Money Skills for Teens
- Jeffrey C. Chapman
- Dec 23, 2023
- 11 min read
Updated: Jan 16, 2024
ESSENTIAL SKILLS EVERY TEENAGER SHOULD KNOW!
In the world we live in now, where money choices affect almost everything in life, it’s super important for teenagers and their financial future to learn about money management. This article talks about important money stuff and solid financial tips that can help you be successful with your finances even while you’re still in high school. It will give you the knowledge, financial literacy, and tools you need to be in control of your money.
How to Budget
Understanding the Importance of Budgeting:
Money management and budgeting are one of the most essential skills for teens that helps you manage your finances effectively. It involves creating a plan for how you’ll spend and save your money. Good budgeting ensures you have enough money for the things you need and the things that are important to you.
Step 1: Assess Your Income:
The first step in creating a budget is to determine how much money you have coming in. Count all your sources of income, including your salary from a part-time job, money from odd jobs, allowances, or any other sources. Be sure to use your net income (the amount you receive after taxes and other deductions).
Step 2: List Your Expenses:
Track all your expenses for a month. This includes everything you spend money on, like food, transportation, entertainment, subscriptions, and occasional expenses like gifts. Don’t forget to include less frequent expenses, such as yearly insurance fees or school supplies.
Step 3: Categorize Your Expenses:
Divide your expenses into categories, such as ‘essentials’ (food, rent, utilities) and ‘non-essentials’ (dining out, hobbies). This helps you see where you might be able to cut back. Essentials should always take priority in your budget.
Step 4: Set Goals:
Think about your short-term and long-term financial goals. This might include saving for a car, college, a special trip, or building an emergency fund. Setting clear goals gives your budget a purpose and can motivate you to stick to it.
Step 5: Create Your Budget Plan:
Use the information about your income and expenses to create your budget. Allocate specific amounts for each expense category. Ensure your total expenses do not exceed your income. If they do, you’ll need to find ways to either decrease your expenses or increase your income.
Step 6: Monitor and Adjust Your Budget:
A budget is not set in stone. Track your spending and compare it to your budget. If you find you’re consistently overspending in one category and underspending in another, adjust your budget. It’s important to review and tweak your budget regularly, especially when your financial situation changes.
Using Budgeting Tools:
There are many tools available to help with budgeting and personal finance. You can use a simple spreadsheet, a notebook, or a budgeting app. Many apps can connect to your bank account and automatically categorize your expenses, making it easier to track your spending.
Practicing Discipline:
Just like any other of the many money management skills, sticking to a budget requires discipline. It’s okay to splurge occasionally, but try to stay within your set limits. Remember, budgeting is not about restricting yourself – it’s about making your money work efficiently for you.
To get you started with budgeting, click here for a great 90 minute course especially created for teens and young adults like you!
How to Invest and Grow Your Money
Introduction to Investing:
When you start earning money, investing is one of the best money skills for teens and is the process of putting your money into vehicles like stocks, bonds, mutual funds, or real estate, with the expectation of generating more money over time. For teens, learning to invest can be a stepping stone towards financial independence and long-term wealth building.
Understanding Risk and Return:
Every investment comes with a certain level of risk. Generally, higher-risk investments have the potential for higher returns, but also a greater chance of loss. Conversely, lower-risk investments usually offer smaller, more consistent returns. It’s important to understand your own risk tolerance and investment time horizon.
Starting with the Basics – Savings Accounts:
A great starting point is a high-interest savings account or a Certificate of Deposit (CD). These are low-risk options where your money can grow at a steady, albeit modest, rate. They’re ideal for short-term goals and as a part of your emergency fund.
Exploring Stocks and Bonds:
Stocks represent ownership in a company, while bonds are akin to loans made to a company or government. Investing in stocks and bonds can be done individually or through mutual funds and exchange-traded funds (ETFs). These funds pool money from many investors to buy a diversified portfolio of stocks and/or bonds.
The Power of Compound Interest:
One of the most powerful concepts in investing is compound interest. It’s the interest you earn on both your original money and the interest that money has already earned. Over time, compound interest can lead to exponential growth of your investments.
Utilizing Investment Accounts:
As a teen, you might consider a custodial account, like a Roth IRA for minors, especially if you have earned income. These accounts can offer tax advantages and are a great way to start saving for long-term goals, like retirement, even at a young age.
Diversification:
Diversification means spreading your investments across various asset classes to reduce risk. Instead of putting all your money in one stock or one type of investment, diversifying can help protect your portfolio from significant losses.
Research and Continuous Learning:
Before investing, do your research. Understand what you’re investing in, the fees involved, and the long-term prospects. Stay informed about market trends and economic factors that can impact your investments.
The Role of Technology:
There are numerous apps and online platforms that make investing more accessible and easier to understand for beginners. Many offer educational resources, simulated investing experiences, or the ability to start investing with small amounts of money.
