Teenage Money Matters
A few years back, my nephew asked my son, Ollie, about my job. He was
six at the time and said, "When you have some money, you should put it
in a piggy bank. If you have too much money for the piggy bank, you put
it in a bank. And if you have too much money for the bank, you give it to
my Daddy." The lesson here is to keep it simple.
First, I want to congratulate the class of 2024! Many of our clients’ children and grandchildren are celebrating high school and college graduations. If you are looking for a gift I would recommend “Breaking Free from Broke” by George Camel. If you prefer, you can call the office and we will be happy to send you a free copy. While this book covers myths and traps around credit cards, loans, get rich quick schemes, etc.... the rest of this letter is aimed at the teenager.
Financial literacy is crucial for teenagers as they begin to navigate the world of money matters. Understanding concepts such as budgeting, saving, and investing empowers teens to make informed decisions about their finances. Without this knowledge, they may fall into common traps like overspending, incurring debt, or failing to plan for the future. By learning how to manage money effectively at a young age, teens can develop healthy financial habits that will serve them well throughout their lives.
Many teens earn money by doing chores or having a part-time job. Now is the best time to build financial habits that will lead to long-term success. Once teens receive the money, I recommend a plan is created in which he/she spends 1/3, saves 1/3 for something special, and bank 1/3. This will allow for trips to Chick-fil-A with friends, save up for the new VR gaming system, and put money away for that 1st car.
A key building block of managing money as a teenager is learning how to make smart spending decisions. This means thinking carefully about how money is spent and understanding the difference between wants and needs. It is crucial to prioritize essential expenses like food, clothing, and school supplies over non-essential items like the latest gadgets or trendy clothes. Before making a purchase, take the time to consider if it aligns with your financial goals and if it is worth the cost.
If you have ever played Monopoly, you will remember that players can only afford to buy properties, pay rent, and make investments if they have cash. This means the players need to earn and save more than they are spending. Doing this helps reinforce delayed gratification and why it is important to budget and save.
A common financial pitfall that teenagers should be aware of is overspending. This is not unique to teens but rather is a crisis in America. The average credit card debt in North Carolina is over $6,000. Debt is money that is owed to someone else. The people you owe money to recoup the debt in the form of monthly payments - meaning the money earned in the future will have to be used to pay for past purchases. I recommend using cash or a debit card only and staying out of debt.
As teens progress into their young adult years, I recommend beginning to invest money. Start with investments that are easily understandable – money markets funds, CDs or individual stock in the teen’s favorite company or area of interest. Create a plan for graduation cash to follow the same 1/3, 1/3, and 1/3 plan mentioned above and have an account already set up for investing.
When entering the workforce, participate in any retirement savings program offered by the employer and be sure to max out what the employer matches. Getting into the regular habit of saving a portion of pay pre-tax will be a great benefit – by learning to live within your means and planning for retirement years in advance.
My Best,
Ryan