Transitioning from being a teenager to a responsible adult is tough. In just a few short years, one has to learn many lessons to get started right. When it comes to saving, starting as soon as possible is crucial, but it’s tough to get young people to think about the future.
We want parents to actively participate in their kids’ financial education. With some sound advice and guidance, you can help your kids transition to adulthood without making the kinds of financial mistakes that could haunt them for decades.
It’s tough to teach kids how important it is to start sooner rather than later. We can teach them about compound interest, but until they’ve been alive long enough to see it at work, the lesson doesn’t always sink in. And if they haven’t been responsible for any major expenses yet, they might not understand how important saving for the future really is.
Talk to your kids about why they should save. What goals do they have? A common one for young people is college. These days, it’s clear that college costs have soared to frightening levels, and the resulting student loan debt has left an entire generation financially disadvantaged. Talk to you kids about how to avoid following in those footsteps by saving ahead, and being thoughtful about how much they plan to spend on college, how much they should be willing to borrow, what they will study & where, etc.
Other major expenses that your kids will someday face are homeownership and retirement. These require a lot of saving, and in the case of retirement, a permanent lifelong commitment to setting aside income for later.
All this talk of long-term goals is likely to make your teens’ eyes glaze over. Also focus on short-term goals with them. There are fun things they might want that could be saved up for over the course of a year or less. If you put them on the path to saving for these goals, they will get the benefit of the fun purchase or activity, and they will appreciate it more for having saved up for it. That smartphone might be far less likely to be damaged or lost if your kids had to spend a year saving up toward it.
Speaking of smartphones, this is an excellent opportunity to teach them to save for emergencies. Find out the cost of the inevitable screen repair for their phone, and guide them to save at least that much in an emergency fund. Then when the phone does get damaged (sadly, it’s bound to happen!), they can pay for the repair out of their savings. This kind of emergency savings will serve them well throughout their lives, when much larger and more urgent situations might crop up.
2.Build a credit history
It’s really important to teach your kids about credit before they head off on their own and sink deeply into debt. College kids get handed a lot of credit card offers, and if they don’t understand how credit works, they can get into real trouble.
Avoid these problems by teaching them how to use credit wisely and the consequences of borrowing. If you’ve impressed upon them the magic of compound interest with regard to their savings, then teach them how interest makes purchases cost a lot more if they use credit and don’t pay them off right away.
One good strategy is to make your teenager an authorized user on one of your credit cards. You will be responsible if they don’t repay the debt, but you can monitor their spending and they will get the benefit of your positive credit history. This gets them started out with a better credit score so they will pay less for their own credit accounts, auto loans, etc.
Also start them out with their own banking accounts as soon as you can. Find a financial institution that will set up custodial accounts for your kids. Again, you can monitor their financial activity as you teach them how banking works. They need a place to keep their money where it is out of reach, and you should make sure they’ve got a separate savings account where they put the money for their emergency fund and other goals. Don’t let them keep everything in an easily accessible checking account.
3.Transition them to their own income
We always encourage parents to set up an allowance for their kids and tie that allowance to household chores. This teaches kids the relationship between work and income—and there is no more important lesson to be a functioning adult in our economy.
As they get older, you will want to transition them to their own income. That means getting jobs, whether it’s an after school or summer job, or helping out around the neighborhood—anything they can do to generate their own income should be encourage.
Even things like yard sales can be good opportunities. Have your kids set up their own section of the yard sale where they will figure out what to charge for old toys, clothes, and other things they no longer need. If they can make the sale, they will have learned a lot of good lessons and generated a little extra cash to boot.
It’s tough to get people to track all of their spending, but it is a crucial step toward having sound personal finances. We want your kids to save, but they won’t know how much they can afford to save if they don’t track their spending first.
And they may not realize they are spending too much until they do some tracking. When we counsel adults through financial recovery, tracking every cent of one’s spending is the first lesson we teach.
These days, there are more options than ever for tracking spending. If your kids have smartphones, there are plenty of apps they can use to track where their money is going. If they are going to have their noses buried in a phone screen, they might as well be doing something important like tracking their spending.
5. Build good spending habits
Once your kids have tracked their spending, you can work with them to figure out where to make cuts and set aside more money for savings. They might be surprised to find out where their money is going, and if they have a short-term goal they’re saving towards, they might find they’d rather get there quicker by cutting some of their discretionary spending.
With spending, we often think impulse buying is the number one way we get in trouble. While that’s certainly important to watch out for, especially with teens, it’s not the primary way we overspend.
The number one form of overspending is paying too much for the things we buy. So work with your kids to understand comparison shopping, looking out for sales and discounts, and making every dollar they spend go further.
Teaching kids about saving and personal finances is a big job, and you don’t have that much time to do it. Start as early as you can and be consistent, and you’ll set your kids up for success.
For younger kids, check out credit.org’s free “Raising a Money Smart Child” workbook. And if you need help with your financial situation, get started with a free coaching session from an accredited nonprofit expert at credit.org.