Today’s world of one-click online shopping and virtual payments makes it too easy to spend money without realizing how quickly it all adds up. At times, it seems as though money comes from nowhere and to a teen, it may seem like it literally grows on trees. It’s tough enough to manage as an adult, which means that instilling healthy financial habits in your teens must be a priority.
The money talk is a touchy subject that many parents would rather avoid. But, starting at a younger age can set your child up for success once they leave the house.
Teach Them How to Make a Budget
It’s true that a preteen or teenager does not have the typical income and expense line items that may be in your budget, but that doesn’t mean it’s too early to learn what a budget is and how it works. Work with your child to set up a budget with line items that apply to their everyday life.
Ask them to identify all their sources of income, whether it’s through an allowance, money they earn completing household chores, or a part-time job. For expenses, include their school lunch, the cost of sports uniforms, app store purchases, and other entertainment expenditures. Much like your own budget, it’s important to teach them to give every cent of their income a purpose.
Creating a budget will give them a new perspective on their spending habits.
Don’t forget to include short and long term savings goals. Show your child how a regular contribution to a savings account can quickly turn into a new pair of shoes, the latest video game console, or even their first car.
Show Them a Bill
Another great way to teach your teenager about money is to review a monthly bill, electricity for example. As a family, you can set a goal to reduce the next month’s bill by turning off the lights and switching off the TV when it’s not in use.
They’ll get a better understanding of how their actions directly impact the family’s monthly expenses.
Explain How Debt & Credit Scores Work
Now is a great time to prepare your child to use debt responsibly. Chances are, your teen understands the basic premise of getting a loan: that the money you borrow must be paid back. It’s important to teach them about how interest rates affect a loan and payments.
Walking them through how your mortgage works won’t likely resonate, so put it into terms they can understand. Use an example that is relevant to your teen, such as a car loan. If they don’t have enough money to cover the full cost of their dream car, they may need to consider taking out a loan. The first dose of reality you can give a teenager here is that loans cost money, which they will repay the lender in the form of interest. Over time, they’ll end up paying more than the original cost of the car. This isn’t always a “bad” thing, but it’s important for them to grasp this concept.
You can also explain to them the consequences of paying a loan late or missing payments altogether. A lender may add late fees to their balance, which means more money owed. If they default on the loan, it significantly impacts their credit score and the lender could repossess the car.
You can liken a credit score to a high school grade point average (GPA). Explain that just as their GPA sticks with them throughout high school, their credit score will remain with them throughout adulthood. One bad grade can significantly lower a GPA and once it dips down, it’s hard to bring it back up. Credit scores work the same way and are why it is so important to borrow money responsibly. Get them to think about it this way: a good GPA will help them get into a college of their choice, while a good credit score will help them buy a home of their choice down the road.
As uncomfortable as it may be, it’s important to talk to your teen about finances from an early age. Doing so now will give them the tools they need to make smart decisions in the future.