Ah, the teen years. Filled with opportunities to learn—and, usually, some angst. There is likely no better investment for you as a parent than time spent now teaching your children the value of money and how to manage it. The lessons they learn early on about budgeting, saving, spending and investing will help them become fiscally responsible adults who feel confident managing finances on their own.
Of course, money is a big topic, and knowing where to begin—and how much to teach—can feel overwhelming for any parent. Here is a list of seven insights designed to help you start the conversation with your teens.
Insight No. 1: Balance Your Budget to Stay on Top of Your FInances
The essential math lesson here is that money going out must equal less than money coming in. To make that calculation, you first need to monitor your spending and track every dollar you earn, so that you can see whether you’re using your money wisely—or not. If you’re always coming up short at the end of the month, budgeting will show you where exactly the bulk of your money is going and where there may be opportunities to cut back.
Once you’ve tracked your spending for a month or two, you can create a list of everything you buy during the average month by category (e.g., food, clothing, entertainment, school supplies).
If your total spending for the month is greater than your available income, it’s time to look at the categories and see where you can cut back. If your total expenses for the month amount to less than your income, you have a surplus, which is a perfect opportunity to start saving for a bigger ticket item or to begin building an emergency fund for that rainy day.
Insight No. 2: Match Your Savings Account to Your Needs
Deciding where you should save your money will depend on how long you intend to have your money in a certain account, what types of perks the account offers and what type of access you’ll need to your money. Here are three common account types:
● Savings accounts: Regular savings accounts allow you to earn interest. But these accounts typically have a lower minimum deposit to keep them open, and you also can usually visit a bank branch to deposit cash rather than using an ATM.
● Money market accounts: These accounts combine features of a regular savings account with those of a checking account. Money market accounts usually have a slightly higher interest rate than a basic savings account, and you may be able to write checks on the account. A higher minimum deposit, however, may be required to keep it open, and banks typically charge a monthly fee.
● Certificates of deposit (CDs): With a CD, you agree to leave your money untouched for a set period of time, anywhere from 30 days to five years. The longer the term, the higher the interest rate, and when the time limit is up, you can withdraw the money. There are typically no monthly maintenance fees with a CD, and online banks may require lower initial deposits. If you don’t need the money right away, this option will give you the best bang for your buck, but early withdrawal of the money typically triggers a penalty fee.
Banks will advertise two types of interest: annual percentage rate (APR) and annual percentage yield (APY). The APR is typically listed for credit or loan accounts and is simply the rate of interest on an annual basis. The APY, typically listed on savings accounts, money market accounts or CDs, factors in compound interest applied to the balance—which shows you the value of saving over time.
Insight No. 3: Save Consistently for Long-Term Goals
The earlier you start saving for a big-ticket item—whether a new car or school tuition or an apartment after college—the more interest compounding will work in your favor.
When interest compounds, it means you’re earning interest not only on the money you deposited, but on all interest you’ve earned thus far. Like a snowball rolling down a mountain, your balance continues to build on itself as time goes on.
For example, if you saved $1,000 in a savings account earning an APY of 1%, with interest applied monthly, you’d have $1,010.05 at the end of the year. After 10 years, your initial deposit would be worth $1,105.12.
Now, let’s say you’re able to add just $20 a month over those 10 years. At the end of that time, you’ll have $3,628.12, thanks to compound interest. For comparison, if you’d put that same money away in your piggy bank, you’d have accumulated just $3,400 over the same time period.
Insight No. 4: Learn About Tax Brackets and Effective Tax Rates
The United States uses a progressive tax system, which means that different portions of your income are taxed at different rates. Regardless of the total amount you earn, the lowest tax rate, or 10%, will be applied to the first $9,875 of your income. The rate rises as your income hits the next threshold.
So, for example, let’s say you earn $50,000 a year. Subtracting the standard deduction amount, about $37,600 of that would be taxable income. You would pay 10%, or $988, on the first $9,875, and 12%, or $3,327, on the next $27,725—for a total tax bill of $4,315. Your marginal tax rate would be 12%, but your effective tax rate—or what you really end up paying—would be 8.6%.
