Preparing Teens for Financial Success
Empowering kids age 14-17 with essential money management skills
When children are young, parents make all the decisions—from what they eat, to where they live, to what the family spends money on. Over time, however, the goal is to gradually transfer that responsibility, helping kids become more and more independent. By the time they leave home, we hope to have equipped them to make smart, informed decisions on their own.
Financial responsibility is a big part of this independence. If teenagers never have to think about earning, budgeting, or saving, how can we expect them to manage their finances once they're out on their own? Fortunately, the high school years offer plenty of opportunities for practical financial learning. Here are five strategies to set your teen up for success:
Encourage Part-time Work
A foundational element of financial education is income generation. Encouraging your teenager to engage in part-time work—whether at home or in a formal setting—establishes the cornerstone for tangible financial learning. While extracurricular activities and family obligations may impose limitations, the requirement to earn an income is crucial. It transitions financial concepts from theoretical to practical, and signals the gradual shift of responsibility from parent to child. Afterall, if there is no requirement to earn their own income, it’s easy to assume that someone else will take care of everything and buy what they need vs starting to think about that responsibility themselves.
To get practical for a second, imagine your son or daughter earns $16/hour working at the grocery store down the road and they commit to 10 hours per week. That amounts to $640 per month. First, they’re going to learn about taxes. That’s a good lesson in and of itself. Next, they’re going to learn about time-management and the value of a dollar. What does 40 hours of work get them? They may start having a greater appreciation for all you provide once they start doing the math, and it will also give them a better understanding of what life costs. For some, it may spark ambition or even an entrepreneurial itch.
Teach Basic Budgeting Principles
Now that your teen understands how much they’ll be taking home after taxes, it would be a good time to discuss budgeting. You may event want to consider showing them parts or all of your family budget so they get a better idea of what the lifestyle they’ve come to know costs. This can also be a good jumping off point to explain why they’ll be responsible for certain expenses. Show them that every budget has fixed and discretionary line items. There are things you have to pay every month even when you don’t want to. Because of that, it wouldn’t hurt to have them be responsible for at least one fixed expense; maybe a car payment or gas.
Next, help them determine what discretionary spending they will be responsible for - things like going out with friends or buying something at the coffee shop. Encourage them to compare their income with their spending needs. Do they need to work more or earn a higher wage? Remind them that some purchases or experiences require saving or investing, so they should leave room in the budget to set aside a percentage of income each month.
Set Financial Goals Together
Once your teenager has an idea of what they’re making, what monthly costs fall under their responsibility and what they have available to save or invest, start setting financial goals together. Investing for the future or delaying gratification doesn’t come easy to many, but try to help them envision their future self and the things that they desire. Show them a path to achieve the goal.
Some examples could include a down payment for a car, funding a senior spring break trip, or saving to cover the amount of college expenses that you determined they will be responsible for. Help them understand how much they need to save each month to hit the goal and that there are real consequences to not hitting the goal.
The more you can provide guidance in this arena instead of bailouts, the more likely they’ll learn to take this seriously. If they’re behind on a goal, or something unexpected comes up, help them problem solve for solutions that can get them back on track. There is just as much accountability on you as the parent to not pay for something they fell short on that you agreed was their responsibility.
Illustrate the Power of Compound Interest
As you set financial goals, inevitably you’ll start talking about long term planning. Your kids may or may not get exposure to investing in high school unless they take some kind of business course. Many of our clients have shared that their investing habits started when mom or dad sat down with them and taught them about stocks or compound interest. We’d encourage you to be that mentor for your children. Here are some talking points you can share with them:
- How compound interest works: If you invest $200/month starting at age 15, and assume a 7% average annual rate of return, you would have nearly $1.1M by age 65, even though your contribution was only $120,000.
- Investing is exponential, not linear: 25 years into that scenario, you had contributed $60,000 and it would have grown to $163,000 based on the 7% rate of return. Investing requires a long-term mindset because growth is exponential, not linear.
- The delayed investment cost: If you started investing 10 years later, at age 25, you would need to save $400/month (double) to reach the same number at age 65. By age 35, that number jumps to roughly $900/month. Starting early pays off.
- Investments rise and fall over time: Illustrate market fluctuations by showing them the S&P 500. While over time, the broader market goes up, there are points in time where their investments may be down 20%, 30%, even 50%. This highlights the importance of diversification and staying calm during fluctuations. Investing is a great way to build wealth, but it can be an emotional ride. It’s important to match your investments to your time horizon and automate the strategy so your emotions don’t hijack your goals.
Open a Brokerage Account
As we mentioned earlier, with investing, starting early pays off. A great first step for your teen is to help them open a brokerage account. This could be a taxable account or a Roth IRA. Really it goes back to the goals you set together. Help them start small, build a system, and work on it together. You’ll love to see how excited they get when they start to see their money grow.
If these conversations have been top of mind for you, know you’re not alone. We often hear from clients that they’re looking for ways to build financial literacy and we know these discussions have the ability to set kids on a whole different trajectory. If you’re wondering where to start and would like to have a tailored conversation around how to approach financial planning for your children, an advisor at Voyage would love to help. Connect with us today.
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All investments carry some level of risk, including loss of principal invested. No investment strategy can assure a profit and does not protect against loss in declining markets.
