How to guide your teen through the challenges of money management
As parents, we all want to give our teens the best shot at success in life, and one of the most important lessons we can teach them is how to manage their money.
We all know that teens are bound to make mistakes—they’re learning, they’re testing boundaries, and they’re figuring out what works for them. However, some financial missteps can set them back as they start to learn how to manage their own money. But here’s the thing: these mistakes don’t have to happen. With the right guidance, support, and open conversations about money, we can help our teens make better choices and set them up for financial success as they reach adulthood.
1. Not Learning How To Budget
When your teen starts earning money regularly, they likely haven’t had to think about budgeting. Without a budget, teens may not recognize how quickly their money can disappear on small, unnecessary purchases like snacks, clothing, or the latest trendy product. By failing to account for these daily or weekly expenses, they may not realize how much they are spending until it’s too late.
Practical Tips To Encourage Teens To Budget
- Teach them budgeting basics – Start by explaining the basics of budgeting—what it is, why it’s important, and how it can help them reach their goals. Show them how to track their money and how to categorize their spending.
- Use tools and apps – Help your teen find a budgeting tool that suits their style. There are lots of apps on the market that can help them make budgeting easier, or you can teach them how to manually track it through a spreadsheet.
- Introduce the 50/30/20 rule – Teach them the 50/30/20 rule of budgeting, which suggests dividing their income into three main categories:
- 50% for needs – Things they cannot live without like food, transportation, or cell phone bills.
- 30% for wants – Things that aren’t a necessity but enhance their lifestyle like going to the movies or dining out with friends.
- 20% for savings – Encourage them to set aside money for savings goals or investing in the future.
- Review and revise their budget – Set a time each month to review their budget together, assess their progress, and discuss any adjustments. Was there a category they overspent on? Can they cut back on spending in certain areas next month to stay on track?
2. Not Saving For the Future
With the excitement of finally having some disposable income, it’s natural for kids to put saving money on the back burner. However, getting into the habit of saving money now can help them accumulate savings that can help them be better financially prepared to handle future expenses like college, a car, or eventually living on their own. It will also help them have a bit of a nest egg to handle emergencies or unexpected costs in adulthood.
Practical Tips To Encourage Teens To Save
- Open a savings account – The first step in teaching teens to save is providing them with a place to keep their money safe. Help them open a savings account at a bank or credit union. A savings account makes it easier for them to track their progress, and many accounts offer low or no fees for minors.
- Set savings goals – Encourage your teen to set a specific savings goal, whether it’s saving for a new phone or something more significant like putting money aside for college. By making the goals concrete, your teen will have an easier time visualizing the benefits of saving.
- Automate savings – If your teen earns consistent income, like from a part-time job, help them set up automatic transfers from their checking account to a savings account. This makes saving effortless and prevents the temptation to spend all of their money.
- Introduce investment accounts – When your teen has earned income, you might consider opening a custodial account on their behalf. While the idea of saving for retirement feels like a lifetime away for your teen, a Custodial Roth IRA is a great option to encourage them to set aside a portion of their income towards retirement once they have earned income. Money added to this account grows tax-free until they retire, but the funds can also be withdrawn for certain expenses, like paying for college or buying their first home.
3. Buying Based On Wants vs. Needs
Teens are constantly bombarded with advertisements, peer pressure, and social media influencers promoting the latest products and fashion trends. While it’s normal for teens to want to fit in, this can lead to a significant financial pitfall: spending money on wants instead of needs.
When teens buy based on impulse or the pressure to have the latest item, they can quickly lose sight of their financial priorities. This often leads to them spending more on things that aren’t necessary, and in some cases, they might end up with buyer’s remorse.
Practical Tips To Encourage Teens To Understand Wants vs. Needs
- Create a needs vs. wants list – Sit down with your teen and create a simple list of needs and wants. This can help them better understand the difference and make more thoughtful financial decisions.
- Encourage saving for larger purchases – Teach your teen to save for bigger purchases rather than buying items impulsively. Whether it’s a new phone, gaming system, or trendy clothing, help them set aside money over time for these purchases. You can even create a savings plan with them—saving a certain amount each week or month until they reach their goal.
4. Spending More Than They Earn
Spending more than you earn can lead to a cycle of debt, stress, and financial insecurity. Overspending to the point of incurring overdraft fees can be a costly mistake, and it’s a habit that can quickly spiral out of control, especially if it continues into adulthood.
Practical Tips To Help Teens Avoid Overspending
- Use cash instead of cards – If your child has an issue with overspending, one way to help them stick to their budget is by using cash instead of their debit card to pay. When they physically hand over the money, they will be much more aware of how much they’re spending.
- Create a “spending reflection” habit – Encourage your teen to reflect on their spending each week or month. Have them ask themselves: “Did I really need this? How did it fit into my budget? Was this purchase worth the money?” This simple practice can help them make more intentional decisions about their finances and avoid impulsive purchases that don’t align with their goals.
5. Relying Too Much On Their Parents Financially
When teens are accustomed to their parents covering their expenses or always bailing them out, they miss out on opportunities to learn how to budget, save, and make decisions about money. While it’s important to provide for your teen’s needs, it’s equally important for them to take on more financial responsibility as they get older, especially for the things they want. Guiding your teen toward financial independence will empower them to take on more financial responsibility as they get older.
Practical Tips To Help Teens Avoid Relying On Parents Financially
- Have open conversations about money – Have open and honest conversations about money with your teen and give them the opportunity to ask questions. Discuss how family budgeting works, how bills are paid, and the importance of financial planning. By involving your teen in these discussions, they will better understand the decisions you make and the responsibilities involved in managing finances.
- Set boundaries – Be clear about what you are willing to pay for and what you expect your teen to cover themselves. Cover their essentials but help them understand what you expect them to pay for discretionary spending, like going out with friends or shopping. Setting boundaries will encourage them to take on more financial responsibility and help them understand the concept of budgeting.
- Provide guidance, not handouts – If your teen asks for money frequently, explain that you are happy to help in certain situations but that they need to start taking responsibility for their own financial needs. If they’re asking for money for non-essential items, gently remind them that they should budget and save for those purchases.
Raising a teen is far from easy, and teaching them about money is no exception. But the lessons we impact now can have a lasting impact on their future, shaping the way they approach not just their finances but their overall sense of security and independence. It’s important to remember that mistakes are a natural part of learning, and it’s okay if your teen slips up along the way. What matters most is how we guide them through those moments and empower them to make better choices moving forward.