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.
Money Management Lessons for Teens
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.
The Difference Between Needs vs. Wants
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.
- A functioning laptop. This may be a necessity for online or in-person school and its projects.
- Food is a basic need. Even if you’re trying to save money, it won’t do you any good if you start skipping meals.
- If you’re sick, purchasing medication is essential and shouldn’t be avoided.
- Purchasing a brand new laptop with features you won’t likely use.
- Depending on what you buy and how much you spend, food can also be a want. Do you really need a Starbucks coffee every day?
- Cosmetics may not be a necessity, especially if you’re duplicating similar products or don’t use them often.
- Based on where you live and your access to public transportation, having your own vehicle may not be a necessity.
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.
Spending money is a big part of life. However, it can be easy to overspend or accrue debt if you’re not mindful of your expenses. There are some key ways to ensure your spending stays on track.
- Understand your expenses. Create a list of all the things you spend money on. Then ask yourself, “what can’t I live without?” Those are your needs and should be prioritized.
- Align with your personal values. Think about what adds value to your life and if its impact is worth its cost. For example, if your health is a priority and you only eat organic foods, the additional cost may be worth the benefits.
- Look for alternatives. You may find that some of your perceived needs are actually wants. There may be an alternative way to reach the same goal. For example, if you want to lose weight, but don’t want to pay for a gym membership, you could exercise at home or start running to achieve the same result.
- Compromise. You can’t completely eliminate spending for things you want, but you can lessen it. If you enjoy unwinding with friends over a nice dinner, perhaps you do it once a month instead of every weekend. This way, you’ll still be able to enjoy yourself and maintain your finances.
Growing Your Relationship With Money
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.
Developing a Healthy Relationship with Money
There are several things you can do to nurture a positive relationship with money. Here are some techniques you can try.
Discuss money matters with your family
Treating financial discussions as taboo or an adults-only subject can lead to feeling uncomfortable about the topic. You may also avoid sharing your monetary challenges, which is unproductive and can create additional financial issues.
When it comes to money matters, don’t hide mistakes you may have committed. If you used up all your allowance on something you didn’t need, own up to it. This helps you create accountability with yourself and may open the door to some constructive feedback and financial tips from those you share with.
Don’t feel guilty for spending
Even though you’re focused on managing your finances, you shouldn’t feel bad about spending on things you need (or want). It’s OK to reward yourself now and again and some purchases need to be made outside of your budget.
Don't compare your finances with your friends'
Comparing your spending behaviors and purchases with others may lead to inaccurate conclusions and create an emotional response to financial matters. Everyone is different — from their spending habits to their overall financial situation.
Understanding the Time Value of Money
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.
When you’re young, it’s easy to think that you have a lot of time to start saving in the future. But the earlier you begin, the better off you’ll be. Even if you’re just starting college, it’s never too early to save up for a home, retirement or your future business.
If you choose to invest your money, having more time is an advantage. For example, if you invest $1,000 today at 20% interest, by next year it could increase to $1,200 and continue to earn year after year. However, if you don’t invest for another few years, your accrual opportunity is less.
Healthy Approaches to Money Management
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.
There are several things you can do to help you take better care of your finances.
- Track your spending. Understanding where your money goes can help you to analyze your spending habits and make necessary adjustments.
- Create a budget. Determine how much you would ideally want to spend in a month. Knowing your necessary expenses will help you significantly. This way, you’re not short-changing yourself.
- Set up an emergency fund. It’s always a good idea to set money aside for unforeseen circumstances and emergencies. Additionally, it serves as an additional savings you may need in the future.
- Start a retirement fund. It’s never too early to prepare for your retirement. As a teen, you may not be eligible for a 401(k) yet unless you fit the definition of a long-term part-time employee, but you can explore the possibility of having an Individual Retirement Plan (IRA).
Financial Literacy Principles for Teens
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.
Budgeting may take time to get set up and started and when implemented, it creates many advantages. Maintaining your budget is also key to financial success.
- Understand your income. Keep a record of the money you receive each month. Depending on your situation, it may be from your allowance or your part-time job.
