Last month, we discussed surefire ways for parents to introduce younger children to the world of personal finance. But teenagers can be an entirely different challenge. Here are a few of our best tips for you parents who need some help breaking the ice...
Earning Wages
If you think your teen is ready, encourage him or her to get a part-time job. Here are some things to discuss once your teen begins working:
- Agree on what your child's pay should be used for
- Show your teen how taxes reduce take-home pay
- Open a checking account and a savings account, and encourage him or her to save a portion of every paycheck before spending any of it
Keeping a Balanced Budget
To develop a balanced budget, have your teen list all his or her income. Next, list common expenses, such as food and gas (don't include things you will pay for). Finally, subtract the expenses from the income. If the results show that your teen will be in the red, you'll need to come up with a plan to address the shortfall. To help your teen learn about budgeting:
- Devise a system for keeping track of what's spent
- Suggest thinking through spending decisions rather than buying on impulse
- Categorize expenses as needs (unavoidable) and wants (that can be reduced)
- Suggest ways to increase income (like doing extra chores) and/or reduce expenses
The Future is Now
An older teen should be ready to focus on saving for future goals, both larger (e.g., a new computer or a car) longer-term (e.g., college, an apartment). Here are some ways to encourage saving:
- Have your teen put the goals in writing to make them more concrete
- Encourage your child to save for what he or she wants, not what other kids have
- Praise your child for showing responsibility in meeting a goal
To introduce your teen to investing, open an investment account for him or her. (If your teen's a minor, this must be a custodial account.) Look for an account that can be opened with a low initial contribution at an institution that supplies educational materials about basic investment terms and concepts.
Should You Give the Kid Credit?
If your teen is responsible, you might consider getting him or her a credit card to begin establishing a positive credit history. Most major credit card companies require an adult to cosign a credit card agreement before they will issue a card to someone under the age of 18. Ask the credit card company for a low credit limit (e.g., $300) or a secured card. This can help your child learn to manage credit without getting into serious debt. Also:
- Set limits with your teen on the card's use
- Make sure your child understands the grace period, fee structure, and how interest accrues on the unpaid balance
- Agree on how the bill will be paid, and what will happen if your child can't pay the bill
- Make sure your child understands how long it will take to pay off a credit card balance if he or she only makes minimum payments
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