Teens are natural spenders: They love to go to movies with friends, buy the latest fashions and eat out rather than make a home-cooked meal. Some may work part-time jobs to fund their impulse buys, but when the money runs out, they usually turn to mom and dad for a cash infusion. Unfortunately, if left unchecked, these spending habits can follow teens into adulthood, setting them up for serious financial consequences. Parents can help their children grow into responsible adults who are savvy about financial responsibility by helping them learn how to properly manage their money when they are young. Because teens are old enough to both earn and spend money independently, they are at an ideal age to begin learning financial responsibility. Here are a few tips for how to teach your tee! n these valuable lessons :
Don't be the Bank of Mom and Dad. Encourage your teen to take a part-time job (one that doesn't interfere with school responsibilities) or establish a weekly or monthly allowance. Be clear about what expenses teens are responsible for themselves and what expenses you will cover. For example, you may agree to pay for clothes and school supplies but require your teen to pay for entertainment, like trips to the movies or eating out with friends. Hold firm to these guidelines, and don't bail out your teen when he/she runs out of cash at the end of the pay period.
Set a Budget
Creating a budget will help your teen understand how to plan for both long-term and short-term goals. Budgets can sometimes be abstract until the spending sets in and your teen realizes how fast the money can run out. It would be helpful to share your own family budget, including how much you spend on each of your bills each month, what you have available for variable expenses like entertainment, and how much you make in income. While some might consider this information private, it will help your teen set real-world expectations about running a household. It will also help to show how you make your own sacrifices and give your teen a better appreciation of your own budget – hopefully so he/she won't be hitting you up for "loans" all the time.
When your teen starts earning money, set up a savings account and talk about the importance of saving. Establish rules for how much should be saved – even a modest goal of 10% can help your teen save a significant amount over the long term and earn a modest return on interest. If you really want to encourage savings, you may also consider offering a match, in much the same way that your employer might match contributions to your 401(k) plan. For example, you could offer to match up to 5% of his income that is saved. Set your own limits and talk with your teen about the long-term impact of savings.
Credit is a notorious financial trap not just for teens, but for adults of all ages. Help your teen learn how to responsibly manage credit early by establishing some parameters with which to use it. For example, you can open a pre-paid credit card or open a card that has a very low limit and no annual fees. Talk to your teen about interest rates, and show real examples of how they compound over time, greatly increasing the cost of items. Be open about your own credit usage and share your score.
Parents, what other methods have you used to successfully teach your teens about financial responsibility? What methods were the most successful for you?