How to Have a Productive Money Talk With Your Teen
Finance isn’t taught in schools. The responsibility falls on the parents.
There may be a few classes that teach basic budgeting, but it doesn’t go beyond that. That explains why teens are running into financial problems immediately upon leaving home. A recent study showed that the debt problem among teens just graduating from high school is getting worse, labeling it a “ticking time bomb.”
Nobody knows the real reason why kids are sent out into the world with sufficient knowledge of calculus, yet little to no knowledge of basic money habits. Don’t worry! You can do something about this.
You can teach your kids what they need to know before leaving home to start college or their career.
Cover the basics
Your teen will likely want to have this talk, especially if you frame it in their favor. This is stuff they need to know to do well financially. Everyone wants to do well financially. When you talk about money, teens listen.
Start with the basic understanding of checking accounts and savings accounts. Then move on to the more complex topics like investing for retirement.
Here are some points to cover:
- The difference between a checking and savings account
- How to regularly check and manage their accounts
- How to track all expenses and budget categorically
- The reality of overdraft fees and how to avoid them by keeping a buffer in checking, or linking their savings account for protection
- The importance of having funds set aside for emergencies
This would be the time to add the importance of giving. Whether you’re religious or not, giving is a healthy part of any financial plan.
Teach your teen to spend wisely
Some financial gurus, such as Dave Ramsey, teach the importance of living frugally and tracking every expense. Others, such as Ramit Sethi, teach the importance of saving on big purchases and not worrying about the small ones. Regardless, your teens must understand that they need to be wise with their money.
Here are some points to cover:
- The high cost of eating out, and how to balance it with eating in
- How to plan meals ahead of time to avoid buying unneeded groceries
- How to use coupons and buy in bulk, only when it makes sense
Smart spending is a habit that’s developed over a lifetime. It’s not about being cheap; it’s about being smart. Things like budgeting your money and planned shopping will stretch your teen’s money much farther.
Explore the dangers of debt
US consumers carry an average credit card balance of around $15,000 per household, according to a study by Nerd Wallet.
That’s only credit card debt!
Total debt is more than double that number, at $34,055, according to a Ramsey Solutions study. When the consumers were asked where the debt came from, the primary two causes were:
Spending more than they realized on unnecessary purchases, people tend to spend more with credit cards than with cash.
Emergencies. Going into credit card debt could’ve been avoided if they had a proper emergency fund.
You don’t want your teen to fall into the debt trap. If you’re in debt, be honest with your teen.
Use yourself as an example of why they don’t want to accumulate mountains of debt. Personal examples are always the best.
It’s perfectly fine to teach your kids how to build their credit, but they first need to know the potential problems they could run into based on statistics.
Spark an interest in compound interest
“My wealth has come from a combination of living in America, some lucky genes, and compound interest.” – Warren Buffett
It’s been said that compound interest is the most powerful force in the universe, and possibly the 8th wonder of the world. It can work wonders for you. It can also nearly defeat you if it works against you.
This chart is all your teen needs to see to understand why it’s important to start investing as soon as possible:
Starting sooner beats waiting until the situation is perfect. Teach your teen to pay themselves first.
They will always find a way to cover bills and basic expenses, but waiting until the end of the month to “invest what’s left over” never works out. Nothing is ever “left over.”
Have the talk sooner rather than later
Don’t wait until your child is racking up credit card debt to have this talk.
You don’t have to have your finances completely in order to teach your teen the basics mentioned above.
If your teen starts preparing for retirement immediately upon entering the workforce, they will be set up for long-term success. If they wait, even just a few years, they will have to catch up.