by Jared Bilodeau, MSFP, Associate Wealth Advisor
The current economic environment has caused many people to reconsider their personal finances and drastically change their spending and savings habits. Out of this economic malaise may come an opportunity to finally instill good habits in your teens that can carry them into adulthood on the right financial footing. Just as parents and grandparents of the Great Depression era developed deeply ingrained attitudes towards money and spending based on their experience, today’s teens can share in the lessons of today’s “great recession” generation.
Witnessing the stress that comes from an economic downturn is daunting, but it is a lesson that I, as well as many Americans, will not forget. Preparing teens for the risk of the markets and explaining the importance of having a plan and being diversified is key to their future. The first step is to make your teen a partner by giving them a stake in the family financial enterprise. For most teens, it’s not about the money (not yet, anyway). It’s more about what money can get them: entertainment, clothes, toys, cars… Money, no matter its source, is simply the means for what is important to them. When a family “tightens its belt” on spending, it’s a great opportunity to turn a teenager’s expenditures into the motivation to learn about budgeting, saving and smart financial management.
Get Them on Board
Teens have a stake in the family’s financial picture, so it is important to communicate to them the family’s goals (especially as they relate to the teen), the current financial situation, what has changed and why, and their role in all of it. It doesn’t necessarily mean that what they have been enjoying will suddenly stop. Rather, they need to learn to become accountable for their expenditures and begin to gain a sense of satisfaction from smart financial management. Many teens don’t realize the value of a dollar, especially if they don’t have to earn it themselves. Making them earn money to pay for the things they want can teach them some good life lessons:
- Have them set their own goals and priorities. It’s a good time to for them to start using a financial journal for budgeting and record keeping. Some teens might prefer to use a software program such as Quicken or Microsoft Money. Get them to distinguish between needs and wants and learn how to prioritize.
- Have them develop a budget based on their priorities and other goals. Some teens are looking ahead to be able to buy a car or finance a trip. Their savings for future needs or wants should be a part of their budget. Both the expenditure side of their budget and the revenue side should be negotiated to the point where everyone signs off on it. Tracking a budget and seeing if you are on course helps to establish good financial habits, and will be beneficial when making larger purchases.
- Have them establish a relationship with a bank by meeting the bank manager, setting up a savings account and issuing them a student “bucks card” for spending. If they are responsible enough for a credit card, show them the benefits of building credit in order to have access to better loans in the future.
- Get them to want to save. If they understand that things they want to buy will need to be financed, in part, from their savings, they will soon see the value in it. You can further encourage their saving habits by applying a “match” to their savings, much like an employer match to a 401(k) plan. The match can be applied monthly or quarterly. You could put withdrawal restrictions on the match portion so that they become “long-term” savings. If they are working for an employer and earning money, you can contribute up to $5,500 into a Roth IRA for them (just make sure you do not contribute more than they are earning).
Think of your teens as adults in training. Given the opportunity, they will demonstrate an increasing amount of responsibility and a penchant for smart financial management. They can certainly be motivated by their own wants and needs. However, when they begin to see the vital role they play in the family’s finances, they may start to understand the bigger picture. They may even surprise you and develop healthy financial habits that can, in turn, teach you something about your own finances in the future.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2015 Advisor Websites.
