Money-saving tips and budgeting are essential lessons for teenagers and can be invaluable later in life. Just because these lessons aren't taught in school doesn't mean your child has to go without them. So, if you are a parent or guardian to a teenager, the time to start having conversations about money is now.
Why is Financial Literacy for Teens Important?
The high school years present an excellent opportunity to discuss the basics of budgeting, saving, debt and investment since teenagers may have more access to discretionary funds in the form of allowances, income from part-time work, or cash gifts.
Having their own cash is undoubtedly a huge incentive for teens to learn how to conserve, spend or even grow money responsibly. Laying the foundation for financial learning at this stage may help teenagers prevent overspending, credit card debt, and poor investing in their 20s and 30s.
Financial Tips for Teens
1. Tracking Expenses
Now that it’s common for young adults to have smartphones in their pocket, tracking expenses can be painless. Budgeting or expense monitoring apps help you consolidate your daily expenditures in one place and give you a clear overview of what you’ve been spending on throughout the week, month, or year.
Try to create a spreadsheet or use a specialized smartphone app to input daily expenses and remember that what matters most is for young adults to stay consistent. Setting a reminder at the end of the day or week to block time for expense tracking can be helpful.
As you help your teenager track their spending, patterns will emerge over time that will help them better evaluate spending habits and determine where cutbacks are necessary.
2. Wants vs. Needs
A central tenet of personal finance for teens is separating their needs from their wants and prioritizing them effectively. Many teens need a computer or laptop to help them with school projects and assignments, but a top-of-the-line gaming computer with all the bells and whistles is more of a want than a need. Similarly, smartphones might be important for communication and safety, but buying a new smartphone every year may be unnecessary.
Ultimately, needs and wants will differ from person to person. For instance, a bike or car may be non-negotiable for teens whose parents aren't available to drive them around but not for those who have access to a good public transport system.
Identifying those non-negotiables is something your teen will need help with early on. To make the process easier, help them budget for a few of those wants and develop a timeline that allows them to save sustainably while setting money aside for that new bike or gaming console.
3. Emergency Savings
These days, easy access to credit cards means that many young adults believe that credit is the easy solution to emergencies such as unexpected car repairs. But additional debt is never the ideal solution to a financial jam. That’s where an emergency fund comes in.
Getting into the habit of saving for an emergency is great preparation for life’s surprises. While teens may not face the typical emergency fund scenarios such as job loss or sudden medical expenditure, they may need money for pet expenses, car repairs, or even to replace a lost or stolen smartphone. The emergency fund can start small and increase gradually over a few months but should grow proportionate to lifestyle expenses and needs.
4. Credit Cards vs. Debit Cards
Distinguishing between credit and debit cards is a critical element of financial literacy since many young people rely on cards for daily expenses. Debit cards let you easily use the funds you already have in your bank account, while credit cards are essentially helping you borrow money from your card provider.
While using credit cards, young adults must understand that they will need to pay off the charges on the cards or risk incurring high interest. It’s not uncommon for parents to give their high schoolers a credit card for emergencies, but this should come with an explanation of credit card interest rates and debt risks. If your teen already has a credit card, then emphasize the importance of paying off the statement balance on or before the due date each month to avoid interest charges and help build a good credit score.
Discuss the options with your child and make sure they understand the differences between using a credit card and using a debit card. Communicating with your teen about the differences of each card is an excellent way to help them understand the implications of using each card.
5. Identity Theft
Many parents don’t think of their kids as possible victims of identity theft, but with the amount of information people share online these days, it’s not a distant possibility anymore.
Identity theft can have long-term consequences for your child, from damage to their credit score and lost funds to having student loans and government benefits denied. Moreover, it can cause tremendous stress. You can create better outcomes for your children by teaching them to be cautious about online transactions and encouraging better internet safety habits.
6. Checking and Savings Accounts
If your teen has started saving up their allowance or has recently started a part-time job, it may be the right time for them to open a bank account. In this situation, understanding the difference between checking and savings accounts will help them choose wisely.
Checking accounts are ideal to keep their spending money. This type of account is designed to support your daily expenses, as it will be linked to your debit card.
On the other hand, savings accounts should be used for money you don't need right away. These accounts typically earn more interest than checking accounts and are ideal to build your teen's savings.
Savings accounts are great for tweens and younger teens who are unlikely to have many everyday expenses. Older teens may want to maintain a checking account alongside their savings account.
7. Understanding Debt
Discussing debt is unavoidable while talking to young people about their finances, but you don’t want to make the subject seem intimidating. Instead, you want to prepare them for an inevitable part of their life. Many young high schoolers will go on to have student loans that will enable them to pursue a college degree, so they should at least understand the basics of borrowing.
Debt may be unavoidable for some, but budgeting early on and devising thoughtfully conceived repayment plans can make all the difference. With this in mind, many students may want to work part-time and avoid building debt.
Try to work with your child to help them understand how debt works and the way interest accrues. You should also try to communicate the importance of paying down debt as soon as possible so that they can start saving more.
Early investment is a key element of wealth building. If your teenager can set aside some money for investing, then there's no time like the present to start.
Index funds may be an excellent way to introduce teens to investing, as they don’t require active management to reap the benefits of making investments. Individual stock purchases may feel much more exciting to a newbie investor, but diversifying is essential. Sinking too much money into one investment is not a risk worth taking for everyone.
9. 401k or IRA
Working teens should know that they have the option to defer a portion of their salary toward building a reliable retirement fund. Depending on the exact plan, employers may also match your contributions to the fund, effectively doubling your savings over time.
A 401k is a type of retirement fund that your employer contributes to pre tax directly. Although a lot of places teenagers work may not offer a 401k plan, they still have the option to open an IRA (Individual Retirement Arrangements Accounts) independently of their employer.
IRAs (Individual Retirement Arrangements Accounts) are another tax-deductible saving option that encourages saving for retirement. These are personal savings plans set up at a bank or financial institution. IRAs come in different plans, each with their own benefits.
Some teenagers may opt to enroll in a 401k if the option is available. Others may choose to open an IRA. Either way, it’s important to have a conversation with your child about the importance of building wealth and saving for retirement. Keep in mind, though, that you could incur an early withdrawal penalty if you take money out of a 401K or a Traditional IRA before the age of 59 ½. Make sure you understand this early withdrawal penalty before you try to take money out of one of these retirement funds.
As a part of their financial education, it's crucial to emphasize the benefits of retirement savings. The earlier they start, the more they’ll gain.
Financial Goals for Young Adults
Saving money can seem like a heavy subject for some teenagers, especially if all the emphasis is on avoiding expenses. But the important thing is to build healthy habits like setting financial goals and budgeting.
Teenagers should not be afraid of spending money or paying off debt. Instead, they should feel confident about their financial choices and be prepared to design the future they want. Budgeting, expense tracking, and investment should not be treated as sources of stress, but as simple tools that build the foundation for a more secure financial future.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.