As a mother of three boys, and a Certified Public Accountant, I assumed my kids would know how to handle money responsibly. I was very mature as a teen in dealing with my own finances. I applied for and received my first credit card at 15 years old, had a checking and savings account, and as April 15th rolled around, prepared my own taxes and sent them to the IRS.
After my 18-year-old college freshman asked me how money just “appeared” on his debit card, I realized that maybe I should have prepared him with some basic financial knowledge before he left for college.
The convenience of digital banking has, ironically, resulted in young people being less finically savvy. We wrote checks and kept a register, they use banking apps and Venmo.
We deposited our paychecks at the bank and received cash, they use direct deposit and don’t use or carry much cash. We applied for one credit card and built strong credit, they are bombarded daily with digital advertisements for “free money”, and often receive it the same day.
The instant gratification of credit cards, coupled with new found freedom and limited financial knowledge, is a recipe for disaster for a new college student.
How parents can teach teens about managing money before they leave home
1. Set up a checking account for your teen
Go into a local bank with your teen and establish a checking account making yourself a co-applicant. Having access to their account will allow you to transfer money into and out of the account as needed, and monitor purchases.
They will receive checks (yes, we still use those sometimes) and a debit card. Make sure they realize that the amount of money on the debit card is tied directly to the amount of money in their checking account. A budgeting app may help them keep a running tab of how much money they have used and what is still available. It is important to have an open dialogue about the money available for college expenses, and how much they will be allowed to spend (weekly or monthly).
Many college students have a meal plan, but that doesn’t stop them from going out with friends or conveniently ordering from food apps. If you have a teen who is prone to over-spending, you might consider limiting the funds to only the amount they are allowed to spend. This will help them learn to budget for their needs and wants.
2. Open a credit card in your teen’s name
Explain to your kids the purpose of a credit card (mainly for emergencies while away at college), and most importantly, how it differs from a debit card. While a debit card is a convenient way to spend your own money, a credit card is money borrowed from the bank, with a requirement to be paid back monthly.
Any charges made on a credit card should be paid back in full, or else exorbitant interest rates start accruing. Having one credit card in your child’s name (with you as a co-signer) can help them build towards a high credit score, allowing them to receive loans at favorable rates in the future.
Although they may be tempted to get additional credit cards once they are in college, you can remind them that having multiple credit cards open without actually using the credit, or not paying it timely, can lower their credit rating. New credit cards typically have around a $300 spending limit. If the card is used and paid appropriately, you can request a higher limit from the bank after about six months. The promise of a higher limit might be a good incentive for your child to use the credit card properly.
3. Open a savings/investment account for your teen
Whether you open a savings account, investment account, or an individual retirement account, it is never too early to teach your teens and young adults the importance of saving. Some people put a designated percentage of every check into savings before they pay for discretionary expenses.
If your teen has a job in high school or college, I advise that you have them put away some amount each month into this account. Not only does it establish excellent habits for the future, it helps them understand how much their money will grow with compounded interest. Setting aside money into savings can help with college tuition, unexpected emergencies, or to pay for a trip during spring break.
4. Teach your teen the basics of paying taxes
Nobody enjoys paying taxes, but it is a fact of life. Many kids wait with anticipation for their first paycheck, only to be disappointed when it is lower than they expected. A simple conversation about required withholdings, such as FICA and federal and/or state income taxes, will help your child with budgeting.
It may be helpful to point out that tax withholdings help them out so they don’t have to come up with the entire tax bill in April. Sometimes the amount paid is too much, and they get a nice surprise refund! There are simple ways to file their tax returns online, and if the program is online, chances are your teen has already found it.
5. Have your teen download a budgeting app
Work with your teen to help them understand that budgeting is a systematic way of tracking how much money you have available each month to spend (income), how much you are required to spend on necessities (expenses), and what you are actually spending. Whatever income is leftover can be used for savings and entertainment. The best way to keep track of spending and to account for specific savings goals is for them to download an App onto their smartphone.
I recommend something easy to use, such as YNAB (you need a budget) or Pocketguard. Budgeting can help your teen to stay focused on their priorities and avoid going into debt. It is the beginning of good lifelong habits.
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