Is your teen at all savvy regarding money handling and financial issues? If so, you are fortunate. A 2013 poll on teen financial IQ from the Opinion Research Corporation paints a bleak picture, reporting that nearly half of teens feel relatively clueless about money management and have not given much thought to future expenses.
The majority of teens report learning about finances from school, but the best place to learn basic finance is at home. You may think that you are not the best financial teacher, but your teen probably has no idea about basic skills that you take for granted.
Here are five ways to help your teen grasp basic finance:
- Introduce a Budget – It is best to start financial awareness in the pre-teen years through an allowance and the concept of a budget. Establish an allowance, and ask them what they plan to do with their money. As much as possible, stay out of what they want to buy – but introduce the concept of goals and how to save for larger purchases. Do not bail them out if they overspend.
- Set up Accounts – Set up a savings account, checking account and/or debit card account with your teen. Show them how to balance and reconcile an account, and track purchases to help with their budget. Introduce the concept of checking overdraft fees and interest on deposited accounts.
- Encourage Getting a Job – A summer job can go a long way toward helping a teen understand how the real world works. They are suddenly introduced to the concepts of taxes and withholding, among other things – and depending on their job, they may get to see finances from the business side.
If your teen cannot find a summer job, set up chores at home for pay and "withhold" some funds to mimic taxes. Do not let them off the hook for missing or substandard work by paying them anyway, or pay them extra for no reason. This sends exactly the wrong message.
When tax time comes, either help them to prepare their own or bring them into preparing yours. Tax forms are a major eye-opener. They quickly learn that earning $1,000 does not mean they can spend $1,000.
- Establish Credit – You can set up a joint account or a secured credit card (pre-deposited money as the credit limit) to establish good credit. If they are driving, a gas card works well, since it minimizes impulse buying.
Teach them the proper use of credit, and use an online calculator to show them how minimum payments perpetuate debt.
- Plan for Large Expenditures – Planning for their first car and/or their college education are practical financial examples. This involves budgeting and taking all costs into account – operating costs such as gas, maintenance, insurance and taxes for the car, and books, room and board, living expenses and fees for college.
Let them know what you expect to contribute and what they will be responsible for themselves. Drive home the concept of debt, installment payments, and the effects of interest. Use online calculators to run different scenarios. They are likely to rise to the challenge and save diligently, look more intensely for college scholarships and better deals on cars, and scale their plans appropriately.
Finally, set a good example. If you have runaway credit or poor spending habits yourself, then you are going to teach those habits to your children. If you are in this situation, both you and your teen can learn together from your mistakes. Perhaps your kids will help teach you how to budget better!