- List your expenses. Make this list as detailed as possible. Don’t forget about the little things. You’d be surprised how much a coffee here and a trinket there adds up to at the end of the month.
- Organize your expenses. It can help to categorize your expenses to easily identify what you’re spending on. Putting them in buckets, such as food, entertainment or health, allows you to see where the majority of your money goes. However, it’s essential that you have specific definitions for your categories.
- Keep it up-to-date. Whether you’re using a journal, a ledger or an online tool, make sure you update your spending daily. It’ll also give you a preview of your personal finances over time and you’re less likely to miss an expense if you do it everyday.
More Budgeting Resources for Teens
- Budget Calculator for Teens: If you want to know how much you should put into your savings each month, this tool can help and can ensure that you don’t spend all your money immediately after a payday.
- My Life My Choices Student Edition: This offers an interactive online simulation of financial choices and their possible effects. You’ll discover how your priorities and personal values affect your money management practices.
- Teen Budgeting and Future Financial Planning Worksheet: This template helps you develop a monthly budget. It also provides space for you to identify short-, medium- and long-term goals.
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.
You can do several things to manage your finances. Whether you decide to cut back on spending or focus on increasing your savings, small changes have a big impact over time.
- Follow a formula. Remember: Income - Expenses = Savings. If you want to have more money left over at the end of the month, you have to decide whether you want to cut your spending or seek additional sources of income.
- Cut back on deliveries. Online shopping has gained popularity, for food or other items. These seemingly small expenses can add up if you’re not careful.
- Avoid using credit. Yes, building good credit is part of good money management. But it’s best if you’re able to pay for your balance in full at the end of each month. If you can’t, it can create more drawbacks than benefits, such as increasing your monthly expenses, incurring higher interest or accruing debt.
- Save regularly. Open a savings account and make sure you put something in every month (even better if you can make it a consistent amount). You can also set up an automatic transfer to move a specific amount from your checking to your savings account.
More Savings Resources for Teens
- Teenagers and Savings: If you want to start a dialogue with your teen about saving, you can find some conversation starters here.
- Compound Interest Calculator: This calculator helps demonstrate how money savings can grow because of compound interest.
- Savings Calculator: You can use this tool if you want to know how much money you need to regularly put aside to reach your financial goal.
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.
The concept of taxation can be overwhelming at first. However, once you understand the basics, you will have a better idea of what you can anticipate when it comes to your pay.
- Differentiate net income vs. gross income. Gross income is the amount you earn before taxes. Your net income is the amount of money after taxes have been deducted. It’s the actual amount of money you get to take home.
- Familiarize yourself with income tax brackets. It’s important you know how much you have to pay in taxes. This is determined by how much you earn and how you earned it.
- Determine if your income is tax exempt. There are some income types that won’t require you to pay taxes. For teens, it usually comes in the form of gifts.
More Taxation Resources for Teens
- Tips for Teenage Taxpayers Starting a Summer Job: This is a good reference to understand whether you are considered a self-employed teen. It also gives advice regarding how to handle income from tips.
- Top 5 Tools for Taxes: Find tools, online platforms or mobile applications that can help you prepare for tax season.
- Understanding Taxes (Student): Go through several lessons designed to increase your understanding of how taxes work. You can take tax tutorials and experience simulations of various taxpayers.
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.
It’s a fine line between being in the green and going into the red when it comes to your finances. While you may not be able to avoid accruing some debt, there are ways to prevent it from getting out of hand.
- Differentiating between good and bad debt. Good debt makes the interest you pay worth the amount of the loan. For example, a student loan allows you to get an education that could lead to better jobs and earning potential. In comparison, getting credit at your favorite clothing store and making purchases you have to pay off over time can lead to large fees, a credit score decrease and more.
- Use a debit card instead of a credit card. 32% of teens don’t know the difference between a debit and a credit card. The latter allows you to borrow against a line of credit, which makes it a loan. If you don’t pay it on time, it will incur interest and late fees. A debit card allows you to complete a purchase by drawing from your bank funds immediately.
