5 Basic Money Management Lessons for Teens

picture of lovely girl with big piggy bank
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A study by the Organization for Economic Cooperation and Development found that the United States ranked No. 9 out of 18 countries in financial literacy among 15-year-old students, scoring eight points below the overall average. This poor performance, linked in part to literacy and math skills, may also be tied to the fact that most young Americans receive little or no money management education at school.

"Most teens these days do not have sound knowledge about personal finance, even when it comes to something as easy as the difference between a credit and debit card," says Gregg Murset, a certified financial planner and the founder and CEO of MyJobChart.com. "Apparently, kids are not being taught these important lessons at school, so it's up to parents to teach their kids personal finance."

Here are five ways to raise financially literate teens.

1. Teach Them Key Terms

"Since most kids aren't receiving proper financial education, many of them don't understand the basic meaning of many critical financial terms," says Murset. "Terms like credit, debit, APR [annual percentage rate], payday loans, national deb, and 401(k) are all things that kids should know before they apply for their first job. The important lesson here is that once kids have an understanding about what these words mean, then they can begin to apply them to real-life settings."

2. Create a Visual Savings Plan

Label three empty containers "gifts and charity," "savings" and "spendable money," recommends Bill Demaree, president and founder of Demaree Retirement Services in Indianapolis. With your teenagers, decide what percentage of the weekly allowance will go into each one so they can see the containers filling up with money. When the containers are full, he suggests handling each one differently.

"Have them take the 'gifts and charity' can and figure out what organization they are going to give this to -- say, their local church or their favorite charity," he says. "If it's local, have them go to the facility and donate the money in person, so they have a sense of accomplishment and better understand how their hard work went to benefit a greater good."

Similarly, Demaree recommends physically going to the bank with the savings container each month with your teens so they can see the account grow firsthand.

"The 'spendable money' will be the teenager's favorite opportunity," says Demaree. "Let them go to their favorite store and buy the item they've been saving up for, or if it's a higher-ticket item, put the money back in that container and let it grow until it's enough to buy the item."

3. Talk About Credit

When your child turns 18, this is a good opportunity to start talking to him or her about building credit and the importance of having good credit, says Tyler Tran, founder of Tran Financial in Azusa, California.

Tran recommends that 18-year-olds apply for a credit card after you discuss various card offers and interest rates. You should talk about the importance of building a good credit profile by paying the balance in full each month. If you cosign the credit card application, you should monitor the account to make sure the bills are being paid on time.

Murset says parents need to make sure their kids understand the major differences between debit cards and credit cards, including benefits, percentage rates, security issues and liability if the card is used fraudulently.

"Kids see their parents using cards all the time for buying things but rarely see any payments being made," he says. "This can give them a sense that credit cards are just free money that adults get to use. As you explain how credit cards work to your kids, make sure you make it very clear that there is nothing free about credit cards."

4. Show Kids That Work Reaps Rewards

Give your kids assigned tasks every day of the week, such as taking out the trash, vacuuming, loading and emptying the dishwasher, washing the dog, mowing the lawn or shoveling snow, suggests Demaree, and determine how much they will get paid for each task or week.

Murset says that while kids fully understand the spending part of the money equation, they need help grasping the earning, saving and sharing parts.

"Kids need to be given more structure either in the form of chores around the house or working in the community," he says. "While saving and sharing money may not be the most popular things for kids to do with money they earn or are given as a present, they are key components to strong financial health as an adult."

5. Let Kids Fail

"Let your child make a mistake with their money, spending all of their money on something trivial -- and then it's gone, and they have nothing to show for it," says Tran. "When the new video game comes out that they want and they have wasted their money on something else, it's a good lesson in saving and spending money wisely."

Parents can also share their own stories with their kids about personal financial failures and successes as part of their effort to educate their teens about money management. If you feel your knowledge about money is inadequate, you can reach out for personal finance tips for teens from a variety of sources, such as financial planners, banks and credit unions, and sites such as Mint.com and PracticalMoneySkills.com.

Michele Lerner is a Motley Fool contributor. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.

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5 Basic Money Management Lessons for Teens
You have to walk before you can run. Set one financial goal that you can achieve this year. It should be fairly substantial, but doable. The point: If you can achieve one goal, you can achieve others. It took me a while to get used to setting goals, but I now I review my goals every quarter. I've more than doubled my revenue, and I credit that to consistent goal setting.
In any plan, you're setting an objective -- usually several. You're also giving yourself a time frame and a path to accomplish them. Let your imagination run free here; you can include as many individual goals within your plan as you like.

