one too. Begin to plant the seeds now. Speak with your teen and emphasize that credit cards are not free money. Explain the difference between various cards, interest rates, late charges, and what happens when the bills are not paid. Engage in exercises with them so they can visualize the impact of late or missed payments…the longer it takes to pay off, the more expensive becomes the original purchase. An alternative to giving your teen his or her own credit card is to make them an authorized user on your credit card. You are on the hook for all charges, so this can be a bit of a scary proposition, but it is one of the best ways for your teen to experience credit card ownership and to develop responsible use habits. The card is in the teen’s name, so there is the feel of individuality. Make an agreement with your teen that he or she will be responsible for all charges they incur on the card.
- Budgeting. Teenagers, and a lot of adults too, do not understand the distinction between “need” and “want.” For your teen, everything is a need. Teach your teen to prioritize expenditures, beginning with food, then clothing, and so forth. Sit down and map out what clothing and other items they really need to buy, how much will it cost and from where will come the money to pay for it. Anticipating bills, your teen will learn how to set a budget, meet the expenses and become money smart. Now is also an opportune time to talk about the importance of paying bills first, before spending money on entertainment and other unnecessary expenses.
- Provide a monthly allowance. The allowance is in addition to whatever income your teen may earn from his or her part-time job and it is not tied to duties around the house. Emphasize that the allowance is for the entire month. If they spend it all in the first couple of days, then they have to wait until next month for a new infusion of cash. Be strong on this point, and don’t bail them out with an additional contribution because you feel sorry for them.
- Household bills. An excellent way to introduce your teen to the concept of managing a household budget and being responsible for the timely payment of bills is to give them one bill that they are responsible for paying. This only works if they have a job. For instance, you can agree that once they are working, they will now pay their cellphone bill, or their share of the family cell phone bill. If they have a car, they can become responsible for paying the insurance, or their part of the insurance on the family car. This experience will teach them the importance of paying bills on time and of making sure to have the money to pay the bill, not blowing it on unnecessary stuff. This will give your teen a taste of adulthood and all the financial responsibilities that come along with it. Of course, key to all of these strategies is that you are there by their side, communicating openly and without conflict.
- College. College is freedom on so many different levels. It is also total independence when it comes to spending money. By the time they head out the door to embark on the next stage of their life experience, they will be money smart and able to handle the peer pressure and absence of parental control. As you prepare for the “big move,” sit down with your teen and review all the college expenses: tuition, dormitory and dining, textbooks, etc. Emphasize that these expenses are the priorities and they must be paid before having fun with friends. Discuss the strategies they will employ to overcome the temptations, and how they will remain money smart.
The teen years give you an awesome opportunity to connect with your child as you work together in a loving way to become money smart. The foundation you lay down now will carry them through all their lives.