- Use your credit card wisely. Having a credit card has its perks — it can help you establish a good credit rating and makes you eligible for rewards or incentives. A trick is to use the card to make purchases you can pay off in full within 30 days. Always pay your statements on time and avoid maxing out your card at all costs.
- Take care of your credit score. Your credit score is a reflection of how well you manage your finances. It scores your personal factors, such as frequency of punctual payments, whether you’ve missed any and how much outstanding debt you have. Your credit standing may affect several things in the future, such as when you apply for car or homeowners insurance.
More Borrowing Resources for Teens
- Five Tips for Teens to Avoid Debt: Although there is such a thing as good debt, not having any is the best possible scenario. This article discusses various ways to help you avoid incurring debt.
- Loan Payment Calculator: Use this tool to calculate for your monthly payments. It can also help you determine the ideal income required for managing your loan.
- Free Credit Reports: If you want a summary of your personal credit history, get a credit report. You can find the various channels to order a free credit report from Annual Credit Report
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.
Understanding investing — types, tips and risks — can increase your success. It’s advisable to start sooner than later to maximize your profits and growth opportunities.
- Different types of investments: Do some research to learn about the different types of investments you can contribute to, including stocks, mutual funds, exchange-traded funds or bonds. American Century Investments detail the differences between these types.
- Try an investment app. There’s hesitation around investing because of the risks that come with it. Trying out a micro-investing app is an effective way to slowly get started and learn how investments work.
- Find a financial advisor. If you’re not confident with making investments on your own or want a professional’s guidance, talking with an expert is a good idea. A financial advisor can assist you with balancing a portfolio, making stock trades and be a sounding board about your financial decisions.
More Investing Resources for Teens
- Wall Street Survivor: Play a free online stock game using virtual currency. It’s an interactive way to learn more about investing without putting real money on the line.
- TeenVestor: Play this stock game for free. You can set up a dummy stock trading portfolio and practice trading stocks for free.
- Greenlight: An investment app that allows you to learn about the world of investing through research and exploration. You can begin by purchasing fractional shares — it can even be as low as $1. If you want to look for other apps, Young and Invested provides a list.
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.
There are several simple steps you can take to avoid being a victim of identity theft. These can easily be added to your routine, keeping you and your finances safe.
- Go through your statements. If you’re using a credit card, review your monthly statements routinely to ensure everything is accounted for. Fraudulent activities are often small and infrequent, and if no action is taken to reverse or look into the fraud by your issuer, fraud can continue and in much more drastic ways..
- Don’t divulge personal information. Your documents with important personal information should be kept in a safe, private place and not easily accessible to others. Remember, when you throw away your personal documents, you should take precautions by tearing them up (or using a shredder) to prevent any data gathering.
- Protect yourself against malware. Install antivirus software on your computer to continuously check for malware or foreign software in your system. Also, remember to maintain necessary software updates.
- Set up password protection. Most applications and platforms require a password or PIN. It’s advisable to create strong ones that are more challenging to hack. Avoid using the same password on multiple platforms or devices — it can compromise all your accounts if one is hacked.
More Identity Theft and Fraud Protection Resources for Teens
- Protecting Against Malicious Code: Learn about the various types of malware and how it may affect your computer. CISA also shares steps on what to do if it happens to you.
- Bank of America: These eight tips from Bank of America can help you build better money habits. They revolve around proactively securing your account against possible scams or other fraudulent activities.
- 5 Ways to Avoid Credit Card Fraud: Diamond Valley reminds you of what you should watch out for. Some practices designed to make online experiences more convenient — like websites “remembering” your information — may not be the wisest decision when it comes to financial protection.
Navigating Your Financial Journey for the First Time
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.
Managing Your First Salary
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.
What You Need to Do
Determine your savings amount
Setting aside your savings amount, whether it’s 5% or 20% of your
It’s also a good idea to select a high-yield savings account that will
Create a budget
Creating a budget, and sticking to it, can help you understand where your
It’s important to account for your monthly finances, including existing
Avoid discretionary expenses
In order to maintain a budget and savings, it’s a good idea to identify
You can also make some compromises, such as spending a little on
Project additional expenses
If you realize there is a necessary expense you need to add, like paying for
You can also make other spending adjustments if needed and it will
Negotiate your next pay level
If you’re consistent in your work performance, excel at certain tasks,
If you’re successful, it may give you a bit more flexibility when it comes
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.
