Talking to Teens About Smart Financial Management
Teen spending is up, and it’s costing their parents money. The average 12- to 14-year old earns $2,700 a year, while the average 15- to 17-year old earns $4,900, according to MarketingVOX and Rand research. Just over a quarter of this income comes from working and 22 percent comes from parents, a YMCA report shows. Armed with this purchasing power, American teens spend $91.1 billion a year, according to a FONA report. This does not include the influence teens exert over parental spending, which boosts it to $211 billion a year.
Some parents are putting themselves in debt to keep up with their kids’ spending and passing on bad budgeting habits. To avoid these problems, here are some smart financial lessons you can teach your teen.
Teaching your teen how to manage a budget responsibly is one of the most important lessons you can help him or her learn. According to a Piper Jaffray report, 23 percent of the money teens spend goes toward food, 20 percent goes toward clothes and another 10 percent goes toward accessories. This type of spending spree doesn’t leave him or her much room to save for important long-term investments, such as cars and college.
A basic budgeting rule of thumb is the 50/20/30 rule. It recommends putting half of your monthly income toward fixed costs such as bills, 20 percent toward financial goals such as saving and repaying debt and the remaining 30 percent toward discretionary spending on items such as entertainment. Start teaching your teen to apply this rule by requiring them to put a percentage of their income in a savings account instead of spending everything on non-essential items.
Saving for Goals
Requiring your teen to save is a great way to teach financial goal-setting. The MarketingVOX and Rand report states that 57 percent of teens are saving up to buy clothes and 36 percent are saving to buy a car. Talking with teens about how to budget toward these types of goals sets the stage for talking about long-term financial goals such as college, a home and expensive furniture like a mattress or couch.
Have your teen identify a financial goal and create a monthly budget showing how he or she plans to reach his or her goal. You may choose to offer a matching savings plan for more expensive goals such as a car, which also teaches your teen how an employer savings plan works.
Building Good Credit History
A Teenage Research Unlimited study found that 11 percent of teens have their own credit cards and another 10 percent have access to their parents’ credit cards. Unfortunately, irresponsible use of a credit card at a young age creates a bad credit history.
Jayne Pearl, author of “The Kids and Money Guide to Smart Spending,” suggests a step-by-step approach to teaching kids how to use credit cards responsibly. She suggests starting with a savings account to give your teen an opportunity to demonstrate he or she can follow good budgeting habits. After your teen has saved up a certain amount, give him or her a separate checking account with a debit card to teach him or her how to use a credit line. This gives your teen an opportunity to learn the importance of spending within his or her means to avoid overdraft fees as well as how to put money into an account when he or she wants to have money available to spend.
Stopping Identity Thieves
Having a debit or credit card puts teens at higher risk of identity theft, so it’s important to teach them how to protect themselves. Teach your teen to keep his or her anti-virus programs updated, use strong passwords and be careful about sharing sensitive information on social media. You should also stress the importance of protecting Social Security Numbers, passwords and PIN numbers.