When it comes to money know-how, a teenager's expertise is often limited to one particular aspect: spending it.
This narrow knowledge won't improve much without some help. "Financial literacy is an essential parental responsibility, right up there with food, clothing and shelter," says JJ Montanaro, a financial planner at USAA.
As with most aspects of a child's development, parents play an important role in enhancing financial literacy and helping position them to make smart decisions when they move on to college or start living on their own.
Follow these seven tips to help give young people money smarts that may pay off big over their lives.
1. Set up a bank account for them. Start with a checking account for daily spending and a savings account for future goals. For the best balance of supervision and independence, open a checking account for your teenager that gives you joint account holder status and complete access, while also letting your child monitor and manage his or her accounts online or with a smartphone.
Also, give them a debit card linked to the checking account. In addition to minimizing the need to carry cash and providing a record of where money is being spent, debit cards have two other pluses. "They give you the convenience of a credit card, but since they cover purchases directly with money from a checking account, they help keep guardrails on teens' spending," Montanaro says.
2. Put them in charge. Instead of buying gas, clothing and other basics for your kids, allot a certain amount of money a few times a year and let them know they're in charge of making it last until their next payday.
This simple move may teach them more about living within a budget than they'll ever learn from reading about it. "Having money and realizing it's for a certain purpose can help teach them to resist making impulse purchases with it," says Stephanie Bell, a spokeswoman for Junior Achievement USA, an organization focused on giving young people the knowledge and skills to achieve economic success.
3. Foster a savings mindset. Whenever kids receive money — from jobs, allowances or gifts — encourage them to pay themselves first. They should put a portion of it into a savings account for future use. If they have a big purchase in mind, help them set a goal that's specific in two dimensions: how much money they need and when they need it. Then work with them to figure out the amount and frequency with which they should put it away to hit their target. Just like adults, teens should learn early to make their money work for them.
4. Teach them some insurance basics. If you have a teen driver, start with car insurance. Explain the purpose of insurance: to cover big costs that would otherwise be difficult to cover on their own. Review the policy and give special attention to deductibles — a concept that's also useful when dealing with other coverage such as health, renters or homeowners insurance.
Consider telling them they'll be responsible for helping cover the deductible for accidents they cause. "If they have skin in the game, they'll better understand the concept and may become more cautious behind the wheel," Montanaro says.
5. Create credit smarts. Many young adults have a tendency to lean too heavily on credit. It doesn't take long to do damage.
"I see plenty of people in their 20s who have already dug a deep hole by carelessly managing even small amounts of credit," Montanaro says.
That hole isn't just measured in dollars. A damaged credit score can limit their ability to qualify for apartment leases, auto loans, lower insurance rates or mortgages. And all that interest they're paying takes a bite out of saving for their future goals and dreams.
Explain how credit works and how purchases can grow increasingly expensive over time, once interest is considered. Bell recommends sharing a credit card, auto loan or mortgage statement with your teen to help illustrate the basics of credit.
6. Discuss the economics of higher education. As the college decision approaches, parents should help teenagers balance costs and benefits. Junior Achievement's JA Build Your Future app lets them crunch the numbers. The key lesson here: "Students shouldn’t incur more student debt than they can reasonably afford to repay based on their career interests," Bell says.
7. Plant a retirement seed. "It may not be top of mind in their teen years, but help them look forward and understand how regularly saving even a modest amount of money can have a big impact on their future," Bell says.
The earlier teenagers understand that retirement is the biggest expense they'll ever save for, the better off they may be. Time is on their side. The power of compound earnings means that the earlier they start saving, the more money they'll have.
If your teenager earns income, think about opening a Roth IRA. A jump-start might just turn your teen into a future millionaire.