Whether you are homeschooling, your teen or they attend public or private school, personal finance is rarely covered in a typical curriculum. It is up to you, the parent, to make sure you are teaching your teens the personal finance skills they will need to be successful adults.
Below you will find the main points of personal finance your teen needs to know, before they become an adult and start borrowing, spending, and hopefully, saving. I have also included links to articles on each of these topics that go into more detail than I do here. You will also find links to helpful, free, calculators. None of these links are affiliate links or take you to landing pages to buy stuff. The purpose of this article is to inform you and your teen and give you helpful tools to educate them in the basics of this important life skill.
Budgeting Basics
The first place to start when teaching teens about finance is with budgeting. You can start by showing them your own budget. Show them your paycheck. Show them your gross income, your taxes, and how much is deducted for medical insurance.
Tell them that many purchases come with expenses that are hidden. Such as, when you buy a car, you also need to pay for auto insurance, gas and repairs. Show them how you balance a budget. Talk about what strategies you use when money is tight. Where do you cut expenses?
Once you have shown them some basics of your own budget, you can take them to the budget planning calculator. This simple calculator is based on people with average incomes. You just input income, and the calculator shows you an approximate budget for the main budget categories. I inputted our monthly family income and found the results to be pretty spot on. This tool can help your teen think about their future and what kind of income they would need to make to live comfortably.
Do they love name brand clothing and want to spend $500 a month on clothes? Or maybe they love eating out at fancy restaurants and want $500 available for that? They can look at both the food and clothing categories for different monthly incomes and then also the amount available in the personal and entertainment categories that they could devote to those lifestyle choices. (Also, remind them, that parents often devote the entirety of the personal and entertainment budget to their kids. Things like vacations, dance classes, and sporting equipment take over this category sooner or later.)
Scroll down past the calculator (on the page linked above) and there is a short article that explains some of the basics and also how the percentages for each category will change dramatically for people with very low or very high incomes.
Encourage them to think about the best way to budget their own current income if they have any. One trap people fall into with personal finance is only thinking about the current moment. If they have the money or credit in the account, they think they can afford an item. But are they forgetting about their future needs?
I love this opportunity cost calculator, it helps teens see what would happen if they saved instead of eating out for lunch, or buying that new $200 pair of sneakers they are drooling over. This unbranded product calculator can help them see how much money they would save over a lifetime if they chose $40 dollar jeans instead of $150 jeans every time they purchase. Understanding these concepts sets kids up to make better choices on a daily basis.
Checking account
If your teen is old enough, consider moving them beyond their piggy bank and wallet and getting them a checking account. Especially if they have a job and are getting checks. Capital One has a unique teen checking account that connects with the parents’ accounts. There are no fees, or minimums, and your teen can even earn a little interest on the balance. Parents will receive text alerts so they know how much their teen is spending, and where. You can get this account for children as young as 8-years-old because of how it is connected to your account. And when your teen turns 18, they can easily transfer their balance to their own independent checking account.
Taking money out of their wallet and putting it into an account is good way to help teens get used to the idea that most of the money they receive should not be spent immediately. It should be set aside for future needs. Encourage them to put only a certain amount of money in their wallet, for a personal/entertainment budget, and put the rest in their checking or savings account.
A checking account can be a convenient way for a teen to pay for gas, car insurance, or other basic purchases that you may ask them to pay for themselves.
Credit Card
Teens may not be ready, or old enough, to have their own credit card, but they need to know how they work. Show them your own credit card accounts, balances, and interest rates. If you don’t use any credit cards, explain to them why you made that choice and the benefits you feel it has brought to your family finances. Tell them stories of people you know (without names or blaming) that got themselves into financial trouble with credit cards.
Whether or not you use credit cards, you need to explain to your teens how to use credit cards wisely. So that, when they are old enough that they will make their own choice on whether to use them, they will have a fighting chance of not getting into eternal credit card debt.
Play around with this calculator to show them how the interest rates on credit cards work and give them a solid understanding of why they don’t ever want to borrow to the point where they are only able to pay the minimum payments. Then scroll down and read the article How to Safely Handle Credit Card Debt.
