For most teenagers, the topic of personal finance is something that's commonly ignored and typically put on the back burner. At such a young age, why should we be worried about taxes, budgeting, and bills? Though you may ask these questions, personal finance is a topic that everyone should be learning about, especially during their teenage years. From determining wants vs. needs, to budgeting, juggling bank accounts, and planning for the future; these are 4 money management methods all teens must know!
1. Determining Wants vs. Needs
When it comes to monthly budgeting, which we'll discuss shortly, determining Wants vs Needs is an essential step. A "need" is a necessity in one's life, such as food, insurance, a place to live, etc. A "want", however, is an unnecessary item that will improve the quality of your life. This may include traveling, designer clothing, eating out regularly, and more! Now, although something such as food is essential, it is important to ensure you are putting your money towards "needs" such as groceries, rather than spending your money when you "want" to go out to lunch each week with friends.
Although you may be able to differentiate between your wants and needs, it's important to find the right balance. Finding the right balance between the two comes easily when the 50/30/20 budgeting method comes into play. According to this method, you should be spending 50% of your monthly income on needs, 30% of them on wants, and the remaining should go to your savings or retirement. I cannot stress enough how important it is to start saving for your retirement before the age of 23. As the years go by, compound interest is going to increase, and once you reach retirement age, you will have all the possible money you could ever need!
Budgeting is one of the most if not the most important subjects when it comes to money management. As we all know, the concept of budgeting is simply putting together a spending plan based on your expenses. This process is incredibly important to ensure you are planning short and long-term expenses, as well as efficiently controlling your spending. As mentioned above, the 50/30/20 method is the best way to go about your budgeting in order to achieve any financial goals you may have. If you're interested in following this method, I'd recommend making a budget either monthly or based on every paycheck. You can do so by creating a Google spreadsheet and budgeting towards categories such as income, clothing, personal care, entertainment, food, and more! There are also a ton of budgeting apps out there, such as Mint and PocketGuard, which are both wonderful ways to assist you on your budgeting journey!
3. Juggling Bank Accounts
One of the most significant staples of financial organization is how you choose to safeguard your money and what bank accounts are worthwhile to open. For example, most teenagers can open up a checking account and keep their money there, accessing their funds through a debit card.
Once you start working and accumulate more money, you’ll want to open up a savings account and put aside around 20% of each paycheck. If you’re saving for a costly goal, like college or a car, try to utilize direct deposit to put as much away as possible; it may seem frustrating to not have the entirety of your summer job income at your disposal, but it will pay off in the long run, as these accounts provide interest. You also may want to consider opening up a specific college savings account, like a 529 plan which has tax-free withdrawals.
As you get older, you may also want to consider applying for a credit card. This account differs from a debit card because it allows you to spend money you don’t have, essentially, borrowing from a line of credit. Every credit card will have its own requirements and limitations, so make sure that you find the right one to fit your needs.
4. Planning for the future
It’s never too early to start saving for the future, especially if you have big dreams and financial goals you want to achieve. Making regular payments on your bank accounts, being cognizant of your spending habits, and managing any debt will help build your credit score. This is a number anywhere from 300 to 850, which lenders (banks, credit unions, etc.) will use to evaluate your trustworthiness when paying back loans. This will especially come into play when you’re making big purchases like buying a car or determining how much house payment you can afford if you want to become a homeowner. You may also have aspirations of traveling to faraway countries or going back to school to pursue your dream career. These are just a few milestones that people may have their eyes set on and can become much more manageable with a few mindful financial planning decisions.
Whatever path you decide to take, make sure that you’re saving enough money to create a comfortable emergency fund in case something unexpected happens. Experts say a good rule of thumb is to stash away three to six months’ worth of living expenses. Additionally, you’ll want to consider how your saving habits will affect your retirement down the road. Depending on your employer, there may be opportunities to enroll in retirement plans (and even match your contributions), but it’s beneficial to set yourself up for success and adopt specific saving methods in your early 20s.
Continue Educating Yourself
Keep in mind that your financial literacy journey is never fully complete. You’ll learn new things every day, even far into adulthood, and can adjust your saving and spending habits accordingly. Taking the right steps early in life, whether that’s in high school, college, or young adulthood, can give you a leg up when it comes to developing a healthy relationship with money.