Money-saving tips and budgeting are essential lessons for teenagers and can be invaluable later in life. Here are some important financial topics to discuss with your teen and some tips for discussing them.
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. 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 straightforward. 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 budgeting app to input daily expenses. Remember that what matters most is for young adults to stay consistent. Having your teen set 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 can 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. 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 good public transportation.
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
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.
It’s important your teen understands how credit cards work. It’s not uncommon for parents to give their high schoolers a credit card for emergencies (typically as an authorized user), but this should come with an explanation of credit card interest rates and debt risks. Teach your teen about 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 between debit and credit cards is an excellent way to help them understand the implications of using each card.
5. 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 can help them choose where to put their money.
Checking accounts are a good place to keep spending money. This type of account is designed to support your daily expenses, and it will typically be linked to a debit card.
Savings accounts are typically better places for money you don't need right away. These accounts typically earn more interest than checking accounts and are ideal for building your teen's savings.
6. 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.
Work with your child to help them understand how debt works and how interest accrues. Discuss the importance of paying down debt as soon as possible so that they can start saving more.
While your teen may not be investing yet, it’s never too early to explain how investments work and what retirement savings plans like IRAs and 401(k)s are.
Parents can begin by explaining the concept of investing in simple terms, highlighting how it involves putting money into assets with the aim of earning a return. Discuss different types of investments, such as stocks, bonds and mutual funds, explaining their risks and potential rewards.
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.