Seeking Guidance:
If you’re unsure where to start, consider talking to a financial advisor. They can provide personalized advice based on your financial situation and goals.
Practical Tips for Young Investors:
Start small and gradually increase your investments as you learn and earn more.
Avoid making emotional decisions; investing is a long-term endeavor.
Reinvest your earnings to take advantage of compound interest.
Stay patient and consistent, as the most significant benefits of investing are often realized over many years.
How to Bank
Banking is a crucial aspect of managing your finances and developing good money skills for teens. It involves using various financial services provided by banks, such as saving money, accessing funds, and managing transactions. For teens, understanding how to effectively use banking services is a vital step toward financial independence.
Choosing a Bank:
Start by choosing a bank that fits your needs. Consider factors like branch and ATM availability, fees, interest rates on savings accounts, and customer service reputation. Online banks might offer higher interest rates and lower fees compared to traditional banks but consider your comfort level with digital-only services.
Understanding Different Types of Accounts:
There are mainly two types of accounts:
Savings Accounts: Ideal for storing money you don’t need immediate access to. They typically earn interest over time, helping your savings grow.
Checking Accounts: Suitable for daily transactions like depositing checks, withdrawing cash, and making payments. They usually come with a debit card and have lower interest rates than savings accounts.
Opening Your First Bank Account:
To open a bank account, you’ll need identification (like a driver’s license or passport) and a minimum deposit, which varies by bank. If you’re under 18, you may need a parent or guardian to open a joint account.
Managing Your Bank Account:
Deposits and Withdrawals: Learn how to deposit checks and cash, and understand the limits and timelines for accessing deposited funds.
Using a Debit Card: A debit card lets you spend money from your checking account without carrying cash. It’s essential to track your spending to avoid overdrafts.
Understanding Fees: Familiarize yourself with potential fees, such as monthly maintenance fees, overdraft fees, and ATM fees, and learn how to avoid them.
Online and Mobile Banking:
Most banks offer online and mobile banking platforms, allowing you to check balances, transfer money, pay bills, and deposit checks remotely. Ensure you use secure internet connections and strong passwords to protect your financial information.
Budgeting and Tracking Expenses:
Your bank account can be a valuable tool for budgeting and tracking expenses. Review your account statements regularly to monitor your spending habits and adjust your budget as needed.
Building a Relationship with Your Bank:
A positive banking relationship can be beneficial in the long run. Get to know the services your bank offers, such as student loans, or financial advice. Don’t hesitate to ask questions or seek assistance when needed.
Safety and Security:
Understand how to protect yourself from fraud and identity theft. This includes monitoring your accounts for unauthorized transactions, being cautious with your personal information, and understanding your bank’s security features.
Planning for the Future and Your Financial Success:
Consider setting up automatic transfers to your savings account to build your savings habit. As you grow older, explore other banking products like credit cards, investment accounts, and loans.
How to Manage Credit and Debt
Understanding Credit and Its Importance:
Credit is essentially borrowed money that you use with the promise of repayment at a later date, often with interest. Building credit and great credit management is crucial for financial health, as it affects your ability to borrow money for major purchases like a car or a home in the future.
What is Credit?
Credit can come in various forms, such as cards, student and personal loans. Each type of credit has its own terms, interest rates, and repayment requirements.
Getting Familiar with Credit Cards:
Credit cards are a common form of credit and can help you manage money better. They allow you to borrow money up to a certain limit for purchases, cash advances, and balance transfers. It’s essential to understand the terms, like the annual percentage rate (APR), fees, and credit limits, associated with your credit card.
How to Use These Cards Wisely:
Pay Your Balance in Full: Try to pay off your entire credit card balance each month to avoid interest charges and build a great credit history.
Pay On Time: Late payments can result in fees and negatively impact your credit score. Set reminders or automatic payments to ensure you pay on time.
Understand Credit Utilization: This is the ratio of your credit card balance to your credit limit. Keeping your credit utilization low (generally below 30%) positively affects your score.
Understanding Loans
Loans are a fixed amount of money borrowed for a specific purpose, like education or a car, which you pay back with interest over a predetermined period. Understanding the interest rate and repayment terms is vital before taking out a loan.
Managing Student Loans:
If you have loans, understand your repayment options. There are often multiple plans available, including income-driven repayment plans that can make your payments more affordable.
Avoiding Bad Debt:
Not all debt is created equal. High-interest debt, like credit card debt, can be costly and difficult to pay off. Prioritize paying off high-interest debt and be cautious about taking on additional debt.
Dealing with Debt:
If you find yourself struggling with debt:
Create a Repayment Plan: Prioritize debts with higher interest rates and create a budget to manage your repayments.
Consider Debt Consolidation: This can simplify payments and potentially reduce interest rates.
Seek Professional Advice: If you’re overwhelmed, consider speaking to a financial advisor or a credit counselor.
Building and Maintaining a Good Credit Score:
Your score is a numerical representation of your creditworthiness. To maintain an excellent score:
Always pay your bills on time.
