It’s a common claim that raising teenagers is one of the most challenging periods of parenthood. As children grow into teens or young adults, they want more independence and control over their lives. At the same time, there is still so much for them to learn and experience before they mature into responsible adults that can thrive and succeed in the larger world.
One of the most important things teenagers should learn is how to manage their finances and grow their savings. And the best teachers? Their parents. In fact, even the best-selling book on personal finance principles Rich Dad, Poor Dad, starts with the premise of learning how to manage money and invest for the future from two father figures in the author’s life. One set of advice would have kept him poor, while another would ensure his financial success. So, let’s aim to be the “Rich Dad” and explore the most important financial principles you should share with your teen. They may not always enjoy the advice, but like most lessons you teach your child, they’ll thank you for it later!
Tip #1: Teens will do as you do, not as you say.
If you don’t practice what you preach all your advice will fall on deaf ears. Children are adept at following examples. So, if you want your teen to have a strong financial future, you need to start showing them how to manage finances well by doing it yourself. Practicing sound financial principles will be one of the best ways to ensure your teens follow in your footsteps and manage their own money in a responsible and successful way. As they start to be able to take on more responsibility and understand complex concepts, it will help if you include them in family budgeting. Ask their opinion on investments or large purchases, and show them how money management, timely loan repayments and smart investments work in real life.
If you have certain unhealthy habits such as taking on too much debt or reckless spending, remember that your teens will likely mirror you, so keep yourself in check. However, don’t be too hard on yourself. If you make mistakes, share it with them so they may learn too, instead of having to make those same mistakes themselves. If you don’t know about something such as bitcoins for example, ask them to help you learn it together. Create an atmosphere where money matters can be spoken about freely and develop a healthy attitude towards money where it is not the ultimate achievement but a means to an end. Topics such as debt, inflation, recession and more may seem scary to touch upon, but are crucial to discuss with your teenager. Also ensure that your teens value people beyond their incomes so that there is no resentment towards someone who earns more or any disdain for someone who earns less, by modelling the right behaviour at all times.
Tip #2: Let them earn their allowance.
One great way to help your teens learn to manage their financial affairs early on is to get them to understand the value of every penny earned. An easy way to do this is by having them earn their allowance by helping around the house. Set a dollar value on all their chores. If they do the dishes for a week, they will get $X amount; if they take out the trash every day, they will get $X amount, and so on. You can hand out extra cash on birthdays and holidays as gifts but try to be strict about the trade-in they make on their allowance. This means that if they don’t do their chores, they will also not earn anything and will have to go without their allowance.
Want to take this one step further? To truly prepare them for the real world, you can cut a portion of their earnings as ‘taxes’. These ‘taxes’ can be put into a term deposit or GIC that they can redeem on their 18th birthday. It may seem unfair and could lead to a tantrum or two, but it not only helps them to learn the difference between gross pay and net pay early on (preventing any rude shocks when they get their first paycheque), but also automatically helps them to start out with a lump sum saving. What’s more, as they see their savings grow over the years, they’ll also discover the magic of compound interest.
Tip #3: Teach your teens to save with some tough love.
Your teen may think that they really need a new smartphone, new car, new video game or a new pair of overpriced brand name sneakers. It could be a genuine want (it’s never a need), or just peer pressure, but either way, you should not be the one giving into these demands. Instead, ask them to save for it and match the amount they save if you can. When they have to forego spending their hard-earned money on a regular basis to save up for something they feel they really want, oftentimes the appeal for the overpriced gadget or clothing wears off. Or, if they do achieve their savings goal, they value the item that much more since they worked hard to purchase it. Your teen will come to learn on their own that money does not come easy and saving takes discipline to reach their goals.
Another thing you can do to help your teen save is open a no-fee savings account for them where they can put in regular deposits and earn interest on their savings. (The savings calculator on our Savings Account page will let them see how their savings can grow. It’s a pretty fun tool they can access often.) They’ll not only earn interest on their money, but also Member Rewards cash dividends as part of our profit sharing program.
Tip #4: Teach your teens about credit and managing debt.
We live in a world where instant gratification is the norm. Want to listen to the latest album by a favourite artist, it’s already on your streaming service. Want to watch a movie? Just click a button. Want to buy something you cannot afford? Use your credit card or get a loan. Get it now, pay for it later is a very attractive prospect for teens because they are still getting accustomed to weighing the risks and payoffs. As a parent, you need to educate them about how their borrowing and spending habits can affect their future. You can’t prevent them from doing everything, but you can equip them with the right information so they can make smart choices on their own.
When it comes to their credit, you should cover topics like:
- credit history,
- why it is important to maintain a good credit score or credit rating,
- what kinds of behaviours can adversely impact their credit score or credit rating,
- how to check for interest rates,
- what is good debt and bad debt,
- how to consolidate debt and create a schedule to repay their debts.
Tip #5: Teach your teens to budget.
Budgeting is one of the best ways to be financially responsible, but it is easier said than done. However, helping your teen learn how to budget well and stick to their budget is something that will go a long way in ensuring their financial security.
Start by making a list together of all their expenses. Here, you can clearly define certain expenses such as food, rent, utilities, school tuition or supplies that you pay for. Be sure to also include expenses that they are responsible for such as entertainment, going out with friends, their mobile phone bills, gifts, etc. (Bonus: The expense list will also show them just how much you pay for if they ever start to become ungrateful!) Then make a list of all their sources of income.
Once you have both the lists you can figure out how much can be put aside as savings, how much should be kept aside to spend, and how much your teen can invest. This would also be a great time to help them identify other sources of income such as monetizing a hobby or taking up odd jobs to earn a little extra cash. You can also explore how they can invest so their money helps them to earn more money. Now that they have a budget in place, you can help them track it on a monthly or yearly basis.
One important financial principle that budgeting can help you teach your teen is to pay themselves first. That is, first to put money into savings and only then consider it for spending or investing.
With these tips you’ll be well on your way to raising financially responsible teens with a healthy attitude towards spending and saving, as well as equipping them with the tools to start investing smartly. If you need more help to plan your teen’s finances or secure their future, you can always speak to one of our financial advisor’s who are ready to help.