In a few short years, your teenager will be on their own, making their way through the world armed only with their wits and whatever lessons you managed to teach them before they left the safety of home. One of the biggest advantages you can give them is a basic education in finance.
If your teen can manage their own money, they will have a higher standard of living and won't have to call you for cash, which will give them a greater sense of financial independence while easing the burden on your checkbook. They'll also have the freedom to choose their path without worrying about excessive student loans, car payments, or credit card debt.
Freedom Is Tied to Level of Debt
A high debt level is the life equivalent of handcuffs. One of the biggest financial dangers for young adults is taking on too many "bargains" such as zero-down financing, no payments for 12 months, or other similar gimmicks offered at furniture stores, home improvement retailers, and automobile dealerships.
In the U.S., 66% of Gen Z consumers aged 18 or above are "credit active," meaning that they have credit cards, loans, or mortgages, according to TransUnion. Among those young, credit-active consumers, 50% have a credit card. That's a potential pitfall, because while responsible credit card use can help build credit, it's all too easy to use credit cards to make unnecessary and expensive purchases. Sooner or later, however, buyers end up paying the cost of the items and possibly much more in interest.
Teach your teen to focus on the cash-flow impact of a major purchase and to avoid recurring financial commitments at all costs.
Everyone Needs a Budget
Younger consumers are the least likely to know how much they spend, according to a Mint survey. Only 23% of respondents aged 18 to 24 knew how much they'd spent last month, compared to 27% of Millennials, 34% of Gen Xers, and 46% of Baby Boomers.
Budgeting is most important when money is tight. A young adult with a moderate lifestyle consisting of only a cell phone bill (let's say $75), car payment ($275), insurance ($100), and rent ($500) is looking at monthly outflows of $950. In other words, $11,400 of their annual income goes to merely maintain a car, a phone, and a roof over their head.
A basic monthly budget will help them track spending, build better financial habits, and set goals. If your teen has plans to buy a house, go to graduate school, or build an investment portfolio, a budget is an essential first step.
Avoid Credit Card Debt Above All Else
Credit card debt is brutal. If a young adult is making 4% on a passbook savings account but paying 20% interest on their credit card balance, it is costing them 16% for the right to earn 4%.
Instead, they should take their available resources and pay off the balances, only investing after they have extinguished double-digit rates from their lives forever. Other debt, such as student loans, mortgages, etc., depending on an individual's specific circumstances.
Open an IRA and Contribute to It ASAP
The day your teenager turns 18, they should open an IRA. A 40-year-old investing $20,000 a year for retirement will end up with only half of the assets as a 21-year-old who invests $5,000 a year. Even the smallest savings can turn into a respectable fortune if given enough time.
Choose a College Wisely
In most cases, there is very little difference between a $30,000 private college and a $12,000 state university. What matters is what your teen does with their degree, not the name attached to it (except in highly specialized fields such as law or medicine).
Strapping themselves with an extra $72,000 in debt can seriously change their plans for life. A few months after graduation, they will be forced to make their first student loan payment. This could result in taking a subpar job for the sake of an income at the expense of a better opportunity later.
Beware the Small Foxes
It's been said that small foxes spoil the vine. The financial success of every young adult is largely determined by their mundane, day-to-day decisions. If they purchase a $500 television, they're likely to go to several different stores, compare prices, and find the best bargain.
Without thought, however, they may spend $50 at a restaurant, $25 at the movies, $20 for a candle, $30 for a book, $5 for a drink at Starbucks...you get the picture.
Those small expenses are fine by themselves, but over time they add up to significant amounts. Without knowing it, a young adult in this situation has unknowingly been spending their millions $1 at a time. By cutting only $3 a day and investing it, a young adult can be a millionaire by retirement.
Use a Software Program to Track Finances
Personal finance software can help your teen organize their finances, track spending, even set goals for the future. There are a host of available programs and tools, including apps like Mint and YNAB and old-fashioned spreadsheets such as Microsoft Excel.
Just remember: the best program is the one your teen will use. So, be sure to involve them in the process to get their buy-in right from the start.