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Financial literacy for teens: 6 lessons about money management

Shot of smiling father and teenage son washing fresh vegetables in kitchen sink
Thomas Barwick/Getty Images

Teenagers tend to live in the here and now, especially when it comes to money. In just a few short years, however, they'll need to make important financial decisions—like choosing a college or finding an apartment—that require a more long-term outlook.

That's why teaching your teens about money is one of the greatest gifts you can offer as a parent. Passing on financial lessons and sharing your values will help your kids develop a healthy relationship with money and set meaningful financial goals. One step toward boosting financial literacy for teens is talking through six core truths about money. Let's take a look.

1. Design your happiness one goal at a time

Parents may know all too well that money is a finite resource, but it's a concept kids have to learn through experience. Goal-setting can be a practical way to teach that, as consumers, we say "yes" to certain choices and "no" to others. As teens begin to manage their own money, you can guide them with "SMART" goal-setting.

S = specific
M= measurable
A= achievable
R= results-based
T= time-bound

Suppose your teen wants a specific new set of wireless ear buds to enjoy on the way to and from school next fall. Have them do some research. Perhaps they find a certain pair for $60—a measurable amount—that has the features they need and gets great reviews online.

Your teen may first have their heart set on a $150 set of popular ear buds, but you could encourage them to think through how far their part-time summer income might stretch. If those ear buds don't feel achievable, they may want to aim for the more affordable pair that performs almost as well.

Next, results-based goals have a specific endpoint. Maybe they want to break down their goal into smaller targets, like setting aside $10 of their job earnings or chore money each week so they can afford the ear buds.

Finally, set a hard deadline for when the goal should be completed. When the goal is open-ended, the sense of urgency gets lost.

2. Your budget is a dashboard

When you bring the word "budget" into a conversation, teens might start tuning you out. But it's important to convey that a budget isn't here to create a shackle on their money. In truth, a budget frees up money for the things that matter most.

Before creating an actual, detailed budget, make sure your teenagers understand the difference between needs and wants. Ask them which of their current expenses belong in the "needs" category. For a teen, it could be things like gas money and car insurance.

Then get them to list things they choose to spend money on but aren't essential. Their "wants" might include eating out with friends, movie tickets, certain clothing items or Internet streaming subscriptions.

Teach the 50/30/20 Rule

Once your teen has a clear understanding of needs and wants, you can help them create a budget with the time-tested 50/30/20 rule. With this method, 50% of money earned goes toward needs, and 30% is allotted for wants. The remaining 20% is earmarked for savings to manage large expenses that arise down the road.

If your teen primarily uses cash, have them create separate envelopes for these three categories. Every time they get an allowance or cash from their employer, have them put the appropriate amount in each envelope. If they have a debit card, on the other hand, have them review their two most recent statements and tally how much they've spent on needs versus wants. Often, the amount they're spending on nonessential purchases results in an "Aha!" moment.

3. A bank account beats a sock drawer

It's far better for your teen to keep their money in a bank account, rather than as a pile of cash in their room. When you talk to your teen, explain the advantages banks and credit unions have over their sock drawer:

  • Security. If cash is lost or stolen, it's probably gone forever. Bank accounts, on the other hand, provide stability. You can talk through the basics of FDIC insurance, explaining that even if the bank fails, their money will be protected.
  • Growth. Even the most hardworking teens will see the appeal in earning money without lifting a finger. Cash that's simply lying around won't increase in value over time. In fact, its worth may gradually decline because of inflation. You can talk through how money in a savings account will typically earn interest just by sitting there.
  • Convenience. We live in a world where fewer and fewer transactions are done with cash. Bank accounts give your child the ability to make purchases with a debit card or to transfer money between accounts electronically—all from their phone.

You'll also want to explain the importance of avoiding overdraft and maintenance fees. It can be helpful to schedule regular check-in times to go through statements together or review balances before planned purchases.

4. Make your money work for you

One of the key concepts of money management for teens is that time is on their side. When they deposit cash into a savings account, they earn interest and grow their balance. Most banks pay compound interest, adding any interest accrued yesterday to the existing principal before calculating today's interest. The result is a snowball effect—the amount they receive accelerates over time.

Let's take an example using online savings accounts, which tend to offer significantly higher rates than brick-and-mortar banks. Let's say the bank offers 4% interest that compounds on a daily basis. If your teen opens an account with $200, the balance would increase to $208 after a year. Even if they don't deposit more money, the account would be worth $298 after year 10.

If they don't plan to touch their money for several years, they may even want to consider investing in stocks or bonds. These have more growth potential than a savings account but also carry greater risk. They could purchase stock shares through a custodial account you manage. Some teen-focused debit cards allow them to buy shares of high-profile stocks right from the app.

5. Keep your college debt manageable

Between federal loans and private lenders, borrowing funds for college typically isn't a problem. However, paying it all back often is.

When it comes to higher education, show your teen how to be a smart consumer. A good rule of thumb is to keep student loan debt at or below their expected first-year salary. If they want to be a graphic designer and expect a starting wage of $45,000 a year, for example, they should aim to graduate with no more debt than that.

How can they keep their borrowing in check and still earn a degree? Encourage them to contribute to their own 529 account well before they head off to college. And seek out as many grants or scholarships as possible.

If they complete high school and aren't financially ready for college, talk to them about alternate paths.

6. Credit can be a slippery slope

When your teen becomes an adult, they'll be able to apply for their own credit card. While that freedom is exciting, it also can pose risks. After all, having what feels like endless purchasing power can be a heady temptation. If your teen isn't prepared to borrow wisely, they could later have to dig out from debt.

Certainly, there are situations when they may need a loan—to pay for college or buy a used car, for instance. You can help them make good choices by talking through borrowing for needs versus wants. An education can help them increase their future earnings, and a car can help them get to classes or a job. Using credit to buy an expensive pair of jeans is a different matter.

Keeping a balance on a credit card can be especially perilous because they typically charge steep interest rates. If your teen has a $300 balance on a card with a 25% APR, for example, they'll be charged $75 a year in interest.

Steer teens clear of pitfalls with these strategies:

  • Make sure they understand the difference between "good" debt (e.g. student loans) and "bad" debt (e.g. credit cards).
  • Explain the basic idea behind credit scores—that keeping low balances and making on-time payments can help them get better rates on future loans.
  • Remind them that creating "SMART" goals before making a purchase can help them avoid unnecessary debt.

Celebrate your teen's financial growth

As you discuss money with your teen, keep patience top of mind. Financial stress can be a challenging part of adult life, but aim to keep it from becoming the basis of your teen's relationship with money. As you foster financial literacy for teens in your own home, celebrate the wins. When they reach a SMART goal or pay off a strategically borrowed purchase, recognize their good choices. When they make a mistake, use it as a learning moment.

Need an ally? Your local Thrivent financial advisor can help you get the conversation started.

Hypothetical examples are for illustrative purposes. May not be representative of actual results.