Parent's Guide to Good Money-Managment Skills for Your Teen

Saving and managing money has become more and more important in today's ailing economy. Instilling good money-managing techniques is very important for us as parents to teach our children and teenagers so they can live comfortably and happily in the unforgiving world we live in. While this may seem like a daunting task, there are a number of different ways we can take that can make this process as easy and painless to us as possible.

To start, I would recommend specifying a time sometime during the week, every week, to talk with your teenager about this subject. Since they're probably in school during the weekdays, the best times to choose would be sometime during the weekend, such as Sunday afternoon or night. Nothing formal or anything, it could even be done over the dinner table or during some recreation time as casual conversation, but it is very important that it be done at least once a week.

Credit Cards:

Now, on to the tips. First and foremost, given the current credit crunch, it is vital that you tell them the dangers of using a credit card. I bet that you didn't know that credit card companies are actually allowed to visit many high schools and colleges. Not only that, credit card companies have bolstered their marketing toward our teenagers because they know many teens don't understand or know very much about credit card debt and how it works. Credit card companies do, though, and they definitely want their business. What I would recommend here is to tell them a personal story, I know we all have them, about our own struggle with credit card debt and the mistakes we made by over-extending ourselves. If they insist on having some sort of card, there are a few options that can be taken:

1) Make them get a job. If they want a card, then it is important that they understand that they must work in order to pay off their debts. This teaches them how the real-world works, builds experience, and lets them dip their foot into what debt is without going overboard.

2) Help them set up a bank account in their name and get them a debit card. A debit card is a great alternative to a credit card. A debit card works nearly like a credit card, minus the actual credit part. Coupled with a job, they'll be spending their own money on the card which means it'll have limits. Also, the feeling of spending your own money is always a little different from spending some big company's, and odds are they'll be a little bit more miserly with it. If your teen doesn't have a job yet, you can put money in their account for them to use, but in this case make sure they don't have a credit option on the card. This again teaches them spending limits, if they choose to blow all the money in the account in one day, they'll have to wait maybe a month before more money is injected into their account. Stay firm and they'll not want to be without money for a month again.

3) Credit cards can be useful and probably somewhere down the line your teen should get one. I recommend that for their first credit card, you get it in both your names and walk them through the process. Show them how to get a good one, reviewing all the numbers, credit limits, and interest rates. Teach them the importance of doing their homework on these things. Take this time to stress the importance of a credit score, tell them that a bad credit score might mean they can't buy their car or house later on down the line. Also teach them how to create a good credit score for themselves. Paying on-time, not just getting by with the minimums, etc.

When it comes to a credit card, always keep the conversation open and frequent. This is not a one-time talk but a learning process that takes time. Let them in on the conversation too. Teens respond and listen better when they have a voice. Ask their opinion. Tell them what you think, Ask what they think. These are key to successfully building a strong relationship with your teen and teaching them a valuable lesson on credit cards and managing money with them.

Bank Accounts:

Bank accounts are absolutely necessary in today's society. Teaching your teen early about how to properly read and use their own bank account is essential to prosper in this world. What I recommend is sitting down with your teen and looking over your own bank statement a couple times to show them what's going on with it. Teach them how to write a check. Tell them what a routing and account number are and where to find them. Starting good financial habits start with how to balance a checking account, so share how you balance your own. Also, our teens need to understand banking products and benefits, like direct deposits, CD's, savings accounts, etc. If you don't personally have some of these, that's okay too. Just tell them they're out there, maybe do some research with them on the pros and cons of some of these options.

Probably the best time to address a lot of this is when you go to help your teen make his or her own bank account. Make conversation with the bank specialist there about what that specific bank is all about and all they offer, even if you're not interested in anything more than a checking account for them at the time. After that, continue to expand on what was talked about for a few weeks, explaining what you think and asking what they think of all the different options that bank can offer. Your teen will thank you later, I guarantee it.

Budgeting:

Once your teen has dived into either a bank account or a credit line, teach them how to budget. Again, personal experience from your own life and how you budget is always a good start to the conversation. For teens, some of the best budget ideas is to divide incoming money into categories of spending. The most basic form of this is budget some of the money on bills (such as credit card bills if applicable to them), some of the money on recreation, and the rest in savings. While it is different for every person and situation, a good saving category should start at about 10% of income. Recommend that they save 10% of their income in a savings account for emergencies. A good choice to do this is to set up a 6 month CD, that way the money is sealed and there is no temptation there to spend it.

One good way to start budgeting learning is to budget with your teen. Do your budgeting together and let them have their own input. Also, take this time to show them that there are indeed bills in this world and that we don't get to keep all the money we earn. More on this in the next point though. In fact, let them have recommendations on how you should budget. They just might have some insight there. Just keep the conversation open. There are too many teens out there that have had parents who seemingly performed miracles of stretching an impossible budgets, but will grow up not having the slightest clue how they did it. I was one of them and it's no fun when you step into the real-world like that.

Bills, Taxes, Expenses, and the Cost of Living:

Way too many teens are going through school and graduating without having a clue about what the cost of living actually is. It is imperative that you teach your teen that living in the world isn't free. Give them an idea about how much it costs to have an apartment complete with utilities. Show them how much you pay for car insurance, and how much they'll have to pay when they get a car. Teach them about taxes too. Most high-schools barely touch on this subject, but it is a necessity to know to live in America. When tax time comes, sit down with them as you fill out your personal tax forms, walking step-by-step with them on what you're doing and why. Tell them what dependencies are, what W-2's and EZ's are. A frightening number of teens growing into adulthood don't have the first clue on these things, and when they're thrown into the world they sink like rocks.

Investing for the Future and College:

A college education is increasingly becoming necessary in order to truly succeed in America. If you're not rich, and most of us including myself aren't, then starting early is the only way to go if you want to be able to afford an education later on. Probably the best investment plan to save for college and invest in your child's future is a 529 plan. These 529 plans are sponsored by states and are basically tax-advantaged savings accounts that you can invest in directly. The best part of this is that the money grows tax free and withdrawn tax free provided it's for educational purposes like tuition and room and board, etc.

What's more, the limits on tax-free gifting are raised when it comes to a 529, allowing generous family members to give up to $55,000 in a year toward your teens college education without being taxed on it. Not only that, the 529 account can be chosen to be controlled by the account owner, not the beneficiary regardless of his or her age. So if you're worried that your teen might be tempted to snatch those thousands saved to buy a car, which is allowed in some other college-savings plans where the money becomes the teens at a certain age, the 529 plan is perfect for you.

In Conclusion:

Ultimately we're living in hard times where saving and managing money has become even more vital to survival than ever before. A lot of teens are growing up not knowing the first thing about how to do this. Please don't let your teen become another one. The tips described above are some basic tips into starting the process of good financial habit building. Always keep the lines of communication about money open with your teen, that, by far, is the most important and helpful thing you could do in teaching your teen the ways of money. And, in the end, they will appreciate it more than you might realize, even if they don't show it at first.