There are many financial concepts your teen will need to understand by the time they reach adulthood, such as saving, investing, and building credit. Some schools don’t offer courses on personal finance for teens, so parents may be solely responsible for teaching their kids about money. To help you craft a lesson plan for your child, here are 9 money moves every young adult should know about before they turn 18.
Personal Finance for Teens: 9 Essential Money Moves
1. Creating a Budget
The most important element of personal finance for teens is budgeting. Teens who have a part-time job often blow their earnings on eating out and shopping. Helping your teen create a budget can prevent them from wasting their hard-earned cash. Everyone prefers different budgeting methods, so teach your kids various money management styles.
A good one to start with is the 50/30/20 rule, which involves setting aside 50% of your income for necessities, 30% for fun, and 20% for savings. Since teens usually don’t have bills to pay, they can up their savings percentage, enabling them to build a nest egg for their future.
2. Tracking Spending
It’s not enough to simply set up a budget with your child. They need to learn how to track their spending and make sure they’re actually following their financial plan. Budgeting apps can streamline personal finance for teens by helping them keep tabs on their purchases. Apps like EveryDollar and You Need a Budget make it easy for young adults to see where their money is going and course correct if needed.
3. Building Good Credit
Although teens can’t take out loans or open credit cards yet, they should still understand how credit scores work. Credit scores track how well each person handles and repays debt. Adults who pay their bills on time and don’t take on too much debt usually have good credit scores. Because lenders use credit scores to screen loan applicants, building good credit is crucial for teens who dream of buying a home or starting a business someday.
Teens whose parents have good credit can ask mom and dad about becoming an authorized user on one of their credit cards. Minors can be added to a guardian’s credit account, allowing them to start establishing credit history early. Once they turn 18, young adults can consider applying for a secured credit card of their own to build a positive payment history. Secured credit cards are often easier to get approved for than regular unsecured cards because they require an upfront cash deposit, which serves as collateral.
Teens should also understand that there are different types of bank accounts. High-yield savings accounts offer a higher APY, or average percentage yield. This figure represents how much interest an account holder will earn on their savings each year. On the other hand, checking accounts provide much less interest, but make it easy to pay bills and receive direct deposits from work. Don’t forget to explain bank account bonuses to your teen, which are often available to adults who open an account at a new bank.
4. Setting Up a Bank Account
Another important aspect of personal finance for teens is banking. Opening a bank account will give your teen a secure place to save funds from summer or part-time jobs, making it easier to reach their financial goals. Since minors usually can’t open a bank account on their own, you’ll have to help your child get set up. Banks typically require both the parent and the child to bring valid forms of identification, such as a birth certificate, passport, or driver’s license. You may also need to provide personal information like your address and Social Security number.
5. Investing
Ideally, personal finance for teens should also involve investing. Parents can open investment accounts on their child’s behalf, such as a 529 for educational savings or a custodial brokerage account. Although you’ll be managing the account until they reach the age of majority, you can still use the account to teach them about investing. Encourage them to check the balance with you and discuss which assets you’ve chosen and why. Covering important topics like compound interest and diversification will help prepare them to manage their own portfolio as adults.
6. Setting Realistic Financial Goals
Sometimes teens have unrealistic salary expectations and financial goals. According to Bank of America, teenagers think they’ll pay off their student debt, save $100K, and own a home all by age 30. Make sure to explain to your child that meeting lofty financial goals requires a high income. Discuss the average salary new grads earn, and cover lucrative jobs and career paths that would allow them to build wealth more quickly.
If their career aspirations won’t make them rich, teach your kids how to set more attainable financial goals. Showing them your budget and bills will help them understand the cost of necessities. Add up their expected expenses and show them how much money they might have left over each month. This hands-on budgeting lesson will right-size their financial expectations.
7. Job Search Skills
Job search skills should also be part of any discussion about personal finance for teens. Even if your child is too busy to get a job now, they should understand how to find and apply to roles on sites like Indeed. With parental consent and assistance, teens may even be able to set up a LinkedIn account to learn about networking. Teaching your child interview skills is also crucial. Understanding how to frame their experience and skills to interviewers will help them get a solid foothold on the career ladder after graduation.
8. Understanding Debt
For teens, credit cards can seem like free money. That may be why young adults rack up an average credit card balance of $2,319 by age 20, according to Bank of America. It’s important to ensure your teenager understands how debt and APRs work.
The annual percentage rate expresses the annual cost of borrowing money as a percentage. Show your teen the average APR for credit cards and calculate how much interest they’d pay on small and large balances. Seeing how interest costs stack up and make it hard to pay off credit card debt may help your young adult avoid costly financial mistakes.
9. Planning for Education Costs
Once your teen understands how debt works, they may be eager to find alternative ways to fund their college education. Explain that student loans aren’t the only way to pay for trade school or university. Your child can apply for financial aid, merit scholarships and grants, or get a part-time job to start saving now. With proper time management skills, they can also work while they study to help cover living expenses and tuition.
Although your child may have a dream school in mind, make sure to discuss the benefits of choosing a cheaper college. Attending community college first or picking an in-state school can help lower tuition costs, reducing their debt burden after graduation.
Are there any personal finance lessons you wish you had learned before you turned 18? Share your experience in the comments.
Vicky Monroe is a freelance personal finance writer who enjoys learning about and discussing the psychology of money. In her free time, she loves to cook and tackle DIY projects.
