Teaching Your Teenager About Finances
Sometimes, your teenager will do a really good impression of an adult – a clearly defined argument explaining why they want what they want or cleaning the house out of (seemingly) nowhere just because they want to help.
It’s easy to forget that despite these impressive shows of mature behaviour, they are still not quite ready for the heavy weight of responsibility that comes with personal finance management.
Money management is really not something most of us want to burden our children with, but the earlier you start teaching children about money management, the more likely it is that they will reach adulthood with the kind of head start that keeps them out of debt and able to get the things they want in life.
The two things that are significant from a very early age (and it’s never too late to start!) are:
Nothing teaches good financial management as much as learning to have patience before getting things. Whether it’s a piggy bank filling with coins to buy that special toy, or a junior savings account complete with interest and an app to track the balance, helping your child understand that you have to build up money to get the bigger things in life will help them avoid huge credit card debt and staggering loans as soon as they step out into the wider world.
“I want it and I want it now,” is an easy trap for us all to fall in (not just children!), but take the time to reverse the process and instil the idea of “if I still want it once I’ve saved up for it, then I’ll get it then,” and you’ll be nurturing financially responsible children.
Understanding that money isn’t free
No matter how much you tell them that money doesn’t grow on trees (and have to deal with the sassy response about paper coming from wood), children find it hard to associate money with work unless you have taken the time to solidify the concept in their upbringing.
While pocket money or an allowance feels like the fair thing to offer your children, the truth is that by providing them with a regular sum of money just for being, you reinforce the idea that money just appears no matter what. It is far more beneficial to tie their regular income to a modest idea of work, even from an early age. “You can have five pounds a week only if you keep your bedroom clean and do the washing up,” is far more beneficial than handing over the note on a Saturday morning to a slovenly teenager who refuses to help around the house.
By teaching children about money and making the early connection between work and payment, your children will learn the value of money and will be eagerly seeking better employment as they get older, rather than just looking for bigger and bigger handouts. And it doesn’t have to be a big chore – even something as simple as cleaning up their toys before bed or putting dirty washing in the basket is enough to teach the concept.
Through savings and putting in some work for money, your child will have a good grounding into the basic concepts of money, but there’s a still a lot for a teenager to learn, and one of those things is the value of money.
It can come as a shock just how widely inaccurate some teenagers can be when asked about money and its values. Most teenagers vastly overestimate the amount they will earn as adults while simultaneously underestimating the costs of basic living, and many even assume that a whole host of paid services are free.
Helping your teen equate their time working to a pay cheque and then on to a list of purchases is a long process that requires multiple examples and real-world experience. Some of the best ways to provide this education include:
Most teenagers understand the idea of being paid by the hour, but many do not understand how many hours a full-time job entails per week, or per month. Other misconceptions include assuming they are paid for travel time and lunch breaks, a lack of understanding regarding sick pay or holiday entitlement, and no concept of income tax.
Spend some time with your teenager using your own income as an example and let them calculate the figures themselves. Explain:
The length of a working week
The cost of commuting
It can be a sobering experience for a teenager to really see that they may find themselves leaving the house at 7am each day for 12 hours, five days a week and yet only seeing pay for 37.5 of those hours at minimum wage. And no doubt, once they see a cut being taken for income tax and national insurance, they will jump at the idea of becoming politicians and putting an end to it all!
How do you teach a teenager financial responsibility? By giving it to them.
The weekly food shop is the perfect way to teach a young adult about budgeting. Sit with them and explain that they have to feed the family on the usual budget and then take them to the supermarket and give them free reign to do the shop – making sure they plan for a healthy week. Alternatively, divide the budget accordingly and have them buy just for themselves – the learning experience is just as good and doesn’t force the rest of the household to eat Pot Noodles and crisps!
By connecting this experience (which should be regularly repeated) to understanding salary, it doesn’t take long before the relative value of work to food becomes clear.
Housing and other advanced concepts
Life isn’t as simple as paying for the supermarket though, obviously a real budget includes housing costs, bills and many other factors. It is important not to overwhelm your teenager with too many ideas, and for some, it can make life outside of the family home seem frightening. However, if your child is an attentive pupil who wants to know more, their teenage years are the perfect time to introduce concepts such as rent, mortgages, council tax, credit card, loans, phone contracts, life insurance, subscription-based services and more.
Remember, no one else is teaching these concepts to your child and it is easy to become lost in a sea of financial products as a young adult without guidance. Even taking a few minutes every month or so over the later years of your child’s adolescence to explain how a rental deposit works, why getting life insurance early is better in the long run, or how to avoid signing up for unwanted gym memberships can give them a huge boost once they leave home.
Once they understand the value of money and its not just vague numbers swimming around in their head, your teenager should be able to properly understand a budget. Of all the money management skills for young people, budgeting is one that should be high on the list to prepare your teen.
When teaching your teen to budget, it is important that you do so with real figures that are relevant to their actual life. Use their income and their real outgoings and don’t overwhelm them with examples that might not be relevant for years.
If possible, avoid basic paper budgets. The use of a spreadsheet or a specialised teenage money management app is going to be more tangible to a tech-savvy teenager and the functions for software to calculate totals means that the effort is lower, and the accuracy is higher! Remember that the result you want is for them to understand good money management, not give them a maths lesson!
Build a weekly or monthly chart (depending on how often your child receives their money) and put everything on it. Try to include:
Any secondary income
Housing costs - if applicable
Bills (mobile phone etc.)
Subscription services (Netflix, Apple Music, Spotify, Xbox Live etc.)
Clothes washing expenses
It’s likely that your teenager is going to find that when a budget is properly worked out, they are going to have to cut back on some desirables – just like adults. Don’t try to sugar-coat this for them or offer to pay for things, simply let them consider and accept the reality and help them choose what to cut from their lives. Of course, if they come to you asking for more jobs in the house to earn a little more and you can afford it, then all is well – they are showing responsibility and understanding that if they work harder, they can obtain more.
No one wants to see their child struggling in life, and the truth is that without a good education in personal finance, that’s exactly what might happen. It’s easy to slip into debt when they turn 18 if no one has shown them a better way. You wouldn’t expect your child to drive without learning how, or to dive into a river having never been shown how to swim, so why leave them in a world where money matters without the right background?
By taking the time with your teenager to help them with concepts about money, engage in money management activities and answer their questions, you give them every advantage for their adult life.
How Compare UK Quotes can help
At Compare UK Quotes, we care passionately about your personal finances – and those of your young adult children! We have a huge library of articles and resources to help you and your teenager understand about a variety of personal finance products, from credit cards to income protection insurance.
For more information on budgeting – both for adults and teens – look to our article series on the subject, and if your teenager is about to become a student soon, we have some extra info that’ll help them manage their money both on and off campus!