When you think about how to prepare your teenagers for life as adults, one of the most important life lessons you could teach them is financial literacy for teens. Why is it so important to teach financial literacy to your teenagers? The way people learn how to handle their money as teenagers can have a direct relationship with how they interact with their money as adults.
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The tale of two girls
Here is a tale of two girls from the same family and upbringing. One is a natural spender and one is a natural saver.
The spender would get her birthday money and it would burn a hole in her hand. In fact, her birthday money almost always had a plan for spending it before she got it. Whether it was to buy a toy she wanted or later to purchase a phone. She had her money already spent in her mind before it even reached her hands. Or we could reframe that and say she had a plan for her money and how she wanted to invest it and spared no time in executing that plan. As a result, her savings account was always nearly empty and her cash reserves were constantly depleted.
There was a second girl who was always satisfied with what she already had and never really wanted to spend her money. She would save it in a piggy bank and later in the real bank. She could hold cash in her wallet for months before spending it. And when she received birthday money and it was deposited in her savings account, she was committed to not touching it. It was her safety net.
How could there be two such different attitudes about money from two children of the same household? Because we are all individuals with unique priorities.
One child so no value in money other than what it could do for her. The other child saw money as having no immediate interest except to keep it locked away until she actually wanted something really badly. Then she spent a small amount of it allowing the rest to keep growing inside her bank account.
Financial literacy for teens starts in childhood
Kiddie Savings Accounts and Piggy Banks
As children, our schools helped to teach financial literacy and introduced programs where the students could open a savings account from the local bank. We would go to the bank to make their deposits and the kids loved that activity.
At home, they had three piggy banks and would put some money aside to save, some to spend, and some to give towards charity or tithing.
This began the path towards understanding how money worked. The more you kept money in the savings the easier it was to see it grow.
The spending bank taught that when it was emptied out it was empty until you could fill it again with new money earned. True too with our spending accounts as adults.
And early on they learned the pleasure and joy of being able to give towards worthy causes that needed their support.
Get a job = get a checking account with a debit card
Once your teenager is old enough to get a job, having a steady paycheck is a game-changer. Whether their first job is a paper route, or a babysitting job, a job mowing lawns, or a job at a shop or restaurant, its at this point that you want to get serious about giving your teen a financial education and going over how banking works in a way they will understand.
Financial Literacy for Teens – Banking
Here are a few subjects you should be sure to go over with your teen in terms of how banking works.
Balancing a Checkbook
Teach your children how a checking account works. How money goes in, that it does not usually earn interest, and that traditionally checks were used as a form of payment. For teens, you probably won’t even get them checks, as they are likely to use a debit card and cash for all their purchases. Shoot, they might even use contactless services like Apple Pay with their debit card and not even need to have a physical card with them to pay.
Repercussions of overdraft
So along with the relative ease (maybe too easy) of paying with a debit card or Apple Pay, it becomes far too easy for all of us to spend money without using cash, and not realize that our account balances are dwindling.
Even though most banks now offer online banking and make it easy to see what your account balance is, if a teen is racking up the purchases on a single day of shopping, she might not be able to get up to the minute accurate account balances due to pending charges.
Explain the importance of having a budget when she does go to shop so she doesn’t make the mistake of over drafting. Explain how overdraft fees work for her bank and what a bummer it is to lose $30 for a mistake like that.
What’s interesting is that avoiding check writing will make it easier to track actual account balances to avoid overdrafts if they are careful.
Still, checkbook balancing and writing checks is an important skill to develop for when they do become adults and need to pay with checks. If that will even be a thing 10 years from now.
Repercussions of debt and how to manage a credit card
This is probably the hardest discussion to have with your teens, especially if you are sitting in debt yourself. Still, stand in your truth, the hard lessons you have learned and what you would change if you could.
You don’t have to walked the path correctly yourself to be able to teach the truths about money you have learned along the way. Sometimes taht open and honest dialogue is just what your kids need to hear to be able to make generational change for your family moving forward.
If you have never had a dollar’s worth of debt in your adulthood, share your tips to your children, but let them also know that if they make mistakes, they can dig out from under it by increasing their input versus their output. That comes with the discipline of following a budget, and we will talk about that with them soon.
Your teens probably have the experience of handling cash that you handed them to spend on occasion. Of money, they received from their favorite aunt for their birthday or for Christmas. Either way, helping them to establish an understanding of the finiteness of money.
Probably the most important lesson they can learn at this age is that money is finite and merchants will not accept IOUs as payment for goods and services.
Handling money and cash is critical to seeing it physically go away and be spent. Then having to wait until a future date for the money to be replenished is a good lesson on how income works.
Depositing money all the ways
Teach your children all the ways they can deposit money. If they get a check from grandma for their birthday, teach them how checks work what the parts of the check are when you fill one out and how signing it makes it eligible to be deposited. So having a check laying around makes it vulnerable to getting lost and then its a hassle for the check writer. So proper handling of checks is important.
There are many ways to deposit checks and cash. Walking into the bank to deposit with a deposit slip (teach your teen how to fill one of those out too), using the drive thru teller, or using mobile deposit for checks. Also, most people use direct-deposit features to deposit paychecks from their employers.
Show your kids the ropes so they are financially literate about how handling a checking account works.
Lastly, explain how they can reconcile their checking account, make sure their purchases were correctly processed (comparing receipts to bank statements), and how to keep an eye on their accounts online.
