September 9, 2024
Photo: milkos via 123RF
Financial literacy is more important than ever. Because everything is digital, it’s easier to ignore the realities of your financial situation and avoid learning about financial best practices. Help your teen start off on the right foot with some basic education about personal finances.
Bank Accounts
A bank account is the first step to financial independence. Whether at your local branch, online, or in a high-yield savings-only setting, helping teens set up their own accounts will provide the chance to learn.
Savings vs. Checking
Adults take it for granted, but teens may not know the difference between checking and savings accounts. It’s important they understand the withdrawal limits on savings accounts and any minimum balance requirements. It’s a good idea for teens to have both a checking and a savings account to get in the habit of planning their expenses separately from their savings.
Options for Teens
Most banks and credit unions offer account options for teens. Choosing the right bank and account type should be a collaborative process. Ask these questions:
- What kind of money access does the teen need?
- Can they be trusted with a typical bank card, or do they need a monitored approach first?
- Is a local institution ok, or do they need better national options?
- Where can we find the fewest fees?
- Do they need a physical location, or is online only sufficient?
Credit and Debt
Understanding credit and debt is crucial for teens. Help teens establish a good credit score early by adding them with limited privileges on an adult’s account. Having a card they can use will make it easier to avoid the credit card companies and their predatory interest rates that will descend on your teen the day they turn 18.
On the flip side, help them understand how debt can quickly snowball and leave them in trouble. This game lets teens play as loan sharks, earning points by offering bad deals to unsuspecting borrowers. Teens will quickly learn that the game is rigged in favor of the lender, and they should avoid falling into that trap as real-world borrowers.
Investments
While a savings account is good for money you’ll want to use in the near term, investments are the better option for long-term savings. Teens can have fun learning about the stock market, but investing in an index fund is the smartest choice. These funds have lower fees and produce reliable returns over the long run. Help teens understand the power of compound interest and investments with this interactive game.
Retirement Savings
Anyone who earns money is eligible for retirement savings. Teens should invest some of their earnings in a Roth IRA (either directly or by getting a guardian to make the contributions). The benefits of a Roth IRA for teens are numerous, but the biggest plus is that most teens can invest that money tax-free. Small contributions now will mean significant gains over the next 40 years.
College and Education Accounts
Saving for education expenses can be an intelligent move for teens if they plan to get higher education. A 529 plan allows you to save money in an investment portfolio and then withdraw it for qualified expenses. Most states have a 529 plan, so shop around to find the best options. If they choose the one for their state, they’ll likely get a tax credit for any contributions.
Photo: foodandmore via 123RF
Budgeting
The single most important part of financial literacy for teens is budgeting. Understanding how to handle your money, plan for future goals, and make smart decisions is the best way to be financially independent and secure. Help teens understand the importance of budgeting with this interactive game that shows how quickly you can go through your money. For an in-depth budgeting game that helps teens see the bigger picture for each small decision, this game and lesson plan is outstanding.
Track Your Income and Spending
Most teens aren’t entirely responsible for their needs yet. This is the perfect time to practice budgeting when the stakes are lower. Have them track income and spending for two months using this worksheet. They can also use this app to track spending in real-time. Knowing your starting point is essential for budgeting wisely.
Make a Plan
After they’ve tracked their money, it’s time to make a plan. Their basic budgeting sheet can help them fill in goals and amounts for categories they anticipate in the future. This app can help them visualize savings goals. Getting in the habit of planning for upcoming needs will help teens successfully navigate their more complicated lives once they leave home.
Financial success as a young adult is mainly about knowledge and planning. By giving teens a chance to practice these skills before they’re financially independent, you’re helping give them an enormous advantage as young adults.
Sponsored by JPMorgan Chase
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