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You’ve supported your child since birth. But one day, they’ll need to leave the nest. And when they do, you’ll want to make sure they’re ready to face financial realities with confidence. Unfortunately, that may not be easy.
In fact, one in five U.S. teens lacks basic personal finance skills, according to research by the National Endowment for Financial Education (NEFE). But you can change that. By starting early, you can take a few steps to put your teen on the path to financial independence. So let’s get started.
Open a Checking Account for Your Teen
Your child may be earning some income through a part-time job, summer job, allowance, or a combination of these. But it’s important for your teen to park this money somewhere safe, such as in a checking account.
If your child is under the age of 18, you’d need to open a checking account with them as a joint account holder. This means you’d both have access to the account. But it also means you’d also weigh the burden of any overdrafts or fees.
This is one of the many reasons why it’s important to shop around. Don’t just run to your local bank for a teen checking account.
Carefully compare your options. Look for accounts that have no monthly maintenance fees or minimum balance requirements. And you should also look into parental controls.
Some accounts allow you to set spending limits, for example. These limits can apply to ATM withdrawals and transactions made with a debit card.
Some even pay interest. Moreover, you should make sure that the bank issuing the account is insured by the Federal Deposit Insurance Corp. (FDIC) or NCUA. Generally, these organizations provide protection on up to $250,000 in the covered account.
Start an Emergency Fund
It’s imperative that teens understand the importance of savings and compound interest as soon as possible. One way to establish a secure emergency fund is by opening a savings or money market account.
But as with a checking account, you’d need to open a joint savings account. And you should also diligently review your options.
Banks and credit unions offer competing interest rates or annual percentage yields (APYs) on these accounts. The average APY on a savings account is 0.39 percent, according to FDIC data. But you can find options paying up to 5 percent or even as much as a whopping 10 percent on higher balances.
But there’s more to it than just having a savings account. Discipline your teen by allowing them to save for their own expenses. Perhaps they want the latest gadget. Don’t flat-out purchase it for them. Encourage them to slowly save for it. This also helps them benefit from delayed gratification. And they could earn a sense of fulfillment by working and saving for their own purchases.
Help Them Create a Budget
While living under your roof, your teen may not have much in the way of major expenses. But they will eventually need to cover the same kinds of expenses you currently do.
So why not walk them through your budget? Take them with you shopping for essentials like groceries and toiletries. Detail how you budget in rent, utilities, transportation, and food against your own paycheck. Help them grasp the true cost of living. Allow them to understand the concept of needs versus wants.
This could also be an opportunity to slowly open the door to real-world expenses. Maybe have them pay more or all of their phone bills and music streaming services like Spotify. This would allow them to manage their own budgets and savings.
Get Them Started on Investing
One of the best ways to build and maintain wealth is through sound investments.
But how can your teen get started? You can begin by opening a custodial brokerage account in your teen’s name.
A custodial brokerage account allows you to manage an investment portfolio on behalf of your teen. Once your teen reaches the age of majority (18 or 21, depending on the state), they can take full control of the account.
In the meantime, though, you can teach your kid about how you manage the account.
Set a goal for the account. Maybe it can serve as another source of funding for college or something to help your teen get started when they open the door to the real world.
But overall, keep them in the loop. Discuss the account’s holdings and why you made those choices. Tell them about investment strategies. Help them see how the account grows over time. This would give them a real-life glimpse into the importance of compound interest and a view into how markets fluctuate.
But as with savings and checking accounts, it’s important to shop around for the right custodial brokerage account.
The best custodial brokerage account providers offer low fees and an array of investment options, as well as an abundance of financial literacy tools.
If you’re new to investing yourself, you may want to consider a custodial brokerage account robo-adviser. These online platforms use advanced algorithms and often the expertise of experienced real-life investment managers to recommend diversified portfolios based on your teen’s specific investment goals and financial circumstances. These are automatically managed, so there’s no need for you to handpick investments.
But whether you’re picking investments yourself or you’re handing investment decisions off to an algorithm, it’s important to understand one thing. There are two main types of custodial brokerage accounts.
On one hand, you have Uniform Transfers to Minors Act (UTMA) accounts. These allow you to invest in virtually any security, including real estate and alternative investments.
On the other hand, you have Uniform Gifts to Minors Act (UGMA) accounts. These limit investment options to cash, stocks, mutual funds, and insurance policies.
Help Your Teen Build Good Credit
Consumer debt in the United States has risen to $17.57 trillion, and the average consumer debt balance is about $105,000, according toresearch by credit bureau Experian.
But your teen doesn’t have to become another statistic. Building good credit habits can start right now.
You can start by adding your kid as an authorized user on one of your credit cards, preferably one with a low credit limit. Help them understand the importance of making timely payments and paying off the entire balance each billing cycle if possible. Help them keep the amount of credit they are using to a minimum. These are the two most important components of determining one’s credit score.
Of course, this is easier said than done. Teens want to have fun, and access to a credit card can easily lead to a lifetime of debt and poor financial decisions. So it’s important to keep an eye on their spending and have serious discussions around spending habits.
Help Lower Their Auto Insurance Costs
Getting behind the wheel for the first time and onto the open road can be a monumental moment for your teen—and a new source of fear and stress for you. But for your teen, it comes at a price.
Sixteen-year-old drivers pay an average of $7,658 a year for auto insurance, according to the Zebra, an insurance marketplace. That’s more than triple the national average for a 30-year-old driver who pays an average of $2,189.
In the eyes of insurance companies, inexperienced drivers mean higher risks of accidents. And sadly, the stats hold true.
But there are ways to cut these costs. You can begin by insuring your teen on your own policy. This path is almost always cheaper than having your teens open their own policies. You can also seek discounts for good grades. Some companies offer discounts for students who maintain GPAs of at least B or 3.0.
You can also consider a telematics program. These programs allow you to use a device or app that monitors driving behavior and rewards safe driving habits with a discount.
Understand How Far Support Goes
Part of becoming financially independent is making mistakes and learning from those mistakes. Adolescents, especially, will make some poor financial decisions. But it’s important to not always bail them out. This could instill in them a sense that you can always cover them. Sometimes you have to be tough and let them pull themselves up. Of course, as a parent, you can always give support to the degree that’s appropriate to the situation.
The Bottom Line
Helping your child learn the basics and importance of budgeting, savings, and investing can help put them on a clear path toward financial independence and wealth. But the road won’t be easy to travel. Still, you can guide your teen as early as possible by helping them establish checking and savings accounts, as well as investing accounts. But it’s your unique guidance and teachings that will set them apart. Go over your own financial situation with them and help them understand the value of money and what it really costs to live in the real world.
Javier Simon is a freelance personal finance writer for The Epoch Times. He specializes in retirement planning, investing, taxes, fintech, financial products and more. His work has been featured by major publications including Fox Business, The Motley Fool, NerdWallet, and Money Magazine.