As you earn more, your effective tax rate would rise. Say you earned $100,000 annually. You would pay 10% on the first $9,875, 12% on the next portion up to $40,125, and 22% on the next chunk up to $85,525. Assuming the standard deduction again, your effective tax rate would climb to 15.1%, with a marginal tax rate of 24%, and your total federal taxes would be $15,104.
Insight No. 5: Learn About Credit Cards
Using credit cards responsibly is a great way to build a positive credit history, so long as you pay your bill on time and in full each month. If you don’t understand credit card basics, however, you can wind up with late fees and interest charges that make the items you purchased more expensive than they would otherwise have been. Here are some common terms to be familiar with before you start charging:
● Annual fee—Some cards charge a fee for every year you use the card. The upside is typically some sort of reward or cash back offer, but before you take on one of these, make sure you’re going to earn enough in rewards to balance out the fee.
● Balance transfer—Many credit cards offer the option to transfer the balance from one card to another for a lower-interest- or zero-rate introductory offer. That can be a way to take advantage of a lower rate while you pay down a balance, but be sure to read the fine print so you understand when the new interest rate will take effect.
● Cash advance—Many credit cards offer the option of taking a cash loan from your account. In an emergency, it might be worthwhile, but be aware that the interest rate will be higher than on regular purchases and interest begins accruing immediately, so the debt can add up quickly. Banks also usually charge a fee for cash advances.
● Credit limit—This is the total amount you can charge to your credit card. The amount will depend on your credit history, income and overall debt. While your limit may start out low, you can request an increase after some period, when you’ve shown you can pay your bills on time.
● Minimum payment—This is the lowest amount you have to pay each month to avoid a late fee—usually 1% of the balance, plus interest and any fees due. Just keep in mind, you will still pay interest on the remaining balance, so your overall debt will rise steadily if all you pay is the minimum each month.
For more credit card terms your teens should know, read “22 Credit Card Terms You Need to Know.”
Insight No. 6: Understand That Investments Make Money in Different Ways
There are two main ways you can invest money to make money: Either the investment pays out income, such as with a bond, or it increases in value, like a stock. Each comes with a level of risk, higher or lower depending on the potential reward.
● Stocks—Also called equities, these shares in a public company are traded on the open market and rise and fall depending on whether investors are optimistic about that company’s prospects, as well as on other factors, such as how the economy and the markets are generally faring. The goal, of course, is to try to buy the stock when it has a likelihood of appreciating in value; the higher the risk, the more money you can potentially make or lose on that investment.
● Bonds—When you purchase a bond, you are effectively lending money to the company selling it—or in the case of U.S. Treasury bonds, you’re lending to the government. The bond issuer, or the borrower, promises you, the lender, to return the principal when the bond matures, as well as a set rate of interest. The amount of interest you’ll earn will depend on 1) the company’s credit rating—those with lower ratings will pay higher interest because they are riskier, and 2) the maturity date—the longer the term of the bond, the more interest you’ll make.
Some stocks also pay dividends, or set payments to shareholders each quarter, but if their earnings fall, they may decide to cut the dividend.
Insight No. 7: Build an Emergency Fund
As many families learned during the 2020 economic slowdown due to the COVID-19 pandemic, it’s nearly impossible to predict when you’ll need a cushion to see you through a challenging time. To avoid needing to take drastic measures to pay the rent, such as taking high-interest cash advances on credit cards, start building an emergency fund—a dedicated pot of money set aside for those unanticipated financial curveballs life throws your way.
Experts recommend having enough on hand to cover anywhere from three to six months of living expenses. But remember that you can start small; putting aside $20 a week can help you accumulate $1,000 in the first year. Consider putting your savings on automatic pilot by scheduling a transfer from your checking account to savings a day or two after you receive your paycheck.
While you shouldn’t be afraid to use your rainy day fund when it starts raining, you also want to be thoughtful and prudent about what you consider bad weather. Keep yourself honest by asking yourself some questions before you tap into those savings. For example, is the purchase really a need-to-have or is it a nice-to-have? Is this event an example of the type of emergency you’ve been saving for—or is it a new purchase you want to make? Is there any other way you can pay for the expense, such as negotiating down a monthly bill?
C.J. Prince is a freelance writer who covers finance, business strategy and leadership. Her work has been published in Working Mother, Entrepreneur and New Jersey Monthly Magazine, as well as many financial websites and magazines.