For example, you can set a plan that includes getting out of debt, starting or increasing your retirement savings or building an emergency fund. Design the plan for three years, and then create strategies for how you'll achieve each objective within that time. It is very important that your plan be in writing –- even formally typed out, like a business plan. Then you can refer to it regularly, at least until following it becomes second-nature.
A lot of people shy away from setting up a retirement plan because they feel overwhelmed by the amount of money required. But you can take it in small steps, and starting a plan is easy. Sign up for your employer-sponsored retirement plan at work, or, if you don't have one, set up an individual retirement account. My pick is the Roth IRA, and I recommend several places to open one. You can fund either account through payroll deductions.
If you're putting money away in a retirement plan (and you should be), boost your contribution by 1 percent of your pay each year when raise time comes around. If you can increase it by more than 1 percent per year, then you'll be that much better off.

By increasing your retirement contributions in small increments, you'll hardly notice the change in your paycheck, particularly if you're getting annual pay raises of at least 2 percent. Soon you'll be saving double digits for your retirement and may be looking at a reasonable prospect of early retirement. One family man I know was able to retire at 30 because of his outrageous savings rate.
The world is always telling us why we should be worried about everything. Let go of it all. You should be concerned, not worried, and sufficiently concerned to take the kind of action that will make the worries go away.
If you have a lot of debt, you probably realize that you won't be able to get back in the black anytime soon -– and you don't have to. Pick one credit card and plan to pay it off as soon as possible. The one with the smallest balance is your best chance.
Once you've paid off that first credit card, choose another to target for payoff. It should be the second-easiest card to pay off, which probably means it will have the second-smallest balance. Once you have two cards paid off, you'll have your debt snowball rolling, and you can keep going until all of your credit cards are paid. It's OK if it takes several years. The point is to get started now.
Paying bills can be emotionally debilitating, particularly if your budget is tight. Spare yourself the aggravation and set up your bills for auto payment. Once you have most or all of them set up this way, you'll have more time for everything else you want to do –- and a lot less stress.
Financial affirmations are brief sentences and sayings that resonate with you. For example, they can deal with the benefits of taking certain actions, helping you to create a mindset necessary to achieve the goal, or simply restating your plan. They should be in writing, and placed in areas of your home that you frequent, such as your bathroom mirror. Create sayings -- like "In five years (or four, or three, etc.) I will be debt-free," or "I'm a saver, not a spender" -- that will help you to cement in your mind that you are fully capable of achieving your goals.
In a perfect world, you would read one good financial book every month. But if that hasn't been your habit in the past, start with one good book. I'd be remiss if I didn't recommend my book, "Soldier of Finance."  But don't stop there. While you're at it, start following a few personal finance blogs. (May I suggest Good Financial Cents?)
One of the best ways to get perspective is by doing volunteer work helping the less fortunate. Seeing people who are in worse situations than you are can make you realize how fortunate you really are. Contributing to your favorite charity is a worthy way to help, but nothing beats getting involved in a more direct way.
It's been said that we're the average of our five closest friends, and if your social circle is dominated by free spenders, they could be unconsciously sabotaging your efforts to be more financially responsible. If trying to keep up with your spendthrift friends has become a problem for your budget, start spending more time with friends who are more conservative with their money. It could end up being the most important step you ever take toward financial security.
Parents are sometimes inclined to shield kids from the often-harsh realities of personal finance. But if your parents did that with you and your siblings, you may be struggling with the effects even now. Introduce your kids to the world of personal finance gently. An allowance is a good way to start, particularly if it is tied to chores. You can complete the lesson by making them aware of what things cost, particularly those they're interested in buying. Just make sure that they pay with their own money.
This is simple in concept, but super hard when the check is in your hand. Yet it can make all the difference in the world. For example, rather than spending your next tax refund or bonus check, deposit it into your emergency fund or your IRA, and  convert that temporary income into permanent savings.
Entertainment is likely the biggest black hole in the average household budget. It can cost $70 to $80 to take a family of four to the movies, $200 to attend a major league baseball game. Instead, spend more time with family and friends (your more frugal friends), take up productive hobbies like reading and gardening and learn to window-shop. It's not that you have to swear off more traditional forms of entertainment, but it will help immensely to minimize them.
When you learn to cook, you're killing several financial birds with one stone:
  • You're eating out less -- and saving yourself a small fortune on restaurant meals.
  • You're creating another activity to occupy your time, instead of seeking out high-priced entertainment.
  • You're making it easier to entertain family and friends in your home, which will save even more money.
Cooking is also a skill, and nearly any skill that you learn will make you feel better about yourself, which will mean you don't need to spend money to artificially achieve that effect.
This mental activity can pack a lot of punch. If you have a lot of debt, start visualizing what it will be like to be debt-free. Imagine how that will feel -– particularly the absence of stress in combination with greater freedom. That visualization will give you something real to aim for. Write down your feelings so you can refer to them as frequently as is necessary. It's another form of financial affirmation, but one that is aimed at getting yourself out of debt.
Unless the mechanic tells you your car is certifiably ready for the scrap heap, keep it at least a year longer than you intended. That will mean one more year without a car payment -- and one more year to save up money for a larger down payment, so that the monthly payment will be lower when the time to buy does come.

