What Your Teenager Needs to Know About Money

Last night, a friend called me after a heated battle with her teenage daughter. The topic? Managing money. My friend’s daughter had a job, and was responsible for paying her own car payment and a portion of her car insurance. Alas, the girl did not budget her money well. The first payment came due and her mother had to foot the entire bill. Like me, my girlfriend is a single mom. This presented much fiscal hardship on her budget.

In retrospect, she revealed that there had never been any real parent/child talk on “how to” budget or “how to” save money. That’s not uncommon for parents. There’s a long list of parental obligations and knowledge we must pass on to kids. Finances shouldn’t be neglected, but for some reason, often are. As we adults know, managing money is a learned skill. It is one we should pass on to kids. In light of that, I’ve written this fundamental article for your teens. You might consider having them read it.

 Financial Advice for a Teenager

 Teen years are full of fun. There are proms, football and basketball games, lifelong friendships and many memories created during this exciting time. Along with fun, however, are challenges meant to prepare you for your future. Possibly the greatest groundwork for adulthood is to learn to control finances. Whether you become a doctor, athlete, rock star, or stay at home mom, wise money management is a huge predictor of your success as an adult.

 Two Concepts

No matter how much you earn, almost all of money management boils down to two basic concepts- budgeting and saving. Neither of these is very complicated, but they do need to be understood. Budgeting, simply means laying down realistic goals on what you earn and how you spend that money. A good budget leaves room for extras and for unexpected expenses. In other words, you don’t want to buy a car that takes all of your available money in payments, even if technically you can afford it. Likewise, you want to learn how to save money. Traditionally, this often means a savings account, but wise spending is also part of saving money.

Budgeting

One of the best ways to learn to budget your money is to write down the income you receive after taxes (also called your net income) and to list any bills or items you spend money on a regular basis. If you are still in high school, this might mean gas money, car payments or car insurance, clothing or college savings. You also can include a purchase you want, but don’t have, such as a new iPod or a prom dress. Take your weekly earnings and decide how much you might spend on each area. Dedicate a portion of your income each week toward bills. If you are responsible for paying a larger bill, such as a cell phone bill or a car payment, divide the amount into fourths. Let’s say your car payment is $120.00 a month. If you divide that amount into fourths, you’d put aside $30.00 a week toward your payment. A good way to establish excellent credit from an early age is to pay more than the payment on interest bearing loans. You will benefit also in paying the item off earlier, which can save a ton of money. In the above case, by simply paying a few extra dollars, (even five extra dollars a week) toward the loan payment, you’ve saved on the interest and are now paying down the principal. The principal is basically what you’ve borrowed. Interest is a fee charged by the lender for allowing you to have the loan. Pay down the principal and you will save on interest and ultimately will spend less.

This only works if you are consistent and if you make your payments on time.

Late payments will hurt your credit and cost you money in fees. A poor credit rating will mean you will pay higher interest rates and additional charges. It may even mean you can be denied credit later. Right now this may seem like a long time away. But later, when you want a new car or are looking to obtain a credit card, denial can be painful.

Deposit money in savings for long term essentials, like college and those big ticket items you want. It helps if you agree with your parents on how much should be dedicated toward college in advance. Keep a small, but reasonable, amount of money out of the bank for extras, such as movies or fast food with friends. (That way you aren’t tempted to raid your savings every day). For my own kids, who have jobs, this is about $20.00 a week. But you can talk with your parents about the exact amount.

Rather than just thinking of all your money going into savings in one lump sum, it’s easier to stay on a budget if you know $30 of each week’s earnings are for new clothing or that iPod you’ve been wanting. Sometimes, having two separate accounts (one for college and one for additional savings is useful). In ten weeks, you can take $300.00 out of the bank to buy your iPod Touch, if you’ve been saving money all along.

 Budgeting money is not hard. It means sticking to a plan. Admittedly, plans sometimes change. Maybe you change jobs or work less hours than planned. In that case, you’d need to sit down and revisit your budget and make changes. This is what adults must do on a continual basis.  You may find it exciting to plan, and to make purchases with your own money, while keeping obligations. These are your first steps toward being a responsible adult, and you should enjoy the process.

 Tomorrow, I’ll continue this for teens and address wise spending and credit cards. Should your teen have a credit card?