Coming into adulthood is one big learning experience in general, but doubly so when it comes to finances. As a teenager, we didn’t think twice about investments, life-savings, or even simple budgeting because, well, 16, 17, or even 18 year olds are too young to worry about that stuff, right? Not exactly!
In reality, teens need to know what to do with money as soon as they have the opportunity to earn it for themselves. Whether it’s saving their allowance for something special or paying for their own phone bill with money they get from a part time job, money management skills—both simple and complex—need to be taught before they move out, take on big bills, and end up accruing completely avoidable debts.
Be very clear about wants vs needs, and the importance of both.
For most teens, their idea of wants and needs are very different from the adult perspective. As adults, we’re responsible for taking care of bills, budgeting for food, making sure we have enough money for the emergency savings, paying down debt, and whatever other obligations we may have.
We don’t have to think too hard about whether or not we need that new jacket or if we need to put extra money away for gas this week—we already know which one should come first. However, teens don’t always have the correct judgement to make those decisions.
In order to cultivate a healthy money mindset in your young adult, you’ll have to break down the difference of wants and needs in a way that may be applicable to them in the future. Here are some ideas:
- Buying a laptop. You need something practical and functional that’ll help you finish homework for school or finish projects. You want a laptop that has all the appropriate features for gaming with your friends. School is a requirement, gaming is a desire.
- We got food at the house. You need to eat in order to nourish your body and ultimately survive. This doesn’t necessarily mean you need to eat fast food. “We got food at the house” is not an attempt to deprive you of what you want—it’s an example of championing a need over a want. Which is, you don’t need to spend money on food when there’s already food available, no purchase necessary.
- Going to work. This is a unique example of wants and needs because it’s one of the first times your teen will see a direct relationship between wants and needs. You may not always want to go to work, but you need to be there in order to make money in order to take care of yourself. That can be both a necessity and a desire.
A lot of teaching your child(ren) about how to differentiate a want and a need has to do with delayed gratification. Often times, doing what we need to do in the moment makes room for us to do what we want later. You cannot stress to them enough that most wants in life are not a “no”, they’re just a “not right now”—and there’s nothing wrong with that.
Instill strong money and resource management in them.
The value of a dollar is something we all come to understand sooner or later. In fact, the whole idea of budgeting wouldn’t even be a thing if no one ever thought about the importance of money and making a dollar stretch as far as possible.
With young adults, it’s important for to know that money is mostly valuable because you put your time and effort into making it. And while you can make money back, your time is spent forever. When you think about it that way, you start to move a lot more carefully with money.
However, you don’t your kids being penny pinchers who are afraid to spend either! Like with all things, moderation is key. Here are a few tips to help them build strong money and resource management:
- Track spending for understanding. You know you spend your money, but you never really know exactly where your money is going until you list your expenses. Have your teen list all of the things they on a daily, monthly, and weekly basis along with their prices. Then ask them how they’re going to cover that. This is a good way to get them to understand the value of money specifically for them.
- The habit of 50/30/20. Introduce them to the habit of spending 50% of their income on needs, 30% on wants, and 20% on savings and emergency funds as soon as they are making consistent money through working or allowance. This will help them build healthy budgeting habits early on.
- Look for alternatives. If something they want is too expensive, they can 1) look for the cheaper alternative or 2) look for different ways to reach their goals. For example, you want a new car. It may be a better option to buy a used car with a warranty than to invest in a brand new one. They compromise, but still get what they want.
- Personal protection. Losing money via theft isn’t something we think about as much as regular expenses or debt, but it’s definitely something to think about when teaching young adults about finances because they are vulnerable newbies to this personal finance thing. The easiest way to avoid this is by teaching them not to share sensitive information with people outside of trusted companies, banks, and sources. This includes passwords, pins, account numbers, social security number, and any verification codes.
Money is ours, but not all of it— bills, taxes, borrowing, and debt.
Do you remember getting your first paycheck? More specifically, do you remember getting your first paycheck and noticing how much money they took out for taxes? Whew, buddy! That’s when we first realized that the government be cuttin’ up a little bit!
While being disappointed about your first ever paycheck is a right of passage for young adults, it’s also a lesson in how some of our money isn’t exactly ours. That’s right! We earned it, but there are bills, taxes, and debts to be paid.
As the young people in our lives start taking out student loans, getting their first credit cards, and learning the hard way about overdraft fees, it’s important to fill them in about certain things. So let’s start here:
- Bills: These come first! Whether it’s a phone bill or their newly 18 and expected to put in some money for rent, bills are top priority. Not only is it important to teach them how to budget for bills, but teach them to get familiar with company policies. Learn about grace periods, payment plans, and late fees in case you’re ever in a bind.
- Differentiate net income vs. gross income. Let them know that gross income is how much you make before taxes and net come is how much you have after. Teach them to always make financial plans based on net income because that’s how much money you’ll actually see and spend.
- Secured credit cards. It’s really not enough to give a young adult a credit card and tell them not to spend it because, well, they will eventually. The best thing to do is get a secured credit card that they put the deposit down for and you also have access to. That way, they can learn more about how credit cards work through actual practice.
- Credit is proof of accountability. Teens need to know that we need credit for everything. Leasing a car, renting an apartment, getting a credit card, the price of homeowner insurance—everything. And the only thing that could seriously negatively impact your credit and impede your life progress is not paying your bills on time. Good credit isn’t about jumping through hoops when you’re first starting out. It’s about literally doing the bare minimum.
As you can see, adulting is hard, and teaching your kids how to be a financially literate adult is even harder! While it may take a lot of trial and error, remember to be patient with your teen. Yes, they’re going to mess up a few things, but didn’t we do the same thing at that age?
Of course we did. Have a little grace and know that you’re setting them up to have a better personal finance foundation than you did. Kudos.
