Money can be a huge source of stress in life — managing debt and credit, sharing assets, prioritizing and deciding where to spend, supporting a family — and it’s important that you talk with your teen about money management in order to prepare them for the future. A recent study conducted by the Organization for Economic Cooperation and Development (OCED) examined the financial knowledge and skills of approximately 29,000 15-year olds in 18 countries: teens in the U.S. ranked between 8th and 12th in financial literacy. Education starts at home, so be proactive in equipping your teen with the tools necessary to succeed.
Open the Conversation
Don’t shy away from the money conversation; make sure that your teenager understands where money actually comes from, as well as the difference between a ‘need’ and a ‘want’. These may seem like simple concepts, but when a child is simply handed money or things, there’s no motivation to think about the source. If you maintain a household budget, ask your teen to sit down with you as you go through it each month. Examine your household income together and then show your teenager where all that hard-earned money goes: utilities, mortgage payments, phone bills, tuition costs, groceries, extra-curricular activities, savings and more. It’s much easier to conceptualize money when looking at actual numbers.
Teach the Terms
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Explain financial terminology to your teenager; simply recognizing the terms and what they mean can set your child up for financial success. Go over the basics: credit, debit, APR (annual percentage rate), payday loan, national debt, 401(k) and anything else you can think of. According to certified financial planner Gregg Murset, these are terms that every kid should know before applying to their first job. If you’re rusty on these terms yourself, do a little digging and brush up. Check out Investopedia, Schwab MoneyWise or other financial sites for help.
Explain Credit
In the U.S., it’s important to both build credit and have good credit. Around age 18, Tyler Tran of Tran Financial recommends that you help your child apply for their first credit card after examining types and interest rates. Make sure your teen understands the difference between debit and credit as well as strategies to maintain good credit — paying their full balance on time each month, for example. Your teen sees you buying things all the time with that little piece of plastic, but probably doesn’t see the payments that you make on your credit card each month. Make sure that they understand that a credit card is far from free.
Create a Budget
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If your teenager receives an allowance, encourage them to budget their money. Have them put some money aside in savings and keep some of the money for spending. For older teens, you might want to put them in charge of many of their extra costs: clothes, activities with friends and cell phone to start. Give them a certain amount of money at the start of the month to cover these costs, but allow them to manage that money from there. Let them make mistakes; it’s important that your child feel the sting when they’ve spent all of their monthly allowance on something trivial and miss out on something they maybe really wanted. Next time around, they may be more inclined to save.
Be open with your teenager: share your own financial failures and successes and encourage them to be proactive in their financial education. Knowing how to approach money management will mean a much easier road for your child later on.
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