Financial Planning For Teens

To set the stage for Financial responsibility, Financial literacy is an essential life skill that teenagers should learn. It is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. It is the foundation of your relationship with money and a lifelong journey of learning. The earlier you start, the better off you will be because education is the key to success when it comes to money.

Financial illiteracy is a big problem that affects many people’s lives. Making good financial decisions is a critically important part of your life that will affect your opportunities, financial stability, and health (both physical and mental.) Unfortunately, most adults don’t have good financial habits. 47% of adults say they are living pay check to pay check, which has increased to 63% during the pandemic. This is just one metric that demonstrates the shocking lack of financial literacy in America. And even though financial literacy is a crucial part of success as an adult, most schools don’t teach it. This is why it’s so important to take it upon yourself to become financially literate.

Financial literacy has been found to have a clear and significant effect on wealth. In a recent study, respondents were asked to complete questions to assess their financial literacy. When the data was analysed, researchers found that the median net worth of individuals in the top 25% of most financially literate participants was over $225,000, quadrupling the median net worth of those in the bottom 25%. This shocking difference suggests a strong correlation between financial literacy and wealth. And it makes sense; being financially literate will allow you to make informed financial decisions, with a higher chance of success. Understanding the principles of personal finance is necessary for adults, but unfortunately, there’s a severe lack of financial education.

Most of the time, financial knowledge is taught by parents to their children, but money isn’t often talked about, even among family. If you aren’t lucky enough to be taught good financial habits by your parents, you’ll have to take it upon yourself to build financial knowledge.

Here are some basic principles of responsible money management:

Organize your finances; Spend less than you earn; Put your money to work; Limit debt to income-producing assets; Continuously educate yourself; Understand risk; Diversification is not just for investments; Maximize your employment benefits; Pay attention to taxes; Plan for the unexpected;

Establishing financial goals early in life

1. Create a budget that aligns with your financial goals. Allocate funds for essentials, savings, investments, and discretionary expenses. Be disciplined in following your budget to stay on track.
2. Set specific, measurable, achievable, relevant, and time-bound (SMART) financial goals. For example, you can set a goal to save a certain amount of money by a specific date.
3. Prioritize your financial goals. Decide which goals are most important to you and focus on achieving them first.
4. Track your progress. Regularly review your budget and financial goals to ensure you’re on track. Adjust your goals and budget as needed.
5. Celebrate your successes. When you achieve a financial goal, take time to celebrate your success and reward yourself.

How a budget forms the foundation of financial planning

A budget is a financial plan that outlines your income and expenses. It helps you to track your spending and make sure that you are saving enough money and not spending more than you earn. A budget forms the foundation of financial planning because it helps you to prioritize your spending and make sure that you are allocating your money towards the things that are most important to you. By creating a budget, you can identify areas where you can cut back on spending and save more money. This can help you to achieve your financial goals and build a secure financial future.

Budgeting apps and resources for monitoring spending

Budgeting apps and resources for monitoring spending are useful for teens who want to learn how to manage their money wisely and achieve their financial goals.

Some of the best budgeting apps and resources for teens are:

• Greenlight: This app helps teens create a budget that lets them earn, save, spend, and give as they wish. It also offers educational resources and parental controls. The app costs $4.99 per month and includes a debit card.
• Current: This app allows teens to track their spending, savings, and earnings across different accounts. It also provides parental controls and notifications. The app costs $36 per year and comes with a debit card.
• Copper: This app is a banking app that offers up to five teen accounts when parents open an account. It also provides financial literacy lessons and bonus cash rewards. The app has no monthly fees and includes a debit card.
• Budget: This app uses the envelope budgeting method, which involves dividing the income into different categories and spending only what is in each category. It also helps teens track their progress and set goals. The app has a free version and a paid version that costs $7 per month or $60 per year.
• Step: This app is a Visa card that allows teens to spend whatever money is stored in their Step account. It also helps teens build credit and earn rewards. The app has no monthly fees and no overdraft fees.

These are some of the best budgeting apps and resources for monitoring spending that are available for teens.

Tools and Strategies for Teen Financial Planning

Opening a bank account as a teenager can help you learn about money management, budgeting, and saving. It can also prepare you for your future financial goals

1. These accounts have low or no fees, high interest rates, and educational features.
2. Gather the required documents, such as your ID, proof of address, and parent or guardian’s consent. Some banks may also ask for proof of income or school enrolment.
3. Apply online, on the app, or at a branch. You may need to have your parent or guardian with you if you apply in person.
4. Receive your bank card and set up your PIN and online banking profile. You can also link your account to a savings goal or a mobile wallet.
5. Start using your account to deposit, withdraw, transfer, and save money. You can also enjoy benefits like discounts, data, and vouchers from your bank.

