April 6, 2015 by middleearthnj
Between allowances, birthday checks from grandparents, and part-time jobs, today’s teens make a good deal of money. One of the best things parents can do to prepare their teens for adulthood is to teach them how to manage the money they earn. Read on to learn how to help your teen avoid common mistakes with their money:
Teens often do not realize the full cost of an item they would like to purchase. For example, if your teen has saved $5,000 for a car, they likely think that they are going to purchase a car that is $5,000. They do not realize that there are many added costs associated with an automobile purchase, such as state registration and taxes, and that they will have to purchase a less expensive car to afford these other essentials. Plus, a car isn’t a one-time expense. Your teen will continue to need money for gas, repairs, and insurance.
You should give your teen perspective about the real world in specific examples. Encourage your teen to research the costs associated with any big purchases, and fill them in on potential costs or obstacles that they don’t discover on their own. Help your teen to come up with a realistic estimate for the true value of their desired item, and help them create a savings plan to reach their goal.
No Planning for the Future
Teens live in the moment. They tend to spend whatever they have in their pocket and just assume they will get more when they need more. It’s a normal part of adolescence, but it’s also an important part of parenting to teach teens to plan for the future. You can help teens think through purchase decisions and the trade-offs of having something now versus saving the money for something more important (and expensive) later.
While you might be able to help your teen avoid this mistake by talking through a savings plan and suggesting a percentage they can put away each month, there is also value in allowing your teen to make this mistake and feel the natural consequence of not being able to afford what they really want later. The key to this lesson is to not bail your teen out when they can’t afford their desired item!
Many teens like to “hang out” at the mall with their friends. Unfortunately, they tend to purchase things they don’t need and didn’t even want before they saw it. Teens have poor impulse control and are susceptible to peer reinforcement and/or pressure. Impulse buying is a terrible habit that can wreak havoc on a budget, so it’s best to help your teen establish good habits now to combat this mistake.
You should discuss impulse buying with their teen. Tell them a story of a time you bought something you did not need, and later regretted buying it. Then, brainstorm with your teen ways that they can avoid impulse buying. Two of the best ways to combat this mistake are:
- setting spending goals so that they are actively working towards earning enough money for something very important to them, and
- helping your teen establish their own rule to wait 24 hours before purchasing any item, which helps your teen get over the impulse and make a better decision to save the money.
Lending Money to Peers
Teens are often eager to help their friends out, which is admirable, but when it comes to money, teens are not reliable in paying back a friend. Before your teen is ever approached by a peer for a loan, parents should discuss the problems that can happen when you lend money to a friend, such as never being paid back and potentially losing the friendship because of resentment. You can offer to be your child’s scapegoat. Your teen may feel more comfortable saying no to loaning money if they can say, “my parents won’t let me.”
While adolescence offers a fairly carefree lifestyle, your child is quickly approaching the real world. If your child plans to attend college, there are plenty of items to pay for beyond tuition, such as going out with friends and textbooks. If your child plans to seek employment after high school, then they will have many living expenses. Having a savings account can significantly help your child in the future, plus it teaches the value of having savings, which is a critical life skill in adulthood. Here are things you should talk to your teen about when it comes to savings:
- Explain the benefits of having savings. Use an example from your own life when you needed that extra money to take care of an unexpected, but crucial, expense.
- Discuss retirement savings now, so that it’s not such a foreign concept later. Your child is eligible to open a Roth IRA as soon as they have their first job. If your teen contributed $25 per month from the age of 18, then they would have over $100,000 by the age of 65.
Spending Too Much
Spending priorities to teens are not always in alignment with the real world. With little experience in spending, teens tend to buy more than they need, buy according to brand names, and/or buy to impress others. Here are three examples of where a teen can spend too much:
- Every teen wants a car. It’s impressive and feels like it gives unlimited freedom. However, cars are incredibly expensive, not just for the initial purchase price, but for ongoing costs. If you live in a city with good public transportation or great bike paths, teens should seriously consider purchasing a commuter pass or nice bike. If that’s not an option, they might be able to manage well enough by borrowing their parent’s car or carpooling with friends.
- Style is a big deal in high school, but trends that are here today and gone tomorrow can steal all of your teen’s hard-earned cash. Help them to consider ways to be stylish and trendy without busting their budget, such as only investing in less expensive accessories each season to freshen up basic pieces or using hair chalk instead of salon coloring.
- Prom is also a big deal to many teens, but it is only one night. Your teen shouldn’t feel compelled to spend so much money on one event. Help your teen set a budget that seems appropriate to them for a one-night affair, and then, help them think of ways to save money, such as renting a dress, finding heels at Target, or sharing a limo with friends.
Budgeting allows you to control your spending and know where your money is going. It is absolutely one of the most important financial tools that every adult should use, but if we don’t teach our teens to budget, they will likely not develop the habit when they are an adult.
Helping your teen budget is really easy. Sit down together and work on establishing a monthly budget. Discuss how much money your teen will need for gas, clothing, entertainment and other expenses that you won’t be paying for. At the end of the month, sit down and see whether your teen’s expenses matched the budget. Let them decide whether they need to make adjustments to their budget or to their spending to make them match. Again, if your teen has spent all of their money before the end of the month, do not bail them out. Let your teen learn how to budget better in the future. It may be a good idea to give your teen a lump sum for items they need, instead of purchasing things for your teen. For example, instead of buying their clothing for school, let them purchase their own clothing with a certain amount you provide. This can help your teen learn the importance of shopping sales and the pitfalls of spending their entire budget on one pair of designer jeans.
Sometimes parents don’t feel comfortable discussing their incomes or expenses with their kids. But, talking about your own budget can be one of the best ways for teens to learn about real-life expenses. If you’ve made some mistakes with your budget and have problems with debt, be honest with your teen. Explain some of the mistakes you’ve made and why your spending has been a problem.
Of course, it’s also important to have conversations with your teen about privacy and keeping financial matters private. The last thing you want is for your teen announcing on social media how much money you make or how much debt you owe.