What You Need to Do
Maintain consistent employment history
While having a job doesn’t directly help you build credit, it may
Be an authorized user
If your parents have a credit card, you can see if you can be added
Remember, this strategy will only work if both the primary
Get a cosigner for a credit card
If your parents agree to cosign a credit card, you can use it to
Apply for a secured credit card
If you’re 18-years-old and want to build your credit from scratch,
A secured card allows you to build credit and become a
Try for a student credit card
A student credit card may be another good starting option and
Practice positive card habits
It’s not a matter of building your credit, it’s also maintaining it.
Remember, if you only pay the minimum amount per month,
Finding the Right Insurance
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.
What You Need to Do
Determine what kind of insurance you need
The types of insurance you’ll need depends on your personal
Calculate for how much insurance you need
Once you know what kind of insurance you need, you should
Remember, the higher your limits are, the more protection
Assess if you need additional coverages
You have the option to customize your insurance policy based
For example, it may be good to add uninsured/underinsured
Compare quotes from multiple insurers
Don’t forget to ask for quotes from multiple providers. Insurers
Rates also vary between insurers, so it’s best to see what
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.
Things to Know
Understand your options — a 401(k),
Both a 401(k) plan and Individual Retirement Account (IRA) are
It’s also crucial to know that there are various types of IRAs.
Decide which one you want to prioritize
While you could have both options, if you’re working with limited
If your employer offers a matching contribution (where they
How Parents Can Help Their Teens Learn About Money
A little more than half (52%) of teens say they learned about personal finance at school. Most still say that their primary source of financial knowledge is their families. This means that the amount of influence parents have over their children’s future financial decisions is significant.
Since parents play a considerable part in teens’ financial knowledge, it’s crucial to ensure some money management practices are instilled early on.
Discuss money matters openly
Don’t leave your children out of conversations involving money. Help them understand the logic behind your financial decisions. When they have a better grasp of your choices and why you do things a certain way, they’ll be able to adopt it in their own lives.
Highlight saving, not spending
If teens associate outcomes of spending as markers of success (such as expensive vacations, nice houses and luxury cars), it may overshadow the value of saving. Share your saving goals with your children and make sure it reflects with your own money management practices.
Give teens a fixed allowance
Having consistent income and a budget will teach teens about their own financial behaviors. For example, they’ll be more cognizant of their spending and know their budgetary limitations.
Open a bank account with them
Having a bank account teaches teens to be accountable for their own funds. It will also instill the value of saving up for emergencies. Learning basic banking skills, such as making deposits or withdrawals, can help their level of financial literacy. They can also appreciate the concept of compounding interest this way.
Expert Insight on Personal Finance for Teens
MoneyGeek reached out to several industry experts to provide you with additional information and insights on pertinent financial topics and teens.
- Besides having parents discussing money matters with their children, what other systems can we put in place to strengthen financial awareness among teens?
- Among the different money management methods — budgeting, building credit, etc — which are most difficult for teens? Where do you think it’s rooted and how can it be addressed?
- Considering the recent changes in the environment and the economy, has it brought about money management problems that weren’t as prominent before?
- Do you see teens and young adults today having different financial challenges compared to previous generations?
Senior Financial Advisor for Rather & Kittrell
Co-Founder & Technical Lead at Fig Loans
President & CEO of Belco Community Credit Union
President & CEO of Council for Economic Education
Additional Resources for Personal Finance for Teens
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.
About Nathan Paulus
- Greenlight. "Celebrate Financial Literacy Month with Your Kids and Teens." Accessed February 2, 2022.
- Piper Sandler. "Taking Stock with Teens Survey — Fall 2020 Survey." Accessed February 2, 2022.
- Next Gen Personal Finance. "What Percent of Teens Don’t Know the Difference Between a Debit Card and a Credit Card?." Accessed February 2, 2022.
- Statista. "What do American teens like to spend their money on?." Accessed February 2, 2022.