Financial Education for Teens

We’ve talked about ways to help young children learn about money— but what happens when they begin to outgrow the piggy bank?

There are dozens of financial lessons for children to learn before they leave home that will set them up for success, no matter where life takes them. Financial education for older kids and teens can help them learn how to make responsible decisions with their finances, set goals, stay on track with their spending, and build good credit.

Financial Education Ideas for Older Kids and Teens

Here’s how to help your children gear up for the financial responsibilities they’ll face as an adult.

1. Take it to the bank.

Piggy banks are a great way to start teaching children to save money, but opening a savings account in a "real" bank introduces them to the concepts of earning interest and the power of compounding.

While kids (especially teenagers) might want to spend all their allowance now, encourage them to divide it up, allowing them to spend some immediately, while insisting they save some toward things they really want. Writing down each goal and the amount that must be saved each week toward it will help children learn the difference between short-term and long-term goals. As an extra incentive, you might want to offer to match whatever children save toward their long-term goals.

2. Teach them to earn and handle income.

As your kids get older, they may begin to earn income from part-time jobs after school, on weekends, or during the summer. This can introduce a taste of financial independence and presents a whole host of new learning opportunities.

Be prepared to teach your kids about:

• Taxes: Earned income from part-time jobs might be subject to withholdings for FICA and federal and/or state income taxes. Show your children how this takes a bite out of their paychecks and reduces the amount they have left over for their own use.
• Automated savings: Let your teen know that they can automate their savings by moving a percentage of their money into a different account with each paycheck they deposit.
• Saving for retirement: Your child’s retirement is a long way off, but it’s never too soon to start stressing the importance of putting away money for the future. Even if they don’t plan to start saving just yet, start the conversation about how retirement savings grow and that the earlier they start saving, the better.

On top of earning money, your child may begin to incur regular expenses. This leads to the need for another important financial lesson: budgeting.

3. Teach your teenagers to create a balanced budget.

With greater financial independence should come greater fiscal responsibility. Older children may have more expenses, and their extra income can be used to cover at least some of those expenses.

To ensure that they'll have enough to make ends meet, help them prepare a budget.

To develop a balanced budget, your teen should first list all their income. Next, they should list routine expenses, such as pizza with friends, money for movies, and gas for the car. (Don't include things you pay for.)

Finally, subtract the expenses from the income. If they are in the black, you can encourage further saving or contributions to their favorite charity. If the results show that your child is in the red, however, you'll need to come up with a plan to address the shortfall.

To help children learn about budgeting:

• Devise a system for keeping track of what's spent
• Categorize expenses as needs (unavoidable) and wants (can be cut)
• Suggest ways to increase income and/or reduce expenses

Check in with your child regularly about their budget. Are they staying on top of it? Are they learning any lessons about their spending habits?

4. Introduce your child to investing.

Teenagers might be ready to focus on saving for larger goals (e.g., a new computer or a car) and longer-term goals (e.g., college, an apartment). While bank accounts may still be the primary savings vehicle for them, you might also want to consider introducing your teenagers to the principles of investing.

One way to do this is by helping them open their own investment accounts, whether it be a college savings fund or a low-risk investment such as a CD.

Helping older children learn about topics such as risk tolerance, time horizons, market volatility, and asset diversification may predispose them to take charge of their financial future.

Helping Your Child Build Credit

There’s another important financial concept that older children and teens should learn about: borrowing and credit.

One way to first teach these important concepts is with a credit card.

The easiest way to do this, especially if the child is 18 or under, is for them to become an authorized user on your credit card account. As an authorized user, your child will have access to the credit card and will be able to use it like any other credit card holder. However, the primary cardholder will have control of the account— and be responsible for paying the bill each month.

Because you’re still ultimately responsible for the account, it’s important to keep a close eye on your child’s credit card usage and address any spending problems you may notice. A few ways to help manage this include:

• Set limits on the card's use
• Ask the credit card company for a low credit limit (e.g., $300) or a secured card to help children learn to manage credit without getting into serious debt
• Make sure children understand 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 the bill goes unpaid
• Make sure children understand how long it takes to pay off a credit card balance if they only make minimum payments

Not only is it important for them to understand these concepts before they venture into the world on their own, but building credit early can help them achieve their financial goals in adulthood.

If there’s a setback and they can’t handle the responsibility of paying their bill on time, don’t be afraid to take the card back. It’s important to also underline the idea that their bills are just that: their bills.

Get Your Kids on the Right Track

Teaching your kids about money early on can help them make smarter financial decisions later in life. Start by opening a bank account together and discussing how to manage the income that they earn. As they begin to master the basics, you can also introduce budgeting and the foundation of investing. By imparting this wisdom early on, you’ll set them up for success down the road.