Setting Money Limits and Expectations for Kids

To become wise spenders and habitual savers, teens need a regular but limited source of income, be it a monthly allowance or earnings from a job, and some freedom to decide how to use it. “Requiring them to make tradeoffs is important. This doesn’t happen by doling out money whenever kids ask for it,” says Ann Freel, director of Family Education and Governance Services for Northern Trust.

A monthly allowance of a fixed amount teaches older kids to control their spending, provided parents say no when they ask for more money after blowing it all in the first week.

Be upfront about what teens are expected to pay for. Perhaps they can pay for entertainment. But what about clothing, extracurricular activities, car insurance or earmarking a certain amount for college? “There’s no right or wrong decision, but be sure to make teens responsible for multiple expenditures so they have to make decisions and tradeoffs,” Freel says.

“Set up teens with a bank account as well as a realistic monthly budget so they can track and manage cash flow for multiple purposes,” she adds.

Task older kids with researching accounts with the lowest fees, highest interest rate and teen-friendly features like text messaging to track debit card purchases and account balances.

Teaching Teens to Save

Encourage teens to put aside money by explaining the concept of compound interest. Use an online calculator to show various scenarios and how it pays to start saving at a young age instead of putting it off. Consider matching their savings for added incentive to stash a set percentage of their income. Ten percent is a good rule of thumb, although some families require teens to set aside considerably more to contribute to major purchases and future college expenses.   

Help teens establish and achieve long-term savings goals. Cars, video game consoles and even prom dresses are not cheap, so make it clear early which major purchases teens are expected to save for so there’s ample time. If you plan to give your teen a car, consider asking him or her to pitch in for gas, insurance and upkeep or adjust allowance accordingly.

It’s also a great time to help teens plan for the unexpected. If they didn’t anticipate wanting the next new iPhone, for example, what are they willing to give up in order to get it?

What About Investing?

By the time they head off for college, teens should understand the importance of saving money not just for specific items but also for the unexpected, such as emergencies and enriching opportunities.    

Introduce teens to the basics of investing as part of regular family meetings. Not sure where to start? Teens are likely learning about the stock market in school, so now is a good time to define asset classes and how cash, stocks, bonds and, for those interested, alternative investments play a part in a diversified portfolio. If your teen isn’t learning it in school, web-based games and “fantasy investment” games let teens experiment without risk. Freel suggests including siblings and cousins in some of these activities to keep it fun but still educational.

One hour with your family’s financial advisor can help your teen build a simple, diversified portfolio while helping introduce the concept of working with financial professionals. They may be making simple decisions now, but as their financial lives grow more complex, they’ll have established a relationship with someone they trust.

Set some parameters around teens’ investments, but let them make mistakes – provided they aren’t too costly – and walk them through what went wrong. “When your son or daughter wants to change things up, have him or her present the case,” Freel suggests.

Teaching Teens to Use Credit Wisely

“Building a credit history” is not necessarily a good reason to supply teens with a credit card. However, teaching teens about the responsible use of credit is important.

Start by using an online calculator to show that compound interest is not their friend when it comes to credit card balances and the often overlooked trap of fees and minimum payments. Teach teens by the time they head off to college how to access and interpret their free credit reports.

If you decide to give an older teen a credit card, ask the card issuer to assign a low credit limit to help him or her learn to manage credit without the risk of serious debt. Or consider a secured, or prepaid, credit card that requires a deposit, which then represents the card’s credit limit. A secured credit card is otherwise the same as a regular one: A bill arrives each month with the option to pay the minimum payment on up to the full balance, and activity is reported to the credit bureaus.

If a teen’s credit card is to be used for emergencies only, define what qualifies as an emergency. It’s especially important to identify examples of what is and what isn’t an emergency. That aside, teens should apply the same principle to credit cards that governs the use of debit cards: Money must be available to cover each purchase.

In short, whether it’s saving, investing or using credit cards, the best way for kids to learn is by doing. “I tell parents that the way to teach their kids to manage their financial lives is no different than anything else they want to become good at,” says Freel. “It’s the same way you get to Carnegie Hall: Practice, practice, practice.”

See more at: https://wealth.northerntrust.com/wealth-management/teaching-tradeoffs-kids-and-money