It is imperative to teach your teens about the facts of finances. Here's what you'll want to keep in mind.
U.S. schools teach students algebra, calculus and trigonometry, but schools in only 21 states are required to teach teens a personal finance course before they graduate.1 Georgia, Idaho, and Texas are among the states offering financial education in their schools, and it’s helping young ones make better decisions. For example, credit scores in all three states had improved three years after the state-mandated education was implemented. And there are other benefits: Students who are required to take personal finance courses when they are young result in them seeking out lower-cost loans and grants for college, and they tend to accumulate more assets and net worth by age 25.2
Given these win-wins, it’s clear how important it is to teach your kids how to be financially fit.
Save and pay for school
Everyone knows that school is expensive — whether it’s college or trade school your young one chooses. However, having a post-secondary education opens many opportunities. So having one can help young ones grow into financially stable adults.
A scholarship helps pay for tuition, books, and room and board. To qualify for one, having an excellent academic or athletic track record helps, but so does having a knack for community service or writing an excellent essay. So, encourage your teen now to get involved and hone their skills in areas in which they excel.
Most likely, a scholarship will make just a small dent in your child’s school expenses. So, start saving for it as soon as possible. Consider a 529 educational savings plan. Note that you can use 529 savings for federally accredited trade schools too.3
Your child can contribute to their 529 plan (or regular savings account) with money they earn from a job such as a food server, lifeguard, or pet sitter. 4The point is that your child should contribute financially to their education — no matter how big or small the amount — so that they feel a sense of accomplishment and ownership in their education.5
Taking advanced placement (AP) courses in high school can pay off in the long run — literally. Doing so gives students a head start in earning their degree since 90 percent of U.S. colleges and universities offer credits for certain AP courses. That means fewer credits and books to pay for later on.5
Create a budget
Creating a budget is one of the most important lessons to teach your teenager if you want them to grow up to be a financially responsible adult. It includes teaching them how to track their spending while saving for the future.
To do so is simple enough: They should create a list that includes their monthly income (after taxes) along with all the things (food, entertainment, transportation, mobile phone, clothes and grooming, school supplies, and other bills) they use on a regular basis and the amount of money they spend on each. Then, it’s a simple addition and subtraction exercise. Whatever money is left can be put into savings.6
A good rule of thumb is to save 20 percent and give 10 percent to charity. (That’s right, your teen should give to a cause that’s close to their heart.) The rest (70 percent) should pay the bills.6
Some experts think a person should hold off getting a credit card until age 25, when the brain’s frontal lobe is completely developed. That might seem extreme, but it is possible to build credit without a credit card and develop good habits now that will help future credit card users.
If your teenager is trustworthy, consider co-signing a used car loan for your 16- or 17-year-old and their first apartment lease when they move out. Paying rent on time boosts credit scores.
Also, once they turn 18, opening a cell phone, internet, or utility account in their name is fair game. Doing so and requesting that their payments be reported to the credit bureaus, such as Experian, Equifax, and TransUnion, will help their credit scores — as long as they pay their bills on time.7
A debit card is a good training tool for having a credit card, if the user builds good habits when using it. If you don’t think your child is ready to totally remove the training wheels, consider steering them toward a secured credit card, which requires a down payment (or deposit) that becomes your credit limit.8
Student credit cards are another good option while providing nice perks.9 Just make sure you’ve drilled the importance of paying off the bill each month so they don’t accumulate debt. For example, having a $1,000 balance on a card and paying just the monthly minimum could result in a total of $600 in interest after paying it off for six years.10
Pay bills on time
Most teenagers have turned in a homework assignment late, resulting in a reduced grade. Paying bills late results in a reduced credit score. Paying them before they’re due results in peace of mind and a good credit score. There are practical ways to teach your child to pay their future bills on time.
Tell them their bill-paying options: they can set up automatic bill pay, pay in person, pay with a check and mail it, or pay by phone or online. No doubt you have a system in place to pay your bills. Share it with your teenager and tell them why it works for you. If your teen has a recurring bill, such as car insurance, teach them how they can manage their payments.11
Save for retirement
For years you’ve preached the importance of saving for college to your kids. To them that might have seemed like a lifetime away. Now that it’s here, it’s time to talk to them about the importance of saving for their retirement.
The good news is that younger Americans are prioritizing their retirement. Millennials started saving for their retirement at age 25 on average, compared to age 30 for Gen Xers. And 70 percent of Generation Z respondents in a Transamerica survey started saving for retirement at age 19.12
So, hopefully, your young one will follow suit. In the meantime, you can lay the foundation for them to have a good financial future by teaching them sound financial principles and leading by example.