Ages 14–18: Getting Ready for the Adult World

Basic tips:

• If your teen has already learned about goal setting, saving, credit and basic budgeting, good. If not, start now to communicate these skills as discussed here in younger-age sections.
• Encourage her to take any personal finance instruction offered in school.
• Have fun together by searching and visiting quality personal finance websites.
• Keep the dialogue about money open. And let it be a discussion rather than a lecture.

Earning a paycheck. Especially in the early teen years, your child needs guidance about employment. You may want to discuss values, with school being the top priority. Some parents set a limit on work outside the home—as does the law. If your teen does take a job, go over codes of conduct and dress at work, the importance of being on time and other employer expectations. Your teenager can learn a lot from having a job. One of the most important things is the concept of “pay yourself first.”

If she begins to set something aside from every paycheck, her savings will grow. More important, she’ll establish a lifelong habit that can result in financial security in the long run. In addition, by looking at her pay stub, she can see how taxes affect take-home pay and how many hours of work it takes to buy a pizza or an iTunes card. Work with your teen to figure out how the items she buys equate to hours spent earning money for them. Understanding this relationship may counter the temptation to spend every cent she earns “because there’s more where it came from.”

Managing a checking account. Shop around for an account with the smallest balance requirements and the lowest service charges. Talk about fees for bounced checks and how to report a lost checkbook. Many accounts offer ATM debit cards that can be used for purchases instead of writing checks. Make sure your child understands that using the card takes money directly out of her account and that she must write down the amount of purchase in her check register, just as she would record a check. Work with her to balance the checkbook for the first few months.

Learning how to use “plastic.” High school students can learn a lot about how to manage a credit card by first using a debit card. Because money comes out of a bank account, this type of card reinforces the need to pace and limit spending. A debit card can be attached to either a checking account or a special savings. Attaching a debit card to a savings account is economical because no checking account fees are incurred. And using a debit card has the added benefit of helping teens establish a working relationship with a financial institution. When your teen does graduate to using a credit card, look for one that lets you establish a ceiling—$500, for example. Communicate that:

1)    Credit card purchases are loans. The price for the loan is called “interest.” It can be very high, especially if the borrower pays only the minimum each month.

2)    There’s one way to avoid paying interest, and that is to pay off the balance each month. Always do this, except in true emergencies.

3)    It’s important to shop for the best deal. Compare interest rates, annual fees, late fees and grace periods.

4)    One credit card is plenty.

Investing. Did you know that a 15-year-old with earned income who invests $2,000 a year in a Roth IRA for just five years (until she reaches age 19) will have almost one-million dollars tax-free at age 65, if the account earns a little over 10 percent? This is the magic of compounding! And it should impress most teenagers. Some mutual fund companies will allow your teen to start a Roth IRA account with the initial $2,000 deposit and low monthly deposit amounts thereafter. In addition to the Roth IRA, you can also open a custodial or guardian account for your teenager’s investments. Keep in mind, however, that if your teen is college-bound, the financial aid office will expect a large percentage of your child’s custodial account to cover college expenses. (It’s often better to save for college in the parent’s name.)

More about the market. Some teens are truly sophisticated about stocks, bonds and mutual funds. Others are not but may be interested in learning. Talk about the best way to start investing, the risks and rewards, terminology, different types of investments and the value of long-term investing. All of the basics are covered in detail on a number of quality websites, which you and your teen can explore together. Discuss how to monitor investments and the advantages of dollar-cost-averaging. (Or how about asking your teenager to teach you these concepts?) Know that neither you nor your kid needs to be a stock market genius to do well financially.

Learning about insurance. Teenagers need to understand that insurance is a way of managing risk. Discuss how much your teen thinks a major illness or car accident might cost. Once she has the idea, you can say that your family has insurance to protect against financial loss resulting from occurrences beyond your control. Teens should know the basic facts about:

• Health and disability insurances. Check to see how long your family policies will cover your child and share the information with her. Colleges, universities and private employers often provide this coverage, but young adults looking for a job may need to take out a temporary interim health policy and a disability policy. Young adults who are self-employed or who work for an employer that does not offer such coverage will have to search hard to find affordable quality policies.
• Car insurance. Many parents ask their child to cover the increase in car insurance that comes when a teenager starts to drive. Your teen should know how to shop for car insurance, getting quotes from several companies before choosing a policy. If your teen owns an older used car, you may want to suggest she take out just liability and uninsured motorist insurance, foregoing collision and comprehensive coverage.
• Renter’s insurance. If your teenager is leaving home or plans to live off campus, she should consider protecting her property with renter’s insurance. If she has items such as a computer, stereo equipment, etc., the cost makes sense. Paying for renter’s insurance can be good preparation for understanding homeowner’s insurance in years to come.

Paul Golden is the communications manager for the National Endowment for Financial Education (NEFE), a nonprofit foundation dedicated to improving the financial well being of all Americans.