7 Financial lessons every teen needs to know
Key Takeaways
Teaching your children financial lessons when they're young can help set them up for success in the future.
It's crucial to cover basic topics like earning money, budgeting, saving, investing, building credit, and minimizing debt.
Be sure to discuss potential obstacles, such as trend-based spending and short-sighted thinking.
Whether your parents taught you how to manage your money or you learned on your own through painful trial and error, taking the time to teach your teens about money can equip them with crucial knowledge when it's time for them to leave the nest.1
Personal finance lessons for teens
Building a successful financial plan can be complicated, so when it comes to teens and money, it's important to stick to the basics, at least for now. Here are some important fundamentals to help you get started.
1. Earning money
Up until now, you've likely provided just about everything for your teenager financially. While they may not yet be ready to go out on their own, giving them opportunities to earn money can help them understand the value of the hard-earned dollar.1
Some potential ideas include:
Paying an allowance for basic household chores
Giving them money for other projects, such as cleaning and organizing the garage or raking leaves
Encouraging them to work during the summer or after school
Helping them come up with business ideas, such as mowing lawns, washing cars, walking dogs, or babysitting
2. Setting up a budget
Budgeting is is a lifelong money-management skill that will help your teen stay in control of their spending, track where they can cut back on expenses, save money, and be financially prepared for the unexpected.2
Discuss with your teen about how budgets can be a useful tool designed to help manage your monthly expenses, meet financial goals, and plan for the things they need and want. If you're comfortable with it, you may even consider sharing your monthly budget to show them how you manage your money.
You can also provide some examples of popular budgeting methods and budgeting apps they can use to create their first budget. Examples include:
Zero-based budget: With this approach, you'll budget in a way so your monthly income minus expenses, including savings, equals zero each month.3
50/30/20 budget: This simpler approach involves spending 50% of your income on necessities, 30% on discretionary expenses (i.e. your lifestyle) and 20% on financial goals.4
Pay yourself first budget: With this method, you'll create a monthly savings goal and set those funds aside with each paycheck. After that, you can spend your remaining cash however you want.5
3. Building credit
Your credit score is an important part of your financial identity, and it can influence the cost of a car, home, or other major purchase you finance through loans or lines of credit.6
As a result, it's important to help your high school student understand how credit scores work and how the consequences of credit missteps can haunt them for years. While there are several factors that affect your credit score, the most important steps they should take include:
Paying bills on time
Applying for credit only when necessary
Minimizing credit card balances or paying in full every month
You may also consider adding your teen as an authorized user on one or more of your credit cards. Once they're added, the full history of the account may be added to their credit reports—though some card issuers may wait until they turn 18 to start reporting. Keep in mind, adding a minor as an authorized user can increase debt and potentially negatively impact both parties' credit scores, especially if there is a late payment.
Now may also be a good time for your teen to request a credit report. This step can help your child learn to monitor their credit and potentially prevent identity theft.
4. The cost of borrowing
Borrowing money can help you improve your way of living and possibly even your financial well-being. However, it's important for your children to understand the long-term cost of borrowing.
Talk to your child about the difference between interest rates and APRs (annual percentage rates), compound vs. simple interest, and how monthly payments can impact their ability to cover other important financial expenses and goals.7
You can also discuss alternatives to borrowing. For example, federal student loans may be easily obtainable, but they are still a form of debt. Help your child research and pursue other ways to pay for college, such as getting a job, saving up, and applying for scholarships or grants.
5. Setting financial goals
Creating financial goals is a critical step in building a strong financial foundation. However, it's important to help your children learn how to set SMART goals: specific, measurable, achievable, relevant, and time-bound. Here's a quick example:
Specific: Save up for a prom date in April.
Measurable: Save $500 for a tuxedo rental, dinner, flowers, and a shared limousine rental.
Achievable: Open a savings account and set aside $100 a month, which is earned by doing odd jobs.
Relevant: Saving up for prom is an important step in creating crucial memories for the future.
Time-bound: Save up enough in five months to achieve your goal.
6. Saving for emergencies
Life is unpredictable, and if you don't have an emergency fund, even a small unexpected expense can cause financial hardship.
That's why it's key to help your teen learn the importance of setting up an emergency fund to prepare them for things like car repairs, auto insurance deductibles, and even unemployment. As soon as your teen starts earning money, help them open a savings account.
If you're already a pro at saving, consider sharing with your teen what specific steps you've taken to build your own emergency fund, along with how it's helped you.8
7. Investing for the future
Your teen may be too young to open a retirement account, but you can still talk to them about the importance of investing and how returns can compound over time.
You could encourage your child to try out a virtual stock exchange, which allows them to learn about investing without risking anything. Some brokerage firms even allow you to open custodial accounts where your teen can invest a little and get real returns.
Discuss potential obstacles and setbacks
No matter what you teach your teenager about managing money responsibly, you can't always make their decisions for them. That said, you can discuss potential obstacles that could affect their progress—now and in the future.
Spending more than they bring in
As a teenager, it can be difficult to fully understand why it’s important to live within their means or the responsibilities of using a credit card. Even with a small credit limit on a starter credit card, it's possible to overspend.
Credit card debt, in particular, can put a significant strain on your budget and potentially damage your credit score. As such, it's crucial that you discuss responsible credit card use and communication as your teen starts managing debt.9
Trend-based spending
Whether it's fashion, technology, appliances, or anything else, your teen is likely going to feel incredible social pressure to stay in line with the latest trends. Your child will be bombarded with advertisements on social media apps and may experience intense peer pressure to buy into the latest and greatest trends.
Take some time to discuss this threat with your teen and help them learn how to find a balance between spending money on things they enjoy and preparing themselves for the future. This is also a good time to talk about financial values and how having them can help guide what they choose to spend their money on.
The bottom line
As your children transition into adulthood, they'll need to learn how to make sound financial decisions on their own. However, teaching them valuable financial lessons in their teen years can give them crucial information to help flatten the learning curve a little.
Consumer Financial Protection Bureau. “Financial well-being: What it means and how to help.”
Consumer Financial Protection Bureau. “Budgeting: How to create a budget and stick with it.”
InCharge Debt Solutions. “Zero-based budgeting.”
Consumer Financial Protection Bureau. “My spending rule to live by.”
Federal Student Aid. “Budgeting tips.”
Consumer Financial Protection Bureau. “What is the difference between a credit report and a credit score?”
Consumer Financial Protection Bureau. “What is the difference between a loan interest rate and the APR?”
Consumer Financial Protection Bureau. “An essential guide to building an emergency fund.”
Consumer Financial Protection Bureau. “What is the difference between credit counseling and debt settlement, debt consolidation, or credit repair?”
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