Keep your credit utilization low.
Avoid applying for multiple credit lines in a short period.
Regularly check your credit report for errors.
Learning from Credit Mistakes:
If you make a mistake, like missing a payment, learn from it. Set up a system to avoid repeating the same mistake, and understand that rebuilding your credit takes time and consistency.
8 Ways To Protect Your Money That All Students Should Know
1. Create and Stick to a Budget:
One of the most effective ways to protect your money is to create a budget. A budget helps you track your income and expenses, ensuring that you live within your means. It also helps you avoid unnecessary debt and save for future goals.
2. Build an Emergency Fund:
An emergency fund is a savings account that you use only for unexpected expenses, such as car repairs or medical bills. Aim to save at least three to six months’ worth of living expenses. This fund acts as a financial safety net and prevents you from resorting to high-interest debt in emergencies.
3. Use Credit Wisely:
Credit cards can be useful tools for building great credit, but they can also lead to debt if not used responsibly. Always try to pay off your credit card balance in full each month to avoid interest charges. Be mindful of your credit utilization ratio and avoid maxing out your credit cards.
4. Be a Smart Online Shopper:
In the digital age, online shopping is a norm, but it comes with risks like overspending and exposure to fraud. Protect your financial information by shopping on secure websites, using strong passwords, and regularly monitoring your bank and credit card statements for any unauthorized transactions.
5. Educate Yourself on Financial Scams:
Be aware of common financial scams targeting students, such as phishing emails, scholarship scams, or fake job offers. Never give out your personal or financial information in response to unsolicited requests, and always verify the legitimacy of any offer or request.
6. Invest in Financial Literacy:
Understanding the basics of personal finance, such as budgeting, saving, investing, and credit, is crucial. Take advantage of resources like books, online courses, or workshops to enhance your financial knowledge.
7. Avoid Impulse Buying:
Impulse purchases can quickly derail your budget. Before making a purchase, ask yourself if it’s something you really need or if it can wait. Waiting can often reduce the urge to buy on impulse, saving you money in the long run.
8. Plan for the Future:
It’s never too early to start thinking about long-term financial goals, whether it’s saving for a car, college tuition, or a trip. Setting goals and planning for them can motivate you to make smarter financial decisions and help you avoid unnecessary spending.
Things Teens Waste Money On
While it’s important for teens to enjoy their youth and have fun, it’s equally important to be mindful of spending habits. Recognizing and avoiding common spending traps can help save a significant amount of money. Here are some areas where teens often spend more than necessary:
1. Trendy Clothes, Shoes, and Cosmetics:
Fashion and beauty trends can be a major financial drain, especially when chasing the latest styles. Opt for classic, versatile pieces that won’t go out of style quickly. Consider shopping at thrift stores or waiting for sales to make purchases. Remember, expensive does not always mean better.
2. Smartphones and Apps:
With the latest smartphones boasting impressive features, it’s tempting to upgrade frequently. However, these devices can be extremely costly. Consider if an upgrade is truly necessary or if your current phone still meets your needs. Be wary of in-app purchases and subscriptions, which can add up over time.
3. School Dances:
Events like prom can be expensive, with costs for attire, tickets, and transportation. Set a budget for these events and stick to it. Look for ways to save, like borrowing attire or sharing transportation costs with friends.
4. Spring Break Trips:
Spring break can be a fun but expensive time. Instead of extravagant trips, look for more affordable alternatives or consider a ‘staycation’ with local activities. Save up for trips over time rather than relying on credit cards or last-minute spending.
5. Cars and Accessories:
The independence that comes with owning a car is exhilarating, but the costs can be substantial, including insurance, maintenance, and gas. If you own a car, consider ways to reduce expenses, like carpooling. Be cautious about spending on non-essential accessories.
6. Video Games and Consoles:
Gaming can be an expensive hobby, with the cost of consoles and games quickly adding up. Limit your spending by choosing games that offer more extended playability, buying used games, or waiting for sales.
7. Concert Tickets:
While attending concerts can be a memorable experience, tickets can be pricey. Set aside a specific budget for entertainment and look for discounted tickets or smaller, less expensive shows.
8. Expensive Dates:
Dating doesn’t have to be expensive to be enjoyable for young adults. Think of creative, low-cost date ideas like picnics, hikes, or movie nights at home. It’s the company and experience that matter most, not how much you spend.
9. One-Click Online Spending:
Online shopping is convenient, but it’s also easy to make impulsive purchases. Avoid buying things on a whim. Take time to think about whether you really need or will use the item.
Conclusion:
Being a teen comes with the excitement of new experiences and the freedom to make your own choices, including financial ones, good money habits, and other money matters. By being mindful of common areas where money can be unnecessarily spent, you can save money significantly and develop sound financial habits that will benefit you for years to come.
For these and many more tips on life skills, check out my book, Adulting Hard: Life Skills for Teens
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