Tips for teens
As we continue celebrating Youth Month! Here are some tips for your teen as begin this leg of their journey to adulthood.
Today that’s money management, building credit and what it really means to have a job.
First Let’s talk a little about money management and spending habits.
It’s never too early to create a good money habit. Is your child one that gets $10 and has to spend it right away or are they one that saves up in order to purchase something bigger and more expensive? Whether that’s a more expensive game or something as big as a car. No matter what their choice is as to how they spend their money, this is their habit. If you see them developing bad habits, help them turn them to positive ones early.
Teaching them how to save and live within their means and sticking to their budget are good habits to instill. Most likely as your teen gets older they will begin to have some bills they pay. Even if it’s just one or two at first like a cell phone bill or car insurance, it will be important for them to understand how to manage their money to insure they learn to handle their responsibilities AND have fun.
A quick breakdown of the difference in wants and needs is a great place to start.
Needs being things like water, food, a place to live and transportation to work/school.
Wants can be anything from concert tickets or movie tickets, a skateboard, coffee or eating out.
As they reach young adult age and start to live on their own this becomes imperative for them to know. When they budget, needs come first, then wants.
If they are finding themselves a little short when it comes to their budget, help them find creative ways to make things work. They may be able to pick up an extra side job here and there or show them how to cut expenses.
I use what we call the latte factor as an example of a good way to realize what even small things are really costing and how managing that spending can make a big difference.
Of course, the example is coffee! Everyone seems to need their coffee, and not just coffee at the office, but the more expensive, fun coffees. A coffee run can easily be $5 at a time, or even more these days. Let’s say you buy a coffee 5 days a week, that’s $25 a week. Over a month, that’s $100. If your teen is doing this every school day, there are usually about 180 days in a school year. Take the $5 each visit times 180 days and that’s $900 a year. $900… what else could be done with that much money??
A suggestion might be, only get coffee once a week. The rest of the time bring coffee from home. Not only does this save money, but it makes that once a week coffee run a treat and something special to look forward to. Make it a positive idea versus feeling like you are taking something away.
We also recommend the “think before you buy” test.
Ask these questions:
· Do I need this or want it?
· If it’s just want, then why?
· Exactly what will it be used for?
· If it’s for a special occasion, can it be used again? Or this a one-time purchase that will then sit in my closet?
· Can I find it somewhere else for less?
· What will I have to give up or put off if I buy this now?
There will understandably be one-time things that are purchased like prom dresses, etc but other things like a new pair shoes may need to pass the “ask” test before you buy. Think of how often you will wear them and how much use you will get from them before you purchase. Decide what need they fill and if they are truly worth it.
If you remember the discussion about contentment and impulse buying last time, this falls right in that conversation nicely.
Managing their money to stay on budget and be able to save for goals and emergencies is a good habit to form. We talk more in depth on savings and budgeting in other episodes if you need a bit more info.
Credit is another topic to talk with your teens about.
Starting with the basics, what is credit?
Buying on credit simply means you are making a purchase with money you’ve borrowed, with the promise to pay the money back.
The principal is the amount the item costs or the amount borrowed.
Whereas, interest on a loan is basically the cost of borrowing. So you pay what you owe plus interest
Using credit is generally necessary for big ticket items like cars or homes. But there is more than one kind of credit.
Ones that will involve paying interest on the loan are:
· Revolving credit which is credit cards. Keep in mind credit cards can be something like a Visa or Mastercard or they can be from a store. For example, Bestbuy, Lowe’s and many others offer credit cards. In fact, many big box retailers have credit cards and will offer you to sign up for their card. Don’t let your teens get into trouble by charging things they can’t afford.
· Installment loans are things like loans or mortgages on a home.
A quick note about interest. The interest on loans will vary for many reasons. Take credit cards for instance. The interest on credit cards is frequently high and variable, which means it can change at any time. When you are carrying large balances on credit cards it can cost you huge interest payments.
