‘Cash Before Plastic' When Teaching Teens About Money

Talking to your teen about money is important, especially when it comes to budgets and credit cards. The more teens know about money at an early age, the more likely they’ll have fewer financial issues as an adult. “Teaching teens financial literacy is as important as teaching all sorts of healthy choices and good habits,” says Marcy Keckler, vice president of financial advice strategy at Ameriprise Financial (NYSE:AMP). “Start early and talk about money on a regular basis so that by the time they launch out in the world, they’re ready to be independent and will be financially successful.” If your child learns about concepts like the value of money, managing money and saving for long-term goals, it’ll carry through to their adulthood. Experts provide tips to help put your teen on the path to financial success.Explain the Value of a Job Encourage your teen to work part time or ask them to do chores for an allowance, experts say. When your teen receives their first paycheck, talk about why money is withheld for taxes. No matter how much they’ve earned, help them complete a tax return. “Going through the process of completing [a tax return], even if you don’t send it to the IRS, is a good learning process,” says Keckler.Open Accounts Once your child has their own money, open their first account with a debit card so they can begin managing spending and saving, experts suggest. Show your child how to monitor their account balance regularly using online tools and mobile apps. “Parents should look [at the balance] every month or every other month, but set up the accounts so [their child] can’t overdraw them,” says Keckler. Find an account for your teen that decline charges for insufficient funds or has spending thresholds for added protection.Start Budgeting Early Help your child create a budget for their money. Include categories for income, expenses, savings and donations. If your child gets an allowance, provide enough funds to cover their expenses, like lunch, gas and spending money. “[Budgets] are a good tool to make sure they don’t overspend and to see how much they need,” says chartered financial analyst Robert Stammers, director of Investor Education for the CFA Institute. If gas prices rise, for example, and your child is managing their money, talk to them about why you may have to adjust their allowance and budget. Also share information with your teen about the household budget so they understand how much things cost. Have them participate in the budget by discussing what you’re willing to spend on certain items and that they have to pay the difference if they want a more expensive item. A child will be able to set their own budget after they’ve budgeted in partnership with their parents, experts suggest.Create Teaching Moments “If they made a mistake [by overspending], ask why this happened, whether they didn’t budget right or made a mistake,” says Stammers. “Then talk about what they plan to do for the rest of the month.” Parents can decide whether to come to the rescue, but making mistakes as a teen has less consequences because the stakes are lower. “If a child goes over budget because they spend $50 at the store, you’d rather make that mistake as opposed to an adult who has a lot of credit card debt,” says Elizabeth Digani, financial advisor at UBS Group (NYSE:UBS).Start Slow With Credit Credit cards are more convenient than cash or checks, but your teen can lose track of spending much easier with a credit card. Explain how these work and that interest accrues on whatever isn’t paid each month. College is a good time to consider getting your child a credit card, but if you do, make sure it has a low limit of $1,000 or $2,000. Put strict rules in place too, like the card is only for emergencies and not for purchases. “There are some credit cards where you have to approve every purchase, and these can give you control over your child’s spending,” Stammers says. In the meantime, until your child has shown responsible money management skills, experts suggest they pay all expenses with cash rather than credit cards.