Sixty-nine percent of Generation Z say they don’t have a clear understanding of how much they can spend now versus how much they should be saving for the future, according to a study by Northwestern Mutual. This lack of clarity demonstrates the common issue of young adults unintentionally adopting poor financial habits. Fortunately, this risk is avoidable with proper education throughout your teen’s years.
To keep your teen engaged and excited about financial literacy, we’ve gathered a few key tips and some easy-to-implement learning opportunities.
Set Them Up For Saving Success
It’s likely that your teen has a bank account of some sort set up, but if not, now is the time to do so. To ensure you are able to supervise their monetary activity, utilize an account that gives you joint account holder status and complete access to all activity. Bank accounts can serve as an excellent tool for teaching savings and money management best practices.
Instilling the importance of saving comes with dedication to practice. Instruct your teen to deposit a portion of every paycheck or allowance earnings automatically into their savings; ideally 20%. This habit, while likely challenging at first, will contribute to a lifetime of responsible savings. It’s important for them to know exactly where their money is going and how to budget with the funds they have available. By dividing up their income like this, you encourage them to develop a valuable habit of living below their means and an understanding of the importance of budgeting.
That all said, this practice also helps teens in learning proper spending habits as well. Thanks to the accessibility of technology, teens can view and manage their accounts right from their smartphone app. This visibility can help teens better manage their spending as they watch their accounts go up and down and, ideally, put more consideration into what they choose to spend their money on.
Build the Foundation For Good Credit
Though credit scores may not seem like an urgent concern in the early teen years, as your teen grows, this will become increasingly relevant to their lives and it’s important to set them up with a good foundation. Poor credit or lack of credit altogether can limit their ability to qualify for apartment leases, personal loans, and eventually a mortgage. Teaching this lesson and its best practices is most effective through the use of real-life experiences.
Create these credit-based lessons early by involving your teen in your monthly credit card payment and any major purchases. Explaining to them the process of building credit, interest accumulation, good credit score maintenance, and the impact that poor behavior can have on your financial profile help to illustrate the basics before dealing with their own credit.
To ensure your teen’s credit habits are developed under your supervision, consider starting them out with a basic credit card by their senior year of high school. This way, once they are away at college and managing their finances on their own, you can feel confident in their ability to behave responsibly. To avoid credit card misuse, implement a use case rule outlining what their credit card should and should not be used for, and work with them on the pay-off process when the time comes.
Practice Responsible Borrowing
Loans are something your teen is likely to face throughout different stages of their lives. Developing an understanding of the different types of loans, their individual value, the process behind approval and payment plans, and so on can positively contribute to their future financial decisions. A daunting student loan should not be the first time your teen is exposed to the borrowing process as this can lead to confusion and mistakes that may impact them long-term.
Perhaps your family is undergoing home renovations that you’re using a personal home improvement loan for; include your teen in that application process and each payment you make towards this loan. Seeing first-hand how your previous financial history impacts this loan, the seriousness of principal versus interest payments, and the importance of making these payments on time in order to avoid repossession is the best way to instill these important lessons.
Guide Them Through the Process
As your teen prepares for college and possibly explores the option of student loans, encourage them to lead the way throughout the application process. Complete the FAFSA together and use the knowledge you’ve previously imparted on them to make the most educated decisions as to what they can realistically afford in a school and what they are willing to pay back over time.
Educating your teen on financial literacy not only serves as a productive use of time together but also sets them up for success that will contribute to a better financial future upon graduation. These lessons don’t have to be fancy. Use the resources you have available and involve your teen in as many steps as you can; they’ll thank you for it in the long run!