There may be occasions where credit card companies will offer special rates, but it’s always a good idea to read the fine print. The interest rate can change and there are always rules that apply. Help your kids understand to read and understand what agreements they are signing and warn them of the dangers credit card DEBT.
Interest on loans will depend on many factors as well. A big one is your credit score, which we will talk about in a minute. Help your teens check the rates and consider not only what they can afford in their budget but what the purchase will cost them overall including the interest.
· Another type of credit is service credit. This is for things like a cell phone or electricity at their apartment or home. If they have no established credit, they may need to consider an option like a co-signer for those contracts.
· One last credit type is a cash loan which tends to be a more personal transaction between friends or family versus a business.
The truth is, there will be credit involved in many parts of their lives, especially as they rent apartments and sign up for utilities.
The question we hear a lot is, I don’t have credit, what do I do? How do I start?
There are actually a couple of options!
Typically, it takes about 2 years to get a good credit score established, so a great start would be credit builder loans. First Pioneers offers credit builder loans, as do many banks and credit unions. The structure for First Pioneers is a series of 4 loans. You start with $250 loan for six months then you go up to $500 for six months. Next is a $750 loan for 12 months and lastly $1000 loan for 12 months. If they’ve maintained their payments and made them on time, they should have a reasonable score after the series of loans is payed off.
Another option is to open a secured credit card or a secured loan. These loans don’t require any collateral, they are considered personal loans.
Let’s stop for a moment and talk collateral. Some loans require collateral and some are considered personal loans.
The definition of collateral is: an asset that a lender accepts as security for a loan.
For homes and cars, THEY are the collateral, but you can also do what’s called a secured credit card. With a secured credit card, the cardholder backs the card with a cash deposit. The deposit is the collateral on the account. This gives the card issuer, probably your bank or credit union, security in case the payments aren’t made. Same with a secured loan. Either of these will help you establish a good credit score.
It’s important to explain to your teens that you go into a loan with good faith that you will repay it. For the most part, that is exactly what happens. The bank, credit union, or business loaning you the money does it with a certain amount of risk. This is why a credit score is important. The lender measures the risk they are willing to take largely based on that score. Good risk = lower interest rate on the loan. Higher risk = higher interest rate. The reality is things happen, life happens, and sometimes the loan is not repaid. But the goal is to fulfill that obligation and your teen understanding that when you don’t ,or don’t show responsibility with the loan, that habit or behavior can follow you as you become an adult.
Establishing a relationship with a bank or credit union can help in this process. Having someone to work with you that can offer suggestions and options can help you navigate the path.
Having money in a checking and or savings account in good standing and being able to show steady employment are things that can also be considered by a lender.
If your child finds themselves needing a car or apartment before they are able to build their credit in a way they want, they could consider having someone co-sign your loan or in the case of the apartment, the lease. A co-signer will most likely be a parent or close family member or maybe even close friend. The co-signer needs to understand that signing a loan with your teen is a pledge to pay the loan back if your teen doesn’t. They will want someone with established, good credit as a co-signer. This is a big responsibility to that person and shouldn’t be taken lightly, so make sure you have a conversation and are in agreement on the terms of the loan before moving forward.
Once they’ve established credit and their credit score, then encourage them to maintain it!
Share the 5 things that make up a credit score:
· Payment history – this is paying on time. Always encourage this!!
· Available credit – which is the amount of credit you have been approved for. An easy way to think about that is with credit cards. If you have 3 cards with a limit of $10,000 each, that’s $30,000 in available credit.
· Length of credit – well that’s obvious.
· New credit – this is applying for new things like loans or credit cards.
· Credit mix or the types of credit. They want to have different kinds of credit. Remember what we talked about before? Revolving (credit card), installment (car), service (cell phone)
Don’t let your teen get discouraged with this effort. It will take time to establish credit and it will change as they grow and their life changes. They will add the type of credit they use and obviously the length of time they’ve had a score will grow. Making payments on time is the most important thing they can do for their credit! Establishing their credit, then maintaining it or making it better is the goal!
