Personal Insights

Budgeting for Teens: Teaching Teens to Save

Every teen looks forward to that first paycheck — but few know what to do with their newfound income.

Financial habits are established early in life, so it’s never too soon to start teaching teens the importance of budgeting and saving money. Here are five practical lessons for responsible money management.

1. Develop a Savings Habit

Teenagers should pay themselves first by putting a certain percentage of the money they earn into a separate savings account. Getting used to setting aside 10% will prepare them to create an emergency fund, save for their first home and set money aside for a rainy day. You can also instill the value of philanthropy by encouraging your teen to give to an organization of their choice. If your teen’s employer offers direct deposit, show them how to set up an automatic transfer of funds from every paycheck into a separate savings account. If your teen needs an extra incentive, you could offer to add 1% or 2% to the total amount they save over a set period of time.

You might also consider helping your teen set up an automatic savings app. There are a number of reliable savings apps available for free or a very low price. By linking their account, your teen can make savings goals and set triggers for an automatic deposit, at which point the app could move money from their checking account to their savings account, for instance. Or, the app might round up transactions to the nearest dollar and sweep the difference into a savings account.

2. Use Online Learning Resources

There are a wide variety of online tools that can help you teach your teens how to manage their money. For example, the Consumer Financial Protection Bureau manages the Money as You Grow site to help prepare children “to live financially smart lives.” It offers activities and resources that make it easier to talk to kids and teens about spending wisely and saving money as they get older. Similarly, the Financial Industry Regulatory Authority offers videos and games designed to teach teens and adults about topics like budgeting, saving and the power of compounding interest.

3. Differentiate Between Needs, Wants and Wishes

The ability to distinguish between needs and wants will help your teen become a smart spender. Today’s teens live in a world of immediate gratification, so parents should explain financial goal-setting, which includes wishes, wants and needs in both the short term and the long term. Having conversations about needs and wants with teens not only helps them differentiate between the two but also teaches them to evaluate and make better financial decisions — such as opting for a more affordable used sedan over a shiny new sports car.

4. Keep a Record of Spending and Saving

You can use a simple system to help your teen track spending: Mark 12 envelopes to correspond with each month of the year. Then ask your teen to save each month’s receipts in the appropriate envelope. This will allow them to review purchases, evaluate past buying decisions, and recognize when they could have spent more wisely. This exercise will help your teen improve spending habits over time. Perhaps they will think twice about spending money to eat out for the third time in a week and put that money into savings instead. Online banking tools like My GreenInsights are another great way to track and manage spending.

5. Establish a Financial Plan Together

When it’s time for your teen to decide how to spend money, have them set specific financial goals. Whether they want a bike, a first car, or to prepare for college expenses, setting a clear goal will give your teen a better understanding of how much they need to save on a regular basis. Then you can work together to set a weekly or monthly saving goal that will help your teen reach that goal. Our savings goal calculator can help teens map out a regular saving strategy.

The earlier you begin talking to your teens about money, the better equipped they’ll be to make smart financial decisions as adults.

Get more tips for how to talk to your kids about money.