Many teenagers are woefully unprepared for their financial futures. Start your child off right by providing the necessary skills to prosper in the real world.
Open Checking and Savings Accounts
Having a checking and savings account is a key step toward independence — but to open one, a minor will likely need your help. Many financial institutions have “teen accounts,” where you as the parent or guardian are custodian until the child reaches maturity.
Your child can use the savings account to learn how to set aside cash for goals and emergencies, and the checking account to become accustomed to writing checks, using a debit card, and managing money. Be sure to explain that he or she (not the financial institution) is responsible for handling and monitoring accounts. Explain how to keep track of deposits, checks, withdrawals, and fees, and the legal and financial consequences of bouncing checks.
Set Achievable Goals
Goal setting is one of the more exciting aspects of personal finance — it’s your teen’s chance to figure out what to do with his or her money and how to attain those goals without having to borrow from others. Cover the three basic goal types: short-term (achievable in under a year), mid-term (one to three years), and long-term (three-plus years). Once your teen has established financial goals, have her or him set an achievement date for each. The formula for how much he or she will have to save each month is simple: the price divided by the number of months until the goal date.
Develop a Spending and Savings Plan
A spending and savings plan (or budget) is the foundation for a healthy financial life. Sit down with your teen and add up every net dollar he or she earns or is given in a month. Then total monthly expenses (including saving for goals) and subtract the sum from her or his income. If there is more going out than coming in, help your teen make sensible, realistic changes by evaluating ways to increase income or decrease expenses. This is also a perfect opportunity to teach the difference between wants and needs. Explain that a want is a desire — something that it is possible to live without — while a need is essential to one’s health and safety. Encourage your child to question each purchasing decision using this criteria.
Teaching the wise use of credit early is crucial. Your young adult will need a glowing credit history to finance a vehicle, rent a home, or secure a job. Explain the importance of paying bills on time, and encourage him or her to only use credit cards for short-term loans on amounts that can be repaid in full when the bill rolls in. Help your teen understand the dangers of intensive credit card marketing and promotions on college campuses and at retail stores, and how buying at a high interest rate can affect his or her financial future. You may choose to help your minor establish credit by co-signing on an account. Before taking this step, make certain you consider the risks to your own credit if your teen defaults on payments.
Start to Invest
When should teens begin to invest? As soon as possible! Your child can achieve long-term goals quickly by making smart investment decisions. When the power of compound interest is put to work for many years, even modest deposits can grow at an astonishing rate. Cover the basics of investing and encourage your teen to learn as much as possible about the world of stocks, bonds, cash, mutual funds, and even real estate. If your teen expresses interest in buying and selling securities, consider opening a brokerage account in both of your names or making transactions for him or her through your personal accounts. Money is not always easy to come by or simple to keep, and mistakes will happen. Be patient. Encourage your teen to learn from each slip-up so that it doesn’t reoccur when he or she is living independently.