Financial Literacy for Teens – the ATM machine
Explain to your teens how an ATM (automatic teller machine) works and how they can check their account balance on the ATM, how to deposit funds, to be sure to look at the receipt after all transactions to make sure there are no mistakes, and everything looks like they expect it to.
Also, teach your teens basic safety practices for the ATM machine and to be aware of both going in and coming out of her surroundings. To put her money away in her purse or pockets to be less of a target, and to be careful to put her money into her wallet so she doesn’t lose it.
Financial Literacy for Teens – a budget
Teaching your teenager the financial literacy lesson of planning and following or keeping a budget perhaps the most useful and practical of all the life skills. This is because as a young adult with their own first place, they will need to learn how to be careful with their paychecks and stay within those means to pay their bills.
From their budget categories, they will need to learn to make spending decisions to they don’t overspend and overdraft their checking accounts. Or worse, find themselves relying on credit cards they cannot afford to pay and therefore falling into the trap of mounting debt.
Financial Literacy for Teens – Savings
Paying yourself first – the power of the habit of saving all of your life.
Teaching your teenagers how important it is to pay themselves second, right after putting their first fruits towards tithing or donating to charity. Paying it forward pays eternal dividends.
Once they have paid their first fruits, they should pay themselves second. Putting money in savings is a habit worth developing from a young age.
There are simple savings accounts. There can deposit money into the savings account they may still have from their childhood days. There are savings accounts that pay healthy interest that is attached to their checking account. Some take automatic transfers from their checking deposits. Whatever account type you choose, challenge your teen to develop the discipline of not touching those funds so they can see it grow over time.
Financial Literacy for Teens – The power and trap of credit cards
Share with your teenagers how credit cards work, and the process to use credit cards to their advantage. But also how to keep from falling into the trap of revolving debt. Credit cards can be an important financial tool with many protective benefits for shopping and travel uses.
Credit cards can also be disastrous for financial wellness when they are abused.
When handled properly with the truth of how daily compounded interest works, credit cards can serve your teenager’s financial habits when they become adults.
Teach your children about daily compounded interest. If you don’t understand exactly how it works, seek a resource to help. This post on how credit cards work is a comprehensive but simple article to help explain.
If you fail to have this essential talk with them, they will be offered a credit card the minute they turn 18 and hit a college campus in exchange for a free t-shirt. Hello “free money”, goodbye good financial habits.
Financial Literacy for Teens – Loans
While you are at it, explain how personal loans work and how they are different than revolving credit as in credit cards. Here is a wonderful article about the difference between personal loans vs. credit cards from nerdwallet.com to explain.
Teach your teens when it is appropriate to apply for a personal loan and how to factor in that expense of the payback terms into their financial budget.
You can also talk a bit about how loans for education aka school loans, work.
And you can discuss home mortgages and how a home mortgage is the type of debt that helps them in the long term gain valuable appreciating assets. Compared to a credit card that typically only pays for depreciating assists.
If all this feels over your head, seek out reputable financial guidance either online or through your local bank to help your teenager and you understand the differences between these different types of loans.
Financial Literacy for Teens – Taxes
As your teenager gets their first really paying job, they will have to pay taxes to Uncle Sam. Teach your teens how taxes work and that those contributions may make their way back into their pockets as a refund.
When it comes time to file taxes, help them practice filing for taxes. Even if you have a tax accountant that does your taxes, having your teen fill out the forms is good practice and an essential life skill. An education on income tax filing is key to complete financial literacy for teenagers.
Financial Literacy for Teens – Unemployment
This is a very strange time we are living in. My teenager was furloughed from her part time job due to closing of shops that were non-essential. When that happened because of the amount she earned the year prior, she qualified for unemployment benefits.
Talk about an education in growing financial literacy for teens. She learned how to call in her benefits, how to be patient (it took over almost three months for her to receive her first check), and how important it is to have money in savings to cover basic expenses. Ideally 3-6 months worth in savings to cover future events like these.
This was a first hand education like no other.
Financial Literacy for Teens – Investing
Roth IRA for Minors
You remember that story of the second sister. The one who saved and saved? She had so much money in her savings that she decided to begin to invest her money now and watch it grow over her lifetime. Her ambition is to pursue a career field in teaching, which can traditionally pay just enough to get by.
So to ensure she has money for her first home deposit, or for a very comfortable retirement, she chose to take a big chunk of her savings and invest it in a Roth IRA for Minors.
She was eligible to invest in a Roth IRA for Minors because she earned an income from working. As long as she has earned money from working and has paid taxes on that income, that money is eligible to be invested. There are annual limits but she is a teenager.
Instead of that money growing pennies in accrued interest from a traditional savings account, she has enjoyed watching her ROTH IRA earning double digits of growth every day.
It is a risk, it could go down with the stock market, but if she is steadfast and rides out the waves, she will have a very hefty nest egg when it comes time for retirement or whatever emergency she needs that money for.
That, my friends, is financial literacy for teens.
Financial Literacy Programs to Learn More
Looking to see where your child is in their financial literacy to this point? Have them try out this quiz called Fin Lit Quiz Challenge High School put together by Fidelity Investments.
Give your kid a good financial start and teach them how to take care of their money. It might be the best life lessons you can give them.
Chandra is the chocolate-chip loving mother of 2 teenage girls who started over again with a baby boy in her 40’s! She is the author of The Mom’s Playbook to Conquering Softball Season. She gives other moms the tools they need to prepare their daughters for real life. Her content is centered on helping girls grow up to be well-rounded, equipped, expressive, confident, intelligent, capable, kind and independent.