Teens and money management: Responsibility is key
You'll need to instill good habits when they're young.
In the past, I've strongly
advocated for families to introduce their teenagers to financial reality as
early as possible. I know that in my own case, I went off to college with
almost no idea of how to manage my money, and it really showed in the spending
decisions I made over the next 10 years of my life.
Over the past decade, I've had the chance to intimately watch other families raise their children through the teenage years with lots of success and some failure. I've been impressed with some of the young people that are the core of Generation Y coming of age. Two in particular, my niece and my first cousin, are the kind of people that are a big net benefit to the world, and I would be incredibly proud if my own children turned out as well as they have.
At the same time, though, I've seen many tweens and teenagers spending money with reckless abandon, spending hundreds of dollars on completely unnecessary things and acting repeatedly as though money has no consequences at all. These people, I'm afraid, are headed down the same painful path that I went down.
When my children approach their teen years, what can I specifically do to teach my children the value of managing their money? This is a topic that's left me thinking for a long time and I've been jotting down ideas and findings all the time. Today (finally), I had a chance to read through quite a few of these things, and I was able to pull out several strong tactics that seem to work together to teach teenagers the value of managing money.
Start young. You're better off starting too young than you are starting too old. Introduce an allowance as early as possible. Encourage their entrepreneurial behavior early. Introduce them to basic budgeting early on, too. You're better off starting before they can fully understand all of the meaning than later on when their ideas for what's normal have already been set, because it will take far more work to undo bad behaviors.
Don't tie a basic allowance to specific chores. A basic, small allowance should be given without strings attached. It's not a tool to leverage for good behavior, it's a tool to teach basic money management. There should be certain behaviors expected in the home, but the allowance should not be a bludgeoning tool to force those behaviors.
Offer extra allowance in exchange for specific extra tasks. If you have extra tasks that go above and beyond normal household duties, you should offer a separate payment to your child in exchange for the task. Allow them (or even encourage them) to negotiate for the exact amount so that they can learn the art of negotiation.
Make basic budgeting part of the equation from day one. I'm a huge fan of the Money Savvy Pig for this purpose. A child's budget should be very simple, especially at first, and that's exactly what the Pig helps with. It just splits a child's allowance into four pieces: spending (they can spend it on whatever they want), saving (saving for a bigger goal), donating (giving to some cause) and investing (learning how to invest money). This forms a perfect simple budget for children. Later on, you can work on more complex budgets with them, with multiple savings goals, but this type of thing forms the backbone in their mind.
Open bank accounts when the "investing"
portion grows large. When they've built up quite a bit in the "investing" portion of their budget, take them to the local bank and open a
savings account for them. Have them deposit their money. Then, when there's an
interest statement, show them the interest that's been earned. As they grow
older, you can talk about other investments with them and allow them to try
these investments (stocks and so on). Set a very long-term goal for their
“investments,” such as college or a house down payment (seriously) so that they
can begin to get a taste for the long term, plus it allows you to differentiate
between short-term savings and long-term investments.
As their money grows, move to a checking
account. Migrate toward allowing them to manage their entire
budget themselves, incorporating saving, spending, donating and investing to
their own desires. One big step in this direction is their own checking account
with a debit card -- a great tool for a pre-teen. Make the card only able to
access the checking account.
Give them a credit card when they're teens. Gulp. Many parents avoid this because it seems like a recipe for disaster, but it actually serves a very important purpose. By giving them a low-limit credit card while they're in your home, they can learn about how to use a credit card -- and, likely, the dangers of getting into debt with them -- while there's still a safety net. Ideally, you want them to get into a bit of debt with it so that they can see the pain of interest.
Show them your monthly budget. Seriously. Show them how much you earn in a given month, then how that money breaks down into mortgage payments, car payments, electric bills, food, and so on. This is a firm taste of the real adult world, something that teenagers crave. Let them see the reality of adulthood and how expensive it is. Talk about the choices that you have to make along the way.
Work on distinguishing between wants and needs. This ties in perfectly with showing your children your monthly budget. Some of the items are needs -- your housing, your electricity. Others are wants -- entertainment. Others are somewhere in the middle -- food spending. The better you're able to distinguish between needs and wants -- and to control those wants -- the more likely you are to teach them to control their own wants. That's one of the biggest keys to adult personal finance success.
This is my gameplan for raising my children to better manage their money. Hopefully, you can pull out a nugget or two for your own children or grandchildren.
- Educating children on fiscal responsibility
- Should teenagers be able to have credit cards?
- Planning for the future on minimum wage
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