Remind them to always consider their options before using credit AND make sure they understand the terms of the credit agreement before they sign on the line!
The last thing I want to talk about is helping your teens understand what having a job really means.
There can be hidden costs of working and there can be great benefits they should consider even at a young age!
Some hidden costs kids may not think about are:
· The cost of getting to and from work
· Clothes or uniforms required – including pants or shoes
· Licenses or education or memberships to unions or professional organizations. This may come with higher positions, not entry level, but these may be goals for them to work toward.
· Tools or equipment
· Child care costs
As your child considers a position, the pay rate and any benefits offered should be carefully considered. Consider how everything fits and if it works for them and their situation.
You may also want to go over a pay stub from a job to help them understand.
An $8 an hour won’t be what they bring home. It’s probably more like around $6.50 an hour. It can be quite a harsh reality, realizing how much you give up out of your paycheck, especially when it’s for things you can’t control.
Make sure they understand the deductions taken out of their paycheck.
· Federal taxes
· State taxes
· Social security contributions
Other possible deductions that could happen without their control:
· Wage garnishments for judgements
· Child support
Most other things coming out of their check would be voluntary.
For instance, 401k contributions, paying for health insurance, or any job related expenses.
Travel or uniforms may be taken out of a check as well. Those things all depend on the job and the employer.
Even though the deductions they see from that first paycheck can be a bit of shock, we would encourage them to participate in things like a 401k or even insurance if it’s offered.
Kids don’t really get a picture of how starting early on retirement can add up to big savings when they are ready to leave their jobs. Saving $100 a month beginning at age 25 should give them over 1 million dollars by retirement age. That may be hard for them to believe, but show them the numbers.
Also show them if they start early, it’s easier to keep it up. You never really see the money that goes to a 401k and keeping it up even if you change jobs can be a great habit. It’s kind of an out of sight, out of mind thing. If you never see it, then you don’t really miss it.
It can be hard. People think they have time, then suddenly they just don’t… early is better.
As for insurance, your teen may still be on your policy, but if they had another policy it could be used as supplemental coverage and that can go a long way with a big medical expense.
Also consider explaining the value of benefits of a job. Paid leave, insurance paid by an employer, a saving plan…. These are all values! I’ve heard, but it’s not like I make that money in my pocket. Maybe not, but being able to take off work when you need and get paid for it. If they are offered vacation or sick leave then they aren’t losing pay because of it. This may have more weight when they are on their own and really responsible for rent and expenses. It makes more sense when they are paying all their bills!
If a company offers things like employee tuition assistance or training, that will only help them grow not only in that position but maybe future positions.
Even employee discounts or wellness programs can offer them savings.
Help them see that value as they weigh their options when job hunting or planning their future.
Bonus tip for their 1st job. Remember the first time you filled out a W4? Did you know what to put for tax deductions! Maybe give them a little advance notice that this will happen and let them know what to put if they are claiming themselves or not. Most likely will not if they live at home, so that would be a 0. But if they have moved out already and you aren’t claiming them, then let them know that. Otherwise, I would expect a text when they get to their new job and start doing paperwork maybe multiple texts.
It's easy to get overwhelmed when you think about all you want to teach your children. Imagine how they feel? Many of them recognize there is so much they don’t know yet they want to prepare to go out into the world on their own. The good thing, questions can always be asked and things will be learned as life develops and creates the need. Most likely, it’s not like they are leaving and can never speak to you again, or speak to someone!
As we have said before, talking with your kids in an open and honest way is the best action you can take. Be willing to listen to their questions and help them get the answers they need. Don’t forget to give you and your kids some grace. None of this will happen overnight and some of this is not that easy to navigate. Give it time and know there are people out there to help you as parents and your kids. Reach out to your bank or credit union or reach out to local organizations that offer this kind of help. That’s what we are here for!