Teens' Guide to Building a Strong Personal Finance Foundation

Creating healthy financial habits, such as regular budgeting and building credit, is just as important for teenagers as adults. However, it’s common for teens, who are learning how to handle their finances, to encounter money mishaps and mismanagement. It’s important for parents and caregivers to discuss financial matters with their teen and teach them to build strong financial practices. Teens can increase their financial literacy through money management principles, spending and savings practices, understanding credit and insurance and more.

Almost three-fourths of teens feel they lack the financial knowledge to handle money matters properly, according to a Greenlight survey. It also stated 86% of teens want to start investing, but 45% don't because they don’t know how to.

Understanding where your money goes is part of proper money management. Most teens spend the bulk of their money on food, clothing, accessories and cosmetics. The average credit score for people in their 20s is 660, below the country’s average. A solid foundation of financial knowledge allows you to build and maintain a good credit standing — and the earlier, the better.

By learning about smart financial practices and how to differentiate needs and wants, you can start building a healthy relationship with money.

In a 2020 survey, “Taking Stock With Teens,” teen spending was averaged to be $2,150 with food as the top spending item despite the pandemic’s impact. The survey showed increases in several categories, including video games, movies and room accessories.

Differentiating between needs and wants can help you make better spending decisions and resist peer pressure. A need is something you need in everyday life, such as food, clothing or shelter. A want is a nice-to-have, such as a trip abroad or a book collection.

Many expenses can fall into a gray area. For example, buying clothes is a need, but only purchasing expensive brand name items makes it a want. Oftentimes, your spending habits may also be influenced by your peers. Although you may feel that you need some things to fit in, you should carefully weigh your options. The following strategies can help you stay on track with necessary spending and avoid overspending on things you want.

The more comfortable you are discussing your financial situations with others, the better your relationship with your finances will be. Having a healthy relationship with money means appreciating good money management practices and stopping feeling guilty about spending money.

There are several things you can do to nurture a positive relationship with money. Here are some techniques you can try.

The time value of money is the concept that the amount of money you currently have is worth more than it would be in the future because of its earning potential. This concept can help you make sound financial decisions and get the most out of your money. Time value of money is essential to financial literacy. You can apply to several areas of money management — savings, investments and purchase power.

Some common financial concerns teens today experience include not earning enough money or spending too much. Sometimes, financial decisions are impacted by the pressure of trying to fit in with a group or continuously saying yes to outings without adhering to a budget. Having effective money management skills can help you handle your finances better.

Although three out of four teens said they aren’t confident about their level of financial knowledge, 73% also said they were open to learning, according to the Greenlight survey. There are several financial literacy principles that you can readily use and if you can get into the habit of setting a budget and managing your savings, you’ll be off to a good start.

We’ll be exploring several areas that can help you establish strong money management skills. Practicing these early makes it more likely that you’ll continue to do so well into adulthood.

It would be nice to have enough money for all your expenses, regardless whether these are necessary or not. Unfortunately, reality often dictates what financial decisions we make.

Budgeting ensures you don’t spend more than you earn. You’ll also be able to plan for short- and long-term expenses. It’s a proactive approach to managing your finances. Best case scenario, you’ll have savings. If not, at least it will help you avoid incurring debt.

Having savings allows you more independence. It means you can cover unexpected expenses or emergencies and don’t need to ask your parents for money. You can even get closer to affording that one thing you want, but couldn’t pay for a couple of months ago.

More than that, if you put it in a savings account, you can expect some growth. If you’re not sure how money you deposit grows, you can review a compound interest calculator that can show you examples.

Having a summer or a part-time job is a rite of passage for teens — and something that’s encouraged. Earning your own income not only pads your wallet, but it creates a feeling of accountability and responsibility. It may also help you increase your savings.

That said, it’s important to know that you don’t get 100% of your earnings. If you have a job and earn an income, you will also have to pay for taxes. Typically, this is deducted directly from your earnings by your employer, which is why you’ll notice that your take home pay is lower than what you may have anticipated.

Ideally, your expenses should not exceed your income. Sometimes, it can’t be helped. When this happens, you can start to accrue debt. However, not all debt is bad. Some debts, such as mortgages or student loans, can help you achieve a better quality of life. If you’re unable to manage them properly, however, it can eventually have a negative effect and may impact your mental health. Mismanaged debt can also lead to a poor credit standing, which can create a negative credit profile.

