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This is a collaborative post.
Being in your teenage years presents an excellent opportunity to set yourself up for financial success. It offers both a generous timeline and a clean learning slate to reinforce good financial habits and money management skills that you can carry with you in the long run.
If you’re a teenager who wants to set yourself apart from the rest of your peers and actually be good with money in the future, read on. We’ll list down eight critical skills to help you become one step closer to living a financially secure life, now and for the rest of your lives.
1. Setting Money Goals
Goal-setting is an essential activity that teens need to partake in if they want to set themselves up for future financial success.
The main reason why it’s so important is because teens have a very valuable resource called time on their side. Specifically, this demographic has enough time to overcome mistakes, pivot their goals, or see through them with some patience and discipline.
That said, goals aren’t something teens should shoddily and hastily create. A proper goal-setting session demands a thoughtful and methodical approach for it to bear fruit, especially if it concerns one’s finances.
A recommended approach to goal setting is following the SMART goal approach. SMART is an acronym that stands for specific, measurable, achievable, realistic, and time-bound. Structuring goals that tick each point in the acronym can dramatically improve the quality of the goal and its underpinning achievability.
Furthermore, goals should be broken down into different time categories: short-term, medium-term, and long-term. A short-term goal could be buying a new tablet before the next semester begins. A long-term goal could be making conservative but consistent investments in a retirement savings account.
In any case, teens should have goals to serve as a roadmap for their financial and individual ambitions. This can increase their odds of methodically accomplishing their goal.
2. Budgeting Expenses
Another crucial life skill every teen should know how to do is creating a budget. Most teens don’t have vast amounts of capital to their name, making empty wallets and drained bank accounts a common occurrence for such individuals.
Given this, budgeting is an activity that these teens should actively focus on improving and upholding. This financial activity entails managing and tracking one’s allowance, income, expenses, and net worth in real time. It also involves categorising expenses and making a clear visual portfolio of one’s finances.
When there’s a clear visual representation of one’s wealth, it can help the budget maker identify their spending behaviour and promote better responsibility for their finances. More specifically, it can tell you which areas of your life you can halt or decrease spending, like dining out or entertainment.
Budgeting also helps you stay in control of your financial situation. This decreases the chances of you being amidst any unpleasant situation that involves money, like being in debt or overspending. As a teen, this is crucial for building a financially stable and prosperous future.
There are many ways you can create a budget. An easy method entails using and updating budget templates from spreadsheet software like Microsoft Excel. Alternatively, you can streamline the process by using budgeting apps on your phone, like Acorns, Mint, or GoHenry.
3. Saving Money
No matter your age, it’s essential to develop a proper saving habit. Saving money is essential for padding your capital, and increasing your spending capacity and safety net.
When you have an ample amount of savings, you become more prepared to handle future financial needs. This applies to both expensive financial objectives and sudden financial emergencies.
There are many ways to approach saving effectively as a teenager. The first is by using a savings jar and putting in loose change from time to time. Over time, it fills up and you can use the money to spend on your financial goals.
An even better way is by applying for a savings account in a bank and storing your money there. This helps you both have a means to store funds and a place to grow them through earned interest.
Of course, you have to be consistent with your savings approach for it to be effective. Try to curb temptations and try to make it so that you can save a portion (like 20-30%) of your allowance or income for future savings. This can make you more likely to achieve your savings goals in time.
Learn more ways to responsibly handle money here.
4. Shopping Thoughtfully
Saving and budgeting aren’t the only things teens should perfect—you should also learn to shop in a disciplined manner.
For starters, avoid overspending on things you don’t need. These minute temptations can accumulate and cost you hundreds of dollars in a month, and thousands more per year.
Instead of buying things impulsively, a good strategy is to wait for 48 hours (or a week if you want this strategy to be even more successful) before following through with a purchase. This time frame makes you less emotionally attached and gives the rational side of your brain enough time to parse through the need for the product or service.
Besides that, polish your research and comparison skills. Search for the cheapest rate of the product you want and shop at a store, online or offline, offering that rate. Moreover, use coupons whenever you can and consider shopping during discount and sale periods.
Additionally, always try to find a decent-quality variant of the item you plan on purchasing. Having a long-lasting and durable item can reduce the need for paying for replacements, which can lead to better savings in the long term.
5. Making an Emergency Fund
Another crucial thing teens should prioritise is creating an emergency fund. This fund helps you overcome an unexpected, emergency situation, like a medical emergency, a home renovation, or a sudden job loss.
Ideally, teens should dedicate at least three months of their monthly income or allowance to this emergency fund. More often than not, this percentage gives them enough capital to deal with the problem sufficiently.
Creating an emergency fund is a demanding task, requiring you to keep spending low to compensate for growing this account. Regardless, it’s an essential part of your financial fund and should be prioritised to cover unexpected costs—as the consequences of avoiding it can be exponentially worse.
6. Managing Debt and Loans
Having enough capital to pay off obligations or big purchases isn’t something every teen immediately has in their possession. In such cases, taking out a loan may be the best course of action to secure a purchase or pay off an upcoming bill.
That said, it’s essential to approach the process of loaning appropriately. Borrowed money entails paying it off with interest, so ensure that you have enough cash flow to handle this prompt repayment.
Furthermore, ensure that you aren’t borrowing more than you can pay back. Otherwise, this can cause you to incur more fees and owe more money over time, leading you to financial ruin.
Be sure to prioritise clearing your debt overspending for wants; you can consider debt consolidation tactics to help you manage your debt stream more effectively.
7. Making Smart Investments
Everyone who’s at least somewhat decent with money knows the importance of growing wealth through passive income. These wealth-growing vehicles are called investments, and there are a tonne of them that you can consider.
Your risk tolerance dictates what investments to go for. If you want a low-risk but slow investment, then you can opt for time deposits and bonds. Medium-risk investments include ETFs and mutual funds, while high-risk investments include cryptocurrencies.
Unfortunately, many brokerage firms forbid minors below 18 to open an individual brokerage account to buy and sell investments. However, you can have your parents open a custodial brokerage account to do the same, just with a tad fewer features.
Before stepping into the fray, it’s essential for teens to learn about the investment process first and know the different strategies, indicators, and terms that surround it. There are many online resources that can bring you up to speed. You can also talk with a financial advisor for comprehensive tips and a more curated learning experience.
8. Protection Through Insurance
In the event of a disastrous financial event, having to pay the damages out of pocket can be costly, if not downright debt-inducing.
If you don’t want to shell out thousands of dollars for, say, a damaged car or burned contents following a house fire, then it’s essential to get insurance coverage. Yes, that includes teens.
Getting insurance safeguards your finances if or when an emergency takes place, granted that it’s covered by said policy.
In essence, this insurance policy helps keep your finances afloat, granting you financial flexibility even after an accident, all at the cost of lower monthly premiums.
Best of luck in your journey towards better money management!