Transitioning Teens

How to ensure your children achieve real financial independence.

As a parent, maintaining a financially stable environment for your children as they grow is really only one part of your job as the head of your financial household. The other part of the job involves teaching your children the right lessons so they’re set up for financial success once they get out on their own.

For young kids, this means starting the money talk early and taking steps to help them learn important lessons like budgeting. However, as your children grow and approach the point where they’re ready to leave the roost to take flight on their own, you need to advance those lessons so they’re really ready to stand on their own two financial feet. But when do you start and what do you teach them? Perhaps even more importantly, how do help them get out on their own as financially independent adults?

The information in this section is designed to help you guide your teens to financial independence. Every teen is different and grows at a different pace, so you’ll want to tailor the tips to your teens and own financial situation. If you have questions or need help with your own financial outlook, we’re here to help. Call Consolidated Credit today at . If you’re struggling with debt you can also complete an online application to request a confidential evaluation with a certified credit counselor. One of the best financial lessons you can teach your children is to ask for help when they need it.

Transition Stage 1: Banking

The first step in transitioning teens to financial independence usually comes with bank accounts. While many parents help kids open a savings account early in life, the big step is to transition your children to their own debit or checking accounts.

This step is usually taken around age 13-15 when many kids start to earn their own money, either from small jobs like babysitting or house sitting for neighbors or from regular chores they’ve picked up around the house.

Opening a debit account teaches your teens a few valuable lessons that you can reinforce:

  • It shows them how to use online and mobile banking safely without putting their money or personal information at risk.
  • It helps them develop the habit of checking their accounts regularly so they know what’s happening with their money.
  • If you transfer allowance into their accounts electronically, you can use it to teach them about transfers or use it as a lesson about receiving income regularly through direct deposit – like a paycheck.

Warnings:

  • Help your teens understand the financial impact of overdrawing the account and how much that really costs – your teens may think it’s only just a few dollars, but the average overdraft costs about $35.
  • Get your children in the habit now of transferring money from their main account into savings now. Forcing them to save regularly now helps them develop the habit so they save on their own.

Transition Stage 2: Credit

The next key introduction you need to help your teens move through is introducing credit.  The Credit CARD Act of 2009 helps prevent credit card issuers for targeting teens on college campuses to have them open up accounts that they really can’t afford to maintain on their own.

However, just because your teens can’t afford credit on their own doesn’t mean they should wait until they’re financially independent to get credit. This could mean they’d effectively be an adult before they get their first credit card and start to use it – which could be financially risky since they won’t be accustomed to having that open credit line to charge on when they want something.

Getting your teen a credit card before they leave your financial nest, where you cosign the account and can help them manage it gives you a platform to help teach them to use credit effectively. You can also keep an eye on the account to make sure they’re not overcharging.

If you decide to give a teen credit before they leave your home, follow the tips offered in our Teenagers & Credit Cards section on the dos and don’ts for helping them learn to use credit safely.

Transition Stage 3: Taxes

The next step most teens typically take to financial independence comes with taxes. What you don’t want to do is shortchange your teens by failing to teach them how to file because you’re still claiming them as a dependent.

Sometime starting in late high school or their early college years – before they stop being a dependent on your income taxes – you should have them sit down with you to see how the process really works. If you use a filing service, you should still take them with you to the office for your consultation so they can ask your tax preparer any questions they might have.

Lessons they can learn from watching you file:

  • The value of early filing and the dangers of procrastination – people who file early tend to get refunds faster and avoid the stress of waiting until April 14 to fill out the paperwork.
  • How things like deductions and tax credits work to help reduce taxable income so you don’t pay as much or get a bigger refund back.
  • Smart ways to use a refund check to help you reach your financial goals.

Warnings:

  • A big refund check usually means you’re withholding too much money from each paycheck – which means you’re giving the government money interest-free. Don’t teach teens to wait for a big refund; teach them to adjust their withholding so they receive less after April 15, but keep more money in each paycheck.
  • Make sure to teach them the dangers of making too many deductions or over-claiming deductions. They need to understand the risk of audits.
  • The lesson to avoid procrastination is critical. Even if you file a tax extension, if you don’t file on April 15 the IRS will charge interest on the tax debt you owe, so you wind up paying more and/or getting less back.

Transition Stage 4:  Insurance

One of the last stages for transitioning your teens usually involves insurance. In fact, many parents keep teens on their insurance into their 20’s – both medical and car insurance. However, at some point you need to teach your children how insurance works, how you apply and maintain the right insurance on assets like a car, and why it’s essential to shop around regularly to make sure you’re getting the best rates.

Keep in mind that car insurance rates tend to be more expensive until your children reach the age of 25. Still, even if you keep them on your car insurance, as you start to purchase them vehicles it’s the perfect time to teach them how auto insurance works. They’ll learn about deductibles, different levels of coverage and take queues from you on how to balance price versus service level.

For medical insurance, you need to teach them how medical insurance through an employer works or how to get insured if their employer doesn’t offer it. The only need to learn valuable savings lessons, like using preventative care rebates, and important coverage lessons like getting gap coverage to insure you for things like emergency room visits.

Key Lesson: Asking for Assistance

The last, most important lesson you need to teach your teens about finance was mentioned in the introduction – you need to teach them when it’s time to ask for help or seek professional assistance.

Too often in our financial lives, we don’t take action because we don’t know enough on our own to move forward. This happens with things like retirement planning and investing, but it also happens for things like debt management and credit consolidation. This is where you can lead by example.

Invite your teens along if you go to meet with a financial advisor. Show them how your 401(k) or IRA is working to help your money grow. Open a 529 or Coverdell college savings plan for them and show them what you’re doing to help save for their education. If you need credit counseling to address challenges with credit card debt, let them listen in on your conversation with your credit counselor. Showing them that asking for financial assistance isn’t a matter of pride, but rather a practical skill that will help them succeed is one of the most valuable lessons you can provide.