Investing is putting your money into something anticipating it will yield a larger future profit. It’s one of the best money management methods to help you reach larger financial goals, such as buying a house or having a retirement fund.

If you start investing during your teen years, time will be on your side and likely will provide you with a larger profit. According to Greenlight’s financial literacy study, most teens are invested in investing, but less than half don’t pursue it because they don’t know how. Investing doesn’t have to be as complicated as you may think; however, there are some key aspects to keep in mind.

As the name implies, protecting is all about keeping you and your assets safe. This can be conducted in a variety ways, including reviewing your finances frequently and safeguarding from identity theft, scams and fraudulent activities.

If you’re using a credit card, identity theft and credit card fraud can result in you losing more than money. Fortunately, there are ways to prevent it and the following practices can help you proactively protect yourself instead of dealing with the aftermath of fraud.

Your financial situation is bound to change as you get older and take on more responsibilities. You may even find yourself facing financial challenges that you never had to deal with when you were younger. For instance, instead of earning an allowance at home, you’ll receive a salary at your job. And, if it runs out before the next pay cycle, you may be out of money unless you ask to borrow it from a friend or family member.

You’ll also need to have additional protection for yourself, especially as you acquire new assets and skills, such as driving your first car. However, there are practical steps you can put in place to help you manage these new challenges.

Getting a job is exciting — whether it’s part-time or full-time. A steady source of income opens many financial avenues for you, such as building your credit and investing. In addition, you have opportunities to increase your starting wage as you gain more work experience.

There are several strategies to negotiate your first salary and once you’re earning a consistent paycheck, managing your finances wisely can be started in a few easy steps.

A good credit score can help you maintain positive financial management and ensure you can take on larger purchases and financial obligations in the future. However, building credit can be a little tricky for teens, as you need to have credit to build it.

When you don’t have substantial credit history, you may find it difficult to qualify for credit cards and loans. Unfortunately, these are the same things you need in order to build credit. There are several ways you can begin building credit, however, and they don’t all revolve around you getting your first credit card.

There’s a variety of insurance coverage available for many needs. For example, If you’re renting the space you live in, renters insurance can protect or replace your belongings and valuables in the instance of theft, fire or flooding.

You may view insurance as an additional expense, but having to cover unexpected damage without it may be costlier. Imagine if your rental is damaged by a neighbor’s plumbing issue. You don’t have rental insurance, which means you likely won’t have another way to cover the water damage to your belongings. You will likely be paying for any repairs and replacements out-of-pocket which could deplete your savings and create debt. However, with coverage, your insurer will help shoulder some (if not all) of the damage expenses.

It may sound odd to prepare for retirement when you’re in your teens, but in reality, it’s never too early to start contributing to your retirement fund. Most people begin thinking about retirement when they’re adults. However, preparing for your retirement while you’re a teen gives you an enormous advantage. Because you have more time, it means your money has greater growth potential. A good place to start is by reviewing the various options available for retirement savings.

As a teen, learning about financial topics, money management and budgeting resources can help lead to smarter financial practices in the future. Explore the resources below to deepen your understanding of personal finances.

• 15 Money Management Skills Parents Should Teach Their Teens (121 Financial): Since parents are teens’ main source of financial knowledge, here are various financial management skills to teach your teenager.
• Bumper: An app that allows you to open an investing account for as much as $1. You can own a slice of a popular company or invest in your favorite brand. You can also complete interactive modules to learn more about investing.
• Finmasters: Financial experts share their advice on how teens can better manage their finances.
• Money as You Grow (Consumer Financial Protection Bureau): A site that identifies key stages of childhood and financial development. Find age-appropriate activities and conversation triggers so families can openly discuss money matters.
• Money Smart for Young People (Federal Deposit Insurance Corporation): Get downloadable financial education lesson plans for free.
• Financial Resources and Support for Teen and Young Parents: MoneyGeek outlines financial resources for teen and young parents, including government aid (TANF, SNAP, Medicaid), educational grants and nonprofit support for essential items and parenting education.