You may be preparing your teen for college but there is another type of education you should also be focused on–a financial education.
While it is wise to start teaching your children early about money management, it is vital to pass on such knowledge to teenagers. Your teen will soon be faced with real-life money matters (i.e. cost of college, supplies, etc.). “Teenagers should be introduced to managing money at a young age, for that will give them the knowledge to maintain their money. Also, introduce teens to the importance of saving and the purpose of a savings or checking account, spending, and how to spend to get the most value for the dollar being spent,” says Donald L. Dowridge, Jr., money management expert and founder and president of DLD Enterprises (DLD stands for Determined to Learn and Develop). “Introduce your teen to the importance of saving and the purpose of a saving/checking account, spending and how to spend to get the most value for the dollar being spent.”
Have them purchase things they want (not need) with their allowance. It will give them responsibility for their own money. If they have a part time job, have them set aside some of that for savings. When they are around 16 years of age, start giving them money to buy their own clothing. Help them set up a budget with this money so they can decide what they want to spend on various items.
You can also help your teen understand how budgeting works by letting them help do the family budget. For example, have them set aside the money for groceries, then have them go food shopping with the family grocery list and the grocery money.
It may be tempting to set up a credit card for your teen, “but don’t”, says Dowridge. Prepaid cards, which are being marketed to teens, aren’t a good idea either. You can, however, help them to understand how credit cards work. “Instruct them on how payments are made and how you can be penalized for missed payments,” he says. This would be a prime opportunity to teach teens how credit histories work, and how missed credit card payments affect credit histories.
Credit card companies are aggressively targeting teens–especially freshman college students. In fact, according to Sallie Mae (publicly traded U.S. corporation whose operations are originating, servicing and collecting on student loans), of 1,000 college students, more than half had $5,000 dollars worth of credit card debt when in school and one-third had more than $10,000 dollars worth.
Dowridge says you should also teach the concept of an emergency/rainy-day fund to your teen.
“Have them set aside a percentage of their earnings and/or allowance for a ‘rainy day fund’,” he explains. “This purpose is solely in case of emergencies that may arrive at any given time.”