The teenage years are particularly important when teaching your children the power of responsible spending. Here are some tips to keep you on track and help you raise financially successful children:
1. Needs vs. wants
Brace yourself! You are most likely going to be confronted with a well thought out rationale as to why they the item they want is a need.
Your teen may think that they need the latest smartphone, and you will have to make sure you stand firm and explain that a smartphone might be a need, but the latest model is a want.
You do not want to send a message to your children that their wants don’t matter, though. If they budget for their needs and have an emergency fund in case something unexpected happens, they can set up savings accounts for their wants.
2. Spend less than you earn and save
We need to teach our teens that if you spend every cent coming in, you’ll never get ahead.
When you spend less than you earn, you can pay your bills, avoid debt, save for the things you want, and even invest for your future.
Your teen’s goal should be to grow the gap. The bigger the difference between what they earn and what they spend is, the faster their savings will grow.
3. Track expenses and start a budget
Whether your teen has a job or gets an allowance, teach them to track what they spend and set up a simple budget.
Most teens (and adults alike) are surprised to see where their money goes when they start tracking their spending. If your teen has a smartphone, they can use a free app like Mint, https://mint.intuit.com
In their budget, your teen should consider their savings, spending and funds they receive. This helps teens to put cash in the bank, and still spend responsibly.
Creating a giving mindset is a great way to teach them to pay-it-forward, so encourage them to support or donate to important causes.
4. Start investing early
As your teen grows the gap between earning and spending, they’ll have more money to save.
If they have accumulated savings, they should consider investing too. The longer their money is invested, the more wealth they will build over time – tiny deposits count!
5. The power of compound interest
Teach teens the power of compound interest. When they invest money, and it starts making money, they’ll keep earning interest on top of interest. If they leave the money invested over several decades, they’ll see the power of compounding.
Time is the critical factor in building wealth through compounding. The earlier they start investing money, the more they’ll earn in the long run.
6. Understand gross vs. net pay
Teens do not realize there are deductions taken from earnings. Make sure they understand the difference between gross and net pay.
Good vs. bad debt
While all liabilities need to be repaid as a part of every budget, some debt moves you forward while other the other holds you back.
Good debt is money you borrow that helps you reach your goals, for example a student loan.
Bad debt needs to be avoided at all costs, as it normal carries high-interest rates and is most often used to purchase our wants instead of needs.
Your credit score matters
Teens need to understand that building a high credit score can save them money on interest rates.
Teach your teen that their credit score can be damaged quickly by irresponsible spending. Encourage them to review their credit report annually.
Big loans can really affect your life
When teens consider study loans, they’re thinking about their first real job, and that large paycheck. They may not realize they could be paying back loans for decades – even if they have good jobs.
Purchasing a car might be a few hundred rands a month, but young adults forget that’s only one expense they’ll have as they become more independent.
The importance of a side hustle
Some teens are natural entrepreneurs and have terrific ideas. You don’t want to dampen your child’s enthusiasm by only talking about money. Explain to your teen to not take on too much debt before they are sure that they’ll stick with the business, and that it will be profitable.