The role of part-time jobs and allowances in financial planning

Part-time jobs and allowances can play a significant role in financial planning for teens. Teenagers who earn their own money can better understand financial concepts like saving and spending. As long as it doesn’t interfere with school, working a part-time job can be a great educational experience. It helps teach young people the value of money, taxes, and the difference between gross and net income. They learn how long it takes and how much effort they need to put in to save up a specific sum. Shopping with your hard-earned cash is a lot different than having parents lay down the plastic. Teens should be encouraged to save money consistently from all their cash or income, including money from part-time jobs, allowances, and special occasions money like birthdays and Bar Mitzvahs. Teens should learn to skim this money right off the top and put it into a savings account

Developing Long-term Financial Vision

Learning about credit and using it wisely as a teen can help you achieve your financial goals and prepare you for adulthood. By following these steps, you can build a positive credit history, improve your credit score, and enjoy the benefits of credit.

Credit is the ability to borrow money and pay it back later. It can help you achieve your financial goals, such as buying a car, a house, or paying for college. However, credit also comes with responsibilities and risks. If you misuse credit, you may end up in debt, damage your credit score, and pay high-interest rates. Therefore, it is important to learn about credit and use it wisely as a teen. Here are some steps you can take:

• Understand the basics of credit. Credit is based on trust and reputation. Lenders, such as banks, credit card companies, or other financial institutions, will lend you money based on your credit history, which shows how well you have managed your credit in the past. Your credit history is recorded in your credit report, which also contains your personal information, such as your name, address, and social security number. Your credit report is used to calculate your credit score, which is a number between 300 and 850 that reflects your creditworthiness. The higher your credit score, the more likely you are to get approved for credit and receive favourable terms, such as lower interest rates and fees.
• Check your credit report and score regularly. You can get a free copy of your credit report from each of the three major credit bureaus (Experian, Equifax, and TransUnion) once a year at AnnualCreditReport.com. You can also get your credit score for free from some websites, such as Credit Karma or Credit Sesame. Review your credit report and score for accuracy and completeness, and dispute any errors or fraud you find. You can also monitor your credit activity and track your progress over time.
• Build your credit history. As a teen, you may not have much credit history, which can make it harder to get credit in the future. To start building your credit history, you can take some of the following actions:
  • Become an authorized user on your parent’s or guardian’s credit card account. This means you can use their credit card with their permission, but you are not legally responsible for paying the bill. However, their credit activity will affect your credit report and score, so make sure they are responsible and trustworthy.
  • Apply for a secured credit card. This is a type of credit card that requires you to deposit collateral, which usually matches your credit limit. For example, if you deposit $500, you can borrow up to $500. A secured credit card works like a regular credit card, except that if you fail to pay your balance, the lender can take your deposit. A secured credit card can help you establish a credit history, as long as you pay your bill on time and in full every month.
  • Apply for a student credit card. This is a type of credit card that is designed for students who have little or no credit history. A student credit card may offer perks, such as rewards, cash back, or discounts, as well as lower fees and interest rates than regular credit cards. However, a student credit card may also have a lower credit limit and stricter eligibility requirements, such as proof of income or enrollment in school.
  • Apply for a credit builder loan. This is a type of loan that is meant to help you build credit history, rather than to borrow money for a specific purpose. A credit builder loan works like this: you borrow a small amount of money, usually between $300 and $1,000, from a lender, such as a bank, credit union, or online platform. The lender holds the money in a savings account until you pay off the loan in monthly instalments, usually over 6 to 24 months. The lender reports your payment history to the credit bureaus, which helps you build your credit history. Once you pay off the loan, you get access to the money in the savings account, plus any interest earned.
• Use your credit responsibly. Once you have access to credit, you need to use it wisely and avoid common pitfalls, such as overspending, missing payments, or carrying a high balance. Here are some tips to use your credit responsibly:
  • Only borrow what you can afford to pay back. Before you use your credit card or take out a loan, ask yourself if you need it, if you have other options, and if you have a plan to repay it. Avoid using credit for impulse purchases, unnecessary expenses, or emergencies. Instead, use credit for planned and budgeted purchases, such as textbooks, gas, or groceries, and save up for larger or longer-term goals, such as a car, a vacation, or college.
  • Pay your bills on time and in full every month. This is the most important factor in your credit score and your credit history. Paying your bills on time and in full shows that you are reliable and trustworthy, and that you can manage your credit well. It also helps you avoid late fees, penalty interest rates, and negative marks on your credit report. If you have trouble remembering to pay your bills, you can set up automatic payments, reminders, or alerts. If you can’t pay your bill in full, at least pay the minimum amount due, which is the lowest amount you can pay without being considered late. However, paying only the minimum will cost you more in interest and take you longer to pay off your debt.
  • Keep your credit utilization low. This is the ratio of how much you owe to how much credit you have available. For example, if you have a credit card with a $1,000 limit and a $200 balance, your credit utilization is 20%. A lower credit utilization shows that you are not maxing out your credit and that you have enough room to handle more debt if needed. A higher credit utilization shows that you are overextended and may have trouble paying back your debt. A good rule of thumb is to keep your credit utilization below 30% on each credit card and across all your credit accounts. You can lower your credit utilization by paying off your balances, requesting a higher credit limit, or opening a new credit account. However, be careful not to open too many new accounts at once, as this may lower your credit score and make you look desperate for credit.
  • Check your credit card statements and loan statements regularly. This will help you keep track of your spending, your payments, your fees, and your interest rates. It will also help you spot any errors, fraud, or unauthorized charges on your accounts. If you find any issues, contact your lender or credit card company as soon as possible to resolve them.
  • Protect your personal and financial information. Identity theft is a serious crime that can ruin your credit and your finances. Identity thieves can use your name, social security number, credit card number, or other information to open new accounts, make purchases, or commit fraud in your name. To prevent identity theft, you should:
    • Keep your credit cards, bank statements, and other documents in a safe place or shred them before throwing them away.
    • Never share your passwords, PINs, or security codes with anyone, and change them regularly.
    • Avoid clicking on links or opening attachments from unknown or suspicious sources, and use antivirus software and firewalls on your devices.
    • Only use secure websites, especially when shopping or banking online, and look for the lock icon or https in the address bar.
    • Review your credit report at least once a year and report any suspicious activity or accounts to the credit bureaus and the authorities.

