Ever notice lessons about personal finance are often missing from your teen’s class schedule? Of the 3.7 million high school graduates in 2019 alone, few received any formal education on how to handle income or answer big questions such as what to spend on rent, whether to buy or lease a car, or how much to put into savings. Not being educated about financial matters early on can put young people at a disadvantage later in life. From accumulating debt and not saving, to holding onto cash when investing may help grow money over the long term. Here’s what you can do to address the most common teen money mistakes and set them up for a better start in the real world.
Having money to spend is awesome—especially when you can do whatever you want with it. If your teen holds down a job in high school and pays nothing toward their own living expenses, 100% of their take home pay is spending money.
After leaving the nest, it’s unlikely their net pay will ever be 100% spending money again. So, if your kid’s first exposure to a paycheck allows them to associate income with free spending money, that can breed some bad financial habits in the future.
Avoid this by making sure your teen is responsible for at least some of their living costs. For example, costs that will transfer into adulthood such as covering their portion of the family cell phone plan, paying for gas when they starting driving, or paying for auto registration or insurance if they have their own car.
You could also make a house rule that requires they save a fixed percentage of every paycheck. This will prepare them for future personal loans and getting them used to having a reduced portion of pay available for fun money is realistic for the future. Plus, what they save can go toward building a healthy emergency savings fund or a special goal savings account to help you start saving money.
When it comes to taking on debt, your teen will see plenty of choices in front of them. Not only do credit card companies sell on college campuses now, there are multiple options for auto loans your teen should be aware of before buying their first set of wheels. They could also end up spending thousands more than necessary on student loans or any other quick loans to fund their education. Explicitly spell out what is considered good debt vs. bad debt when teaching your teens about money.
Good debt is worth the cost of the interest you must pay. Assuming you’ve saved up a healthy down payment and have the abiity to make the monthly payments, a low interest mortgage for a home could be a good debt to have because the house may appreciate in value over time. Plus, you will own more of the home with each payment you make.
Another example may be a low interest student loan. College or trade school loans can help you get an education that paves the way to a career. The pay you earn throughout your career may help you eventually earn much more money than you spent on your student loan.
Bad debt is money that costs you more unnecessarily and keeps you in debt. For example, using high interest credit cards to shop for things you want, but don’t need. Not only are you paying for that extra pair of shoes or expensive vacation, but potentially high interest on top of it.
With a large balance on a credit card, the interest costs alone can get so high that you’re not making a dent in the money you spent in the first place. It’s easy to see how people stay in debt permanently with these kinds of spending habits, isn’t it?
Of course, good debt turns rotten when you’re in over your head with say, a mortgage plus student loans. So it’s important that you help the young adults in your life think through how to evaluate new debt and debt-to-income ratio. For student loans, you might ask these questions:
As an adult, you know how many areas of your life are impacted by credit and therefore, it’s important to understand what affects your credit score. You might know from experience just how long a bad financial move can haunt your creditworthiness and credit score. A bad credit score can affect your ability to rent an apartment, buy a house, and simply cost you more (in higher interest) over time.
Help your teens launch into the world of credit with open eyes and a few financial health tips that will last a lifetime. Stress the importance of paying all their bills on time. Tell them a credit card may help them build credit and boost their credit score, but, to use it wisely. One good rule of thumb is to only spend as much on the card that you’re able to pay off at the end of the month. Encourage your teens to know their debt-to-income ratio and why it’s important. And help them think through the decision of charging a purchase or taking out a loan for something they don’t truly need.
When you’re young, you’re typically blind to the price tag of everyday life—food, housing, healthcare, utilities, education, entertainment, and more. It all adds up and, often, is totally covered by parents or guardians. If you’ve never known the costs of these things, when you’re gearing up to handle life as an adult, it’s easy to undervalue them, or forget to factor them into your expenses entirely. Unfortunately, this can lead to undersaving and living paycheck to paycheck.
So what can you do? Forget the taboo and start talking about money with your teens and any other young adults in your life. Show them how to create a basic budget. Break down where your money routinely goes every single month. Help them create real estimates for the types of costs they’re likely to encounter in their own lives in the near future.
Once your teens are ready to pay some expenses of their own, it’s important to hand down some great news: Bargains are everywhere! More often than not, there are many options for where you spend and what you pay.
Help your teens brainstorm financial check ups that help slash costs and clean up spending habits. Can they find what they need (like a new dresser), but wait for it to go on sale? Is there a coupon or rebate? If it’s a major purchase like a vehicle, can they negotiate down fees and interest rates?
When it comes to major purchases, it’s important to do some comparison shopping. Is another seller offering the same thing at a lower price? Or can they find a similar, generic option for what they plan to buy? Doing a little homework can pay off big when you think about how much you save each time you take this approach versus paying full price.
If a young adult has never lost money or had to budget, they might be too trusting of others when it comes to money. It’s up to you to encourage your kid to protect themselves financially and even protect their relationships.
Of course, you want to protect your kids, nieces, nephews, or any young person you care about. And, when it comes to money, you’d absolutely prefer your teen only makes thoughtful, informed decisions. So your first instinct if something goes wrong is probably to fix it for them, or take on the consequences of their money mistakes yourself.
Resist the urge. The perfect time for your teens to learn from their mistakes is when they’re still young, when the stakes are lower and consequences less severe.
Make them work (or do chores) to earn extra money or shop the sales for back-to-school outfits when they blow their entire budget on designer jeans. Learning money skills and developing a healthy money mindset now might save them from bigger mistakes later on—like failing to budget for essential expenses like their bills, or buying more house than they can afford.
Now that you know some of the most common money mistakes teens make, it’s time to sit down for that money talk.
You’ll not only show your teens how to respect money, you’ll help them learn about personal finance and grow new skills. Empowering teens to be money smart as they launch into adulthood is good for them, and good for your family.