Most teens dream of the day they move out and become independent. As a parent, it can be difficult to accept that soon your “baby” will no longer need you. Except … when they need money. “Dad, can I borrow $100,” may become a familiar plea as they struggle to make ends meet. That’s why it’s important to teach your kids how to manage their finances before they fly the coop.
Teach them how to budget
Most teens spend money faster than they blink. Budgeting is not a concept they grasp because when the money runs out, they simply turn to mom or dad for some extra cash.
The teen years are a good time to teach kids how to budget. Let them use their pocket money to pay for personal items like clothing, cell phone plan, and entertainment. Emphasize that once their monthly allowance runs out, no more will be available.
There are some great budgeting apps to help young teens learn to budget. Wally is simple to use — just snap pics of receipts and Wally tallies up what you’ve spent and how much funds are remaining. As your teen becomes older, they can graduate to a more sophisticated app like Mint that syncs with their bank account.
Have family financial discussions
Parents often discuss financial matters when the kids are not around. Yet many parents are unaware that their kids overhear talks and arguments their parents have about money. If money was a bone of contention in the home, kids will attach negative emotions to money that will affect their financial life as adults.
A better approach is to have family discussions about money that make kids aware of the costs of running a household. And the sooner you start, the better. This is a good way to prepare your child for the expenses associated with living on their own.
Let them take ownership of car expenses
If your teen or young adult has a job, they can take responsibility for their car expenses such as car loan payment, insurance, gas, and repairs. Managing their car expenses while living at home is a great way for them to start learning real-world financial management. You’ll still be there to guide them on how to negotiate car loans and find the best insurance rates.
Educate them on paying taxes
If your teen is employed, even if it is a casual or part-time job, they may be surprised to find a chunk of their income got snatched by the taxman and that they are required to submit a tax return. So, the sooner your teen learns how to do taxes, the better. Explain how the tax system works, why we pay tax, when tax returns must be filed, and take them through the process of completing a W-4 form. They can also learn about the tax system with the Internal Revenue Services’ (IRS) Understanding Taxes tutorial.
Help them manage debt
A tricky lesson to teach young adults is how to handle debt. No debt means no credit history which is a disadvantage when applying for a car or home loan. On the other hand, you don’t want your kids to fall into a debt trap they struggle to get out of. Teaching them the difference between good debt and bad debt can help them make wiser choices when it comes to buying on credit.
Student loans can also be a heavy financial burden. If your child has completed their studies, it may be best to let them continue living at home while paying off their student loan. They’ll have more disposable income to make larger monthly payments on their loan and pay it off faster. It also gives them time to save up some money in preparation for leaving home later.
Encourage them to save
Wealthy people all preach the same principle: the power of compounded interest. That means the more you save, the more interest you earn. Plus the earlier you start, the higher your return on investment will be. That’s why it’s never too early to teach kids to save.
As a young child, the humble piggy bank still works. As they move into their teens, an app like Acorns helps them invest their spare change and they can watch it grow. As they move into their 20s and start flexing their investment muscles, they can manage their investments on a wealth management platform like Personal Capital. In addition to long-term investment, encourage them to have a separate emergency fund for when life throws unexpected curveballs.
Financial literacy isn’t taught in schools. It’s up to parents to instill good financial skills in their kids. A big salary doesn’t necessarily equate to wealth. With poor financial management, a high-earner may just be scraping by while a low-earner that’s financially savvy can become surprisingly wealthy.
This content is sponsored by Ryan Kh.