Whether your teen spent the summer as a lifeguard, working at a retail store, or baby-sitting and mowing lawns off-the-books, this is the perfect age to teach money management. If they’re old enough to earn it, they’re old enough to learn strategies for smart saving and spending.
Open a checking account
This will help teens keep track of their money and lay a foundation for their adult money life. Most importantly, a checking account will teach your teen — the hard way — about bank fees. Only a few banks offer free accounts for young customers, so a credit union may be a better bet. Your teen will learn how to make deposits and write checks, as well as how to manage an ATM card and the fees that may go with it. Reviewing monthly statements with your child will give you an opportunity to discuss whether that $3 ATM fee at the mall was “worth it.” Teens also will learn quickly the convenience — and dangers — of debit-card transactions. Your daughter won’t be able to spend more than is in her account, but she’ll also see how fast the money can go if she’s not prudent.
Use the ‘bucket’ approach
Just as adults have short-, medium- and long-term goals, so do teens. Help them plan and discuss the differences between “needs” and “wants.” Let’s say your son has three goals: day-to-day spending to go to the movies or out with friends; a medium-term goal, such as buying a new iPhone, and a long-term goal of saving money for college or a new car. Help your child direct his earnings into three different “buckets.” Use the checking account for short-term spending, and two separate savings accounts for mid- and long-term goals. These different “buckets” of money give you the opportunity to explore interest rates (check bankrate.com for the highest-paying interest accounts) and show why a mattress isn’t the best place for savings. My children are 13, 10 and 6, and they’ve mastered the concept of certificates of deposit (CDs) for longer-term savings. “The Bank of Mom and Dad” pays 10 percent interest on six-month investments. Because the kids are such adamant long-term savers, we may soon need to lower that interest rate. (We can save this for a future column.)
Consider a matching program
If your teen is all about instant gratification and long-term savings isn’t a priority, consider instituting a matching program, similar to those offered by employer 401(k) plans. For every $50 your teen saves for a long-term goal, you can match 10, 25 or even 50 percent. Entice your child with some real-life examples. Use your own 401(k) plan statements as examples of how the “free money” of matching funds works, and spend a few minutes together using compound interest calculators such as those found at bankrate.com or finaid.org.
Talk about credit cards
Thanks to the Credit CARD Act, borrowers younger than 21 must show an ability to pay before getting a credit card. Once your child has a job, he or she may qualify, or you might be asked to co-sign the account. Co-signing is a mixed bag. It allows you to keep an eye on the account, but you’re also responsible for the account should your child flake. Another option is to make your child an authorized user on your card. That will help you stay on top of his or her spending. And if you have a good credit history, it will help build your child’s own credit history. Use your own credit card statements as an example, whether or not you pay your balances in full. New regulations mean your statement will clearly show how long it will take you to pay the debt if you only pay the minimum. Even if you have a less-than-stellar credit history, you can teach the “do as I say, not as I do” lessons of credit management.