Personal Finance Skills are one of the most important skills you can teach your teen today.  This generation of teens and young adults seem to be struggling more than previous generations with this essential skill.  Most teens do not grasp the reality of money as they have never known a reality where items can’t be purchased online or without a piece of plastic.  Real tangible currency, the paper or metal kind you can hold in your hand and count, has never had a place in their lives.

Personal Finance Skills is having, understanding, planning, and managing your own financial resources.

In this post we will discuss the three most important steps to begin teaching your teen Personal Finance Skills that will give your teen the foundation for learning more advanced Personal Finance Skills and set them up for future financial success.

Generating an Income – Essential to Begin Learning Finance Skills

The first thing we need to discuss with our teens when teaching them about personal finance skills is the skill of generating income.  The fact is that without income, you have no finances to manage and nothing tangible to learn this skill.  When we were young, I’m sure you heard your parents or grandparents say on more than one occasion, “Money doesn’t grow on trees”.  Boy, I know that I heard this quite a lot from my parents during my teen years.  What our parents were trying to stress is that in order to have money for things you need and/or want you will need to take certain actions to generate that money. 

It is important to discuss with your teen the different ways to generate income and to stress the importance of working to begin generating that income.  Because the fact is the most dependable way to generate income is to work at a job.  Jobs bring in steady and reliable income that we all need and are essential to learning all other type of personal finance skills.  Not only are they essential to learning finance skills, bringing in a steady income through working at a job is the first step in being able to generating income through other means.  Or to use another quote our parents have said many times before, “It takes money to make money”.

Whether or not your teen is old enough to work outside of the home will depend on their age and the laws in your state.  However, even if your teen is too young to work outside the home, there are other options for your teen to begin generating some income.  One option you have is to allow them to make money by doing odd jobs around your home.  Another option you have is to give your teen an allowance. 

I know there are different thoughts on these two things.  Some people believe that doing chores around the house should be done by everyone who lives in the home without the expectation of compensation.  And I don’t disagree, everyone in a household should be helping to keep the home clean and tidy.  But I also believe there are ways to have it both ways in this situation. 

In order to do both, you could have your teen do basic chores without compensation, but also pay them for any chores over and above those basic chores. You could also pay your teen to do things that you may already be paying others to do, such as house cleaning, lawn or flower bed maintenance, car washing, or pet sitting or walking.  Wouldn’t it be better to be paying your own teen to do something around your home than paying someone else?  And not only will they be learning how to generate income while doing some of these chores, they will also be practicing some basic Daily Living Skills while they are at it.

Budgeting – Essential to Mastering Personal Finance Skills

Once your teen has money coming in that is their own.  The next step to teaching your teen about personal finance skills is to teach them to budget their income.  In order to do this, there will need to be an assignment of spending, saving, and giving.

Teens are always excited to have their own money!  And they should be.  But they are not always so excited to learn that not all their money should be spent immediately on something they want.  Learning to budget takes discipline to resist the urge for instant gratification.  Instead of instant gratification teach your teen to be forward thinking to set financial goals.  To do this you’ll need to show your teen how to make their money work for them by assigning a percentage of teach paycheck into three categories; spend, save, and give.

The spend category will be responsible for both needs and wants.  Obviously, your teen will not have enough income to provide for all of their needs.  But that doesn’t mean they can’t start contributing to some needs.  Needs would be items like food, clothing, school supplies, etc.  The needs that they can be responsible for will depend on the amount of money they bring in.  You could start with having your teen be responsible for any food they decide to purchase outside of the home.  This one is a good one to start with as they always have the option to pack a meal of snack from home.  Another option would be to have your teen be responsible for purchasing one pair of jeans or shoes per school year.

Teach your teen to use savings for larger dollar amount needs and wants.  Learning to save is one of the most important financial skills your teen can learn.  Teaching your teen to save allows them to practice patience and resist the monster of instant gratification.  It allows your teen to set financial goals and work towards those goals when they want something that costs a larger dollar amount.  They may also have some needs that will be larger dollar amounts that only need to be purchased once or twice a year.  By teaching them to save, they will be prepared when those purchases are needed.

The give category is important to learn to put our money towards a good cause and helping others who aren’t as fortunate as we are.  It doesn’t matter how much money someone brings in there is always room for helping others.  A common giving percentage is between 10% – 20% of a person’s income.  Show your teen that this percentage is really not that much compared to the money they are left with to spend and save.  Now, your teen can choose a charity, church, or cause that is important to them and begin giving to help others.

Banking – Essential Tool for Managing Finances

So now that your teen has income and has learned how to make their money work for them through budgeting, it’s time give them a place to help them manage their personal finances.  It’s time for them to have a savings and/or checking account.  A savings or checking account is a great tool for managing one’s finances.  These accounts provide place to keep their money until it’s needed. These accounts also takes the temptation of spending when they don’t have cash in sight and within reach at all times.

Bank accounts can be set up where a certain amount of their paychecks automatically go into a savings account.  This is a super easy way to make saving easy.  This is handy because it separates their savings money from their spending money.  That way your teen won’t accidently spend what they should be saving.  They will have a lot more success with their financial goals when they learn to have their savings automatically transferred to a savings account.

Having a savings and/or checking account is also a great way to begin teaching your teens other helpful and basic financial skills.  If they have a savings and/or checking account, they will have a monthly bank statement.  Teach your teen each time they receive a bank statement to balance their account. Learning that their daily account balance does not always show what they have because there may be some outstanding debits.  This one thing that a lot of teens don’t understand and can get them in trouble quickly.  Having these bank accounts also provides them practice using debit cards, an ATM, writing checks, and making deposits and withdrawals from their accounts.  All of these simple tasks that we take for granted are important to teach our teens.

As you can see, the starting point to teaching your teen personal finance skills is simple.  Find a way for them to begin earing their own money, then show them how to budget their money, and allow them to have a place to manage their money.  These are the three most basic personal finance skills essential to your teen having financial success in the future.  Teach these three personal finance skills to your teens and their financial success will follow!

Want to learn more skills your teen should master before leaving the nest? Visit Essential Life Skills for Teens to learn the five essential life skills categories teens need to master for a successful future.