This was originally published on Monday, August 17, 2015, in the Pacific Daily News. Click here to subscribe to the PDN.
Q: My teenager just started driving and my husband and I are thinking of opening a checking account for him. Do you have any tips to help teach budgeting to a teen?
A: One of the most important tools you can teach your teen to be financially healthy is how to create and stick to a budget. It is great that you are taking initiative to teach him. Unfortunately many teens do not gain the skill of budgeting before going off to college or obtaining their first job. Teaching teens how to budget their money today will instill good spending habits for the future.
Sit down with your teen and discuss how much he will earn monthly. Have him list his monthly expenses such as gas, clothing, incidentals, and entertainment for which he will be responsible. Come to an understanding about what you are willing to pay and for what he will pay. Include paying for proms, yearbooks, class ring, and so forth. Talk to him on how to put some money aside to save for emergencies and to save for those large expenses. Agree on a percentage of how much he should save. Let him start with the monthly budget you both agree on. After a few months reevaluate the budget and make any necessary changes.
One of the best ways to teach your teen about budgeting is to share your household budget. Many parents feel that the amount of money they make and how it is spent is personal. But being open about how money is spent in your household will only benefit your teen. Talk about how to prioritize where the money is spent and how to save in real-world scenarios. A survey performed by the Consumer Federation of America found that only 73% of parents feel capable of teaching their children about finances. Some parents may feel inadequate because of their financial woes. If your financial health is not the greatest, it is a lesson that you can pass on to your son. Discuss what decisions you made that put you in the predicament you are in today and what steps you are taking to correct it. You may want to stress that it is a personal family matter and that it stays within the immediate family. Parents play a very important role in teaching their children about finances. Don’t let your financial confidence or stability stop you from teaching your child.
Among the hardest lessons for both teen and parent are the consequences of not following the budget. If your child comes up short at the end of the month and wants to go to the movie, bailing him out will not teach him to stay within his means. It may mean having to say “no” and wait till the next pay period. It is a lesson best learned now instead of later down the line when the consequences are much more dire.
Another lesson teens should start being aware of, is how debit and credit cards work and when it is acceptable to use them. Like anything else, there are pros and cons. They are great in emergency situations, it builds good credit history, it may earn valuable reward points and it does give you time to pay. On the other hand, interest adds up and depending on credit cards to overcome shortfalls in the budget can lead to some unfavorable practices. Discuss what a credit score is and how a bad credit score can effect getting a job or a loan, or even purchasing a cellphone.
Learning how to invest money at this age is also beneficial. Go online and find a financial calculator and discuss how much money they want to retire. Break it down into how much a month they will need to put away to achieve it. Inform them on how retirement funds and the stock market work. If you need help there are many online tools to assist.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com.