I contribute much of my financial success early on from driving "The Lu" for the first couple years of my career. "The Lu" was a champagne colored 1998 Chevy Lumina that I inherited from my grandmother. Not having that car payment allowed me to sock money away in my 401(k) and Roth IRA. By my calculations, the money I saved driving "the Lu" will eventually yield me $2 million or more. Thanks, grandma!
If you are establishing financial goals that differ from what you've traditionally had, you'll need company helping you to stay on track. Find someone with similar financial goals and meet at least monthly to exchange ideas and hold each other accountable.
If you start a regular exercise program, you'll probably find that you feel better about yourself, meaning you'll have less time or need to spend money to buy things that will give you that feeling. It will also improve your health, which will make you less dependent on costly health care. Exercise also helps you to focus, which can only help if you're trying to establish new financial plans for your life. My workout regiment of choice is Crossfit. If that's too extreme, just find a workout program that gives you the motivation to get your butt off the couch and work up a sweat.
If Personal Finance 101 was a real course, spending less than you earn would probably be covered on the first day. No progress is possible unless you can arrange your budget so that you'll have extra money each month. That will be the capital source you'll use to increase savings and investments, and pay off debt.
An emergency fund can seem so old school that you may not get around to ever having one. It's important to understand that your retirement fund is not an emergency fund, and credit lines only lead you deeper in debt –- which invariably leads to the next emergency. Get serious about establishing and funding an emergency fund. Once you have it, leave it for legitimate emergencies only.
The whole purpose of TV is advertising, and the whole purpose of advertising is to get you to buy things that you wouldn't ordinarily purchase. It's very likely that the less time you spend watching TV, the less money you will need to spend.
In a world where convenience is so highly prized, the routine whenever we need something is to buy it at the nearest big-box retailer or on Amazon. Quick and hassle-free -- but also expensive. Instead, see what's available on Craigslist. You may find the very item that you need, just a couple of years old, at a fraction of the price. You may not be able to do this on every major purchase, but doing it on just a few can save you several thousand dollars.
Do you find yourself agonizing over past financial mistakes? It could be a "good job" that you quit (or got fired from) and have never recovered the salary level. It could be a failed business. It can also be a previous bankruptcy or foreclosure. Whatever it was, don't let it continue to define your life. The past is the past, and you can't change it. More importantly, your mission now is to move forward and create the best life possible.
A funny thing happens when you shop without credit cards -- you're unable to spend money you don't have. Use your debit card for routine shopping trips, and save your credit cards for the times when it's absolutely necessary -- like when you need travel insurance on airline tickets or buyer's protection plan on a major purchase. That will keep your credit card balances from growing on impulse buys. (And make sure that your bank won't approve transactions that overdraft your account.)
Having multiple income streams is becoming more important as job security continues to fade. One of the best places to look for ways to diversify your cash flow is on the Internet. Research what kind of web business you might be able to start. It could be starting your own blog, subcontracting for other businesses, writing articles for blogs and websites, or selling products or services.

If you're pretty adept at the social media, you might even try your hand at becoming a social media manager for several websites. Start small, and plan to grow it over several years. You can work at home, and work at your own pace. And it could provide the extra cash flow that you will need to build up savings to pay off debt.
Make a list of skills that would make you more valuable to your employer -- or to a future employer. Master one on the list that is either most valuable or most doable from where you are. It could be the skill that either gets you a bigger raise or puts you in line for a promotion. Do that every year from now on.
I saw this on Facebook (FB) the other day, and it stuck with me. Most of us are pretty good at being transactional -– dealing with the situation that's right in front of us. But by becoming transitional, you begin to think of the big picture, like making major changes and improvements in your life. See yourself in a constant state of flux -- always ready to move, to be flexible, to implement life-changing strategies. That will put you in a position to create a new lifestyle. And where finances are concerned, it's important to always be moving forward, if only a little bit at a time.
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