Learning about credit and using it wisely as a teen can help you achieve your financial goals and prepare you for adulthood. By following these steps, you can build a positive credit history, improve your credit score, and enjoy the benefits of credit

Investing early: exploring stocks, bonds, and mutual funds

Investing as a teen can give you a huge advantage in the long run, as your money can grow and benefit from the power of compounding. 🚀

There are different ways you can start investing as a teen, depending on your goals, risk tolerance, and preferences. Some of the most common options are:

Stocks:

These are shares of ownership in a company. You can buy and sell stocks through a brokerage account, which you can open with the help of a parent or guardian. Stocks can offer high returns, but they also come with high risks and volatility. You should do your research before investing in any stock, and diversify your portfolio across different sectors and industries.

Bonds:

These are loans that you make to a government or a corporation. You can buy and sell bonds through a brokerage account as well. Bonds typically pay a fixed interest rate and return your principal at maturity. Bonds are generally considered safer than stocks, but they also offer lower returns and may lose value if interest rates rise. 📉

Mutual funds:

These are collections of stocks, bonds, or other assets that are professionally managed by a fund manager. You can buy and sell mutual fund shares through a brokerage account or directly from the fund company. Mutual funds can offer diversification, convenience, and expertise, but they also charge fees and expenses that can eat into your returns. You should compare different mutual funds based on their performance, costs, and objectives.

Insurance and saving for emergencies are also important financial habits for teens to develop. They can help you prepare for unexpected situations that might affect your income, health, or property, and avoid going into debt or losing your savings.

Insurance is a way of transferring the risk of a potential loss to an insurance company, which will pay you a certain amount of money if the loss occurs. For example, if you have car insurance and you get into an accident, the insurance company will cover the repair costs or the replacement of your car. Insurance can also protect you from medical expenses, legal liabilities, or loss of income due to disability or death.

Saving for emergencies is a way of setting aside some money in a separate account that you can access quickly and easily when you need it. For example, if you have an emergency fund and you lose your job, you can use the money to pay for your living expenses until you find another job. Saving for emergencies can also help you cover unexpected costs such as a flat tyre, a broken phone, or a dental procedure.

Some benefits of having insurance and saving for emergencies are:

• You can avoid or reduce the impact of financial stress and anxiety, which can affect your mental and physical health.
• You can avoid or reduce the need to borrow money from family, friends, or lenders, which can strain your relationships or put you in a cycle of debt.
• You can protect your long-term financial goals, such as saving for education, buying a house, or retiring comfortably, by not having to dip into your savings or investments.
• You can have more peace of mind and confidence in your ability to handle any challenges that life throws at you.

Some tips for building insurance and saving for emergencies are:

• Start as early as possible, even if you can only afford a small amount. The sooner you start, the more time you have to grow your money and benefit from compound interest.
• Make it a habit to save a portion of your income every month, ideally 10% or more. You can use a budgeting app or a savings account with automatic transfers to help you stay on track.
• Choose an insurance plan that suits your needs and budget. You can compare different options and get advice from a licensed insurance agent or broker. You can also check if your parents, school, or employer offer any insurance benefits that you can take advantage of.
• Review your insurance and emergency fund regularly and adjust them as your situation changes. For example, if you get a raise, you can increase your savings or upgrade your insurance coverage. If you have a major life event, such as getting married, having a child, or buying a house, you can update your insurance beneficiaries and policy.

I hope this article will help you in building your financial know-how.