Below, we’ll dive deeper into why money goals are important for teens as well as how to help your teen save and plan for unexpected expenses. We’ll also discuss how to ensure money conversations are a regular part of your teen’s life.
The Importance of Setting Money Goals
Financial goals are milestones you set for your money over specified periods of time. They’re just as important for your teen as they are for you. “Encouraging teens to save money and set financial goals will help them learn about the importance of financial literacy and creating healthy habits around their finances,” Jason Priebe, a certified financial planner at Priebe Wealth, told The Balance in an email.
Short-Term Savings Goals
Short-term savings goals are those your teen can achieve in less than a year. Saving for a concert next month is a good example of a short-term savings goal you can help them meet. Sit down with your child and look at how much money they earn on a weekly or monthly basis. Then, ask them about the price of the concert ticket and work together to determine how much they’ll need to save from their paycheck to buy it.
Long-Term Savings Goals
Long-term savings goals typically take more than a year to accomplish. Your teen may want to buy a car, go on a spring break trip with friends, or pay for college tuition. With long-term goals, it may make sense to introduce a budgeting method, such as:
50/30/20: The 50/30/20 budget can ensure your teen has enough money for their needs, wants, and savings goals. They allocate 50% of their after-tax income to their needs, 30% to their wants, and 20% to their long-term savings goals. Pay Yourself First: With the pay-yourself-first budget, your teen will calculate how much they earn after taxes and then how much they need to save each month to reach their goal. The figure they come up with is treated as a mandatory expense, like car payments and auto insurance.
What Does Saving Look Like?
“Many teens graduate high school and go off to college without a real understanding of saving money and how to spend responsibly,” Priebe said. “When this happens, they may make financial mistakes that could follow them out of college and into their adult years.” Teaching your teen how to budget appropriately and save will help them learn to live within their means when starting their career. To promote saving early on, you can help your teen open a savings account. Since most financial institutions don’t allow minors to open savings accounts on their own, you’ll likely need to be a joint account holder at first. Ideally, you’d choose a savings account at a bank or credit union near your home with digital tools like online banking that your teen will appreciate. Not all savings accounts are created equally, so shop around with your teen to find a no-fee savings account that works well for how they earn, access, and save money. “Teaching teens the basic lesson that passing up current consumption for greater future consumption can change their life for the better,” said Robert R. Johnson, a finance professor at Creighton University in an email to The Balance.
Planning for Unexpected Expenses
Teens should know that planning for unexpected expenses is different from saving for a particular financial goal. “Saving for a financial goal, like buying a television, can be completed on a short-term or long-term basis,” explained Annette Harris, founder of Harris Financial Coaching, in an email to The Balance. “However, saving money for unexpected expenses helps you maintain financial stability in a job loss, car accident, or medical emergency that medical insurance does not cover.” To prepare your teen for unexpected expenses, teach them how to build an emergency fund. Let them know that if their car breaks down, for example, an emergency fund can cover the cost without putting them into debt.
Put Your Money To Work: Investment Options
Consider setting up a custodial investment account for your teen. This type of account is set up by an adult for the benefit of a minor and offers the opportunity for parents to teach kids some basic investing skills. You can explain the investment options in your teen’s account and review statements with them. “A custodial account is a wonderful way to teach a child about investing while maintaining control of where the assets are invested,” Johnson said. Priebe noted that teens may be more inclined to invest if they can put their money toward companies they love. “For example, if your child is an athlete and supports Nike products, you can talk to your teen about Nike as a company, track how their stock is doing, and even buy some shares of it together for them to learn,” Priebe said.
Investing Large Money Gifts
As your teen grows up, they’ll likely receive large monetary gifts from family members for special milestones like their bar or bat mitzvah, sweet sixteen, or graduation. While they may be tempted to spend this money on fun, big-ticket purchases like new furniture or electronics, saving it can make their life easier in the future. Encourage your teen to be smart with large gifts and allocate them toward long-term financial goals, like saving for college.
What’s the Deal With Taxes?
Since taxes are a key part of everyone’s finances, teach your teen the basics. Let them know that taxes are deducted from their paychecks, so they’ll pocket less money than they earn. Also, explain that they’ll need to file a tax return every year and can do so with the help of tax software or a tax professional.
Keeping the Conversation Going
According to Johnson, you should make time to talk to your teen about money whenever they need to. “Basic financial literacy is incredibly important because financial mistakes made early in life can change the entire trajectory of one’s economic life circumstances,” he said. Teaching teens about finances can save them from making crippling mistakes that haunt them throughout their lives, like starting a working career with debilitating student loan balances. Margaret Echelbarger, a postdoctoral researcher at the University of Chicago’s Booth School of Business, told The Balance in an email that involving kids in financial decisions is another way to keep the money conversation going organically. “In short, it’s important to create opportunities for children, adolescents, and teens to use money—saving it, spending it, and even making mistakes with it,” Echelbarger said. “And, when possible, to invite children, adolescents, and teens to participate in household financial decision making, like drafting a grocery list given a budget.”