I would not ‘assign’ any of these things as a task for your teen. Rather, make it bonding experience, something you do together. And don’t try to cover all of personal finance in one afternoon. Make a weekly date, perhaps during the summer, where you chat finances together, perhaps over an ice cream or coffee. If you make talking finances a pleasant, bonding experience, they are more likely to come to you for advice as young adults.
If you have made mistakes with credit cards in the past (or currently) don’t be afraid to share that with your teens. Teens will appreciate your honesty and be more careful with their own financial decisions if you are honest with them.
Teens also need to understand what a credit score is and how it is calculated. If they want to be taken seriously for future lending such as home mortgages, they need to start establishing a great credit score.
When your teen is ready to apply for their first credit card, they can use this comparison calculator to see which card is a better deal. There is also a lot of great information about how and why to state out of credit card debt under the calculator.
Loans
There are many kinds of loans that are a normal part of modern life. Although it sounds ideal to remain completely debt free your entire life that is a goal that is unattainable for most people. So rather than trying to convince your teen to never borrow money, educate them about different types of loans. Talk to them about different interest rates. Get them thinking about when it may be a good idea, and when it may be a bad idea, to borrow money. Many wealthy financial investors borrow money, they just do it wisely.
There are some basic loan calculators at pigly.com along with an article that goes over a wealth of basic information about loans that every needs to know.
College Loans
First let’s talk about college loans since that is likely one of the first types of borrowing your child will be encouraged to take. With college costs soaring and many degrees that have an elusive value, it is important for kids to think about how they are going to pay off any college debt before they take it on.
I think a lot of conversations need to happen around college expenses, degree decisions, and what type of career the degree will prepare kids for. There are too many unemployed and underemployed college graduates to simply go to college because everyone else is doing it.
Yes, college can be a great thing, it can set your teen up to make more money as an adult, but it can also set them up to be in debt for the rest of their lives. I know people who are retirement age and still have college loans that are not paid off. Thinking through their life choices from a financial perspective can help them with the many decisions they will be facing as they complete their high school years.
These conversations can also be a motivating factor to help kids put in their best effort, either academically, in the arts, or both, to be eligible for as many scholarships as they can get. If you child has a dream that is educationally expensive, you can encourage that dream while still talking to them about the financial reality and risk involved and encouraging them to be proactive in looking for the best solution.
Student loans are not that different from personal loans. Although they come with deferment options and tax advantages, they often have a higher interest rate. You can use this personal loan calculator to input the amount your teen is thinking about borrowing for student loans. Looking at the total amount paid over time, even if everything goes smoothly, such as finding a good paying job straight out of college, which is not a guaranteed event, can be very sobering.
Keep in mind when inputting tuition, that many people do not end up paying sticker price (what is listed on a college website) many students will receive scholarships and financial aide. But the price is still often high, and your teen needs to have a solid career plan and know that they will enjoy work in their chosen field before spending tens of thousands of dollars. College is no longer a ‘go party and find yourself’ option for typical households, it is just too expensive.
If your child is not serious about their future, they may be better served by getting a job while they think about what they want to do in the future. A job will provide them with experience, and many skills, and even if they hate the job, it can help them understand themselves more and realize what they want to do.
Also, do not be afraid to look into less traditional and cheaper ways of getting a college education. Depending on the degree they are pursuing, they may be able to take CLEP tests to cover many credits and lower the overall cost. This can be a great option for a kid who wants an English or Marketing degree. However, if they want to be a doctor or lawyer, they will need to take a more traditional route and attend a university for all of their courses.
Listen Money Matters has a great article with ideas for alternatives to college degrees, and links to information about how to lower your student loan debt, if your teen plans to go to college.
You can find more great articles and resources about alternatives to college at Praxis, a company that provides paid internship opportunities for kids looking to get started with great careers without the college degree. Whether or not your teen pursues a college degree, I encourage you to listen to the Forward Tilt podcast with them. It is not too long and gives a lot of practical career advice that will help them no matter where they are going in life.
Car Loans
A car loan may be another temptation for teens to get into debt they can’t afford. They may look at the small monthly payment and think they can afford it with their part-time job, no problem. One thing teens need to understand is that debt can weigh them down, especially when they are young. Owing that monthly car payment may mean they can’t quit that part-time job when they find out they hate it. Or it might mean it will take them 10 more years to pay off their college loans because they can’t put that car loan payment money towards the college loan.
In most places, you need a car to get around, but for most teens it makes more sense to save up and pay cash for an inexpensive used car. They need to research the car and make sure it will not cost them a fortune in repairs. They also need to keep in mind that all cars have maintenance costs, gas costs, and insurance costs. This automobile operating cost calculator can help them think about all those additional expenses. Before purchasing a car, they need to contact their car insurance company and get a quote on the insurance. Some cars cost much more to insure than others.
You can use this auto loan calculator to show teens how long it will take to pay off cars with different price tags and loan schedules. There is also a helpful article with details about auto loans under the calculator.
Mortgages
It will probably be years before your teen is thinking about taking out a mortgage. But they still need to understand the basics. How much of a down payment should they be saving for? What payments will they be able to afford with the career path they are planning? What kind of lifestyle do they want to have?
Warn your teens not to rely on banks to be an accurate measure of how much house they can afford. If you buy a more expensive house, banks get more interest, it is to their advantage to encourage people to devote a larger portion of their income to house payments.
This buying vs. renting calculator is a good tool to check out and does a good job of showing kids all the different add-on costs of buying a home. The difference is not simply a matter of monthly payments.
Encourage them that when the times comes to consider a mortgage, they need to look carefully at their own planning budget, and even if a bank says they can afford another ($150,000), they know better than their bank what size of monthly payments they will be comfortable with.
There are also costs in addition to the basic mortgage payment, and I have known people who went all the way through signing processes without realizing what their final payments would be. They were stretching to make the basic payment, but when they realized they had to add insurance and real estates taxes to those payments, they just didn’t have enough money left for their basic monthly budget.
These kinds of mistakes can set back the personal finances of families for years. So a basic understanding of mortgage lending, understanding that banks don’t have your best interests in mind, and also that they don’t know the details of your life or how that affects the percentage of your budget that can be dedicated to house payments, can all help save the next generation from making financial mistakes.
This mortgage calculator will familiarize your teen with the different add-on expenses of mortgages, and how much money will go to interest on the mortgage vs. principal on the loan payment. It is also an excellent idea to share your own mortgage numbers with your teen. Maybe pull out the first mortgage statement and show them how much went to interest, taxes, and insurance. Then compare that to a current statement so they can see how the numbers change. Share with them the year in which you will own your home.
You may also want to introduce your teen to the different types of mortgages that are available. Dave Ramsey and Nerd Wallet both have easy-to-understand articles comparing the different mortgage types.
Savings
Now that you have covered several of the main spending categories with your teen, it’s time to start talking about savings. Every dollar that comes into your teen’s hands will either be saved or spent. Encourage them to save and spend on purpose. Start with the habit of deciding what portion of their income they will save. Talk about the advantages of having a savings and the different categories of savings. Understanding compound interest is good start to help them understand what type of accounts to look for when they are where to put their savings account.
You can put an inspiring spin on studying savings interests rates with this Will You Be a Millionaire Calculator?
Short-term
Separate out savings into two basic categories. If the savings is for a large purchase that will be made in the next year or two it is short-term savings. For teens this might include items such as laptops, smart phones, or cars. These are not everyday purchases and a portion of the monthly budget may need to be set aside for several months before there are enough funds to cover the purchase.
Short-term savings help people stay in control of their debt-to-income ratio. Talk about what will happen if your teen has an unexpected expense and does not have enough in savings to cover it? Will they use a credit card? How much more will that expense cost them in interest by the time the credit card is paid off?
Talk about the importance of a rainy-day savings fund for unexpected expenses and help your teen decide how much their own rainy-day fund should be.
Then they can use this savings goal calculator to find out how much they need to save each month to reach their goal.
Long-term
Long-term savings should not be touched for rainy days. These are the funds that stay where they are and hopefully grow with interest until the life event that they are created for comes to pass. It’s never too early for a teen to start setting aside a small percentage of their income towards a future down payment on a house or a retirement fund.
They can use this savings goal tracker to get an idea of how much money they would have to put aside, and for how many years, in order to save the amount needed for a down payment on a house. You can even look up some home prices in your neighborhood and calculate what an average down payment would cost.
Now that your teens know some of the basics of personal finance they are one step closer to becoming successful adults.
