Talking About Money Management With Your Teenager

Key Takeaways:

• 1. Parents can help educate their teenagers on how having good money management habits can better support their life and financial goals.
• 2. Opening a bank account and learning about the responsible use of credit cards are two practical introductions to teenagers on the topic of money management.
• 3. Parents can be role models for teenagers by creating an environment of financial education, adhering to a budget, and practising responsible spending.

As your teenager passes through adolescence and becomes a young adult, it is essential to impart strong financial literacy skills. After all, knowledge is power. Numerous large-scale studies of populations have suggested that both “Parents serve as the primary role models in the financial socialisation of their children…” and that “childhood financial socialisation is an important determinant of financial well-being in adulthood” (David Allen Ammerman, 2019).

By imparting the necessary information and tools, teenagers may be better equipped to make choices that set them up for a life of financial independence. Let’s review a few ways parents and teenagers can learn about and practise responsible money management.

Opening a bank account and saving

Parents can encourage their teenagers to set two simple types of financial targets:

• A passive target: such as saving a certain percentage of their allowance every month.
• An active target: such as an item or an experience they would like to purchase that requires saving for a number of months.

Although the above can be achieved by simply placing cash in a wallet, opening a bank account in your teenagers’ name1 may have more benefits. Possibly the most important feature a bank account has is a digital trail of transactions which grants the user the possibility to review and reflect on financial decisions made.

Using these records, parents can suggest biweekly or monthly review sessions together with their teenagers to analyse their spending and savings. If you are comfortable with spreadsheet software, you may want to educate your teenager to record the opening balance and closing balance at the end of every month, classify purchases to needs and wants, and track progress towards achieving the active goal of a larger ticket item. A very valuable outcome that may arise out of each month’s review could be “What should I do next month to achieve my goal?”.

Tracking spending via ATM and debit cards

It may be the case that most parents hand out cash to young children to purchase goods. Building on the concept of how having accurate records by opening a bank account can help with managing money, parents can decide if they want to transition their teenager to use an ATM or debit card when their teenagers are eligible¹.

With a bank account, teenagers and parents can track their spending and savings. By reviewing these transaction activities periodically with your teenager, the state and flow of money could help your teenager be more conscious of their future financial decisions.

You may wish to introduce some guard rails by setting withdrawal or purchase limits on the ATM or debit card, which may be services provided by your bank. This may also be an opportune time to emphasise the importance of being vigilant about security and fraud – from safeguarding their account or card security passwords to recognising well-known fraud patterns.

A bank statement, together with the associated cards, may likely have your teenager’s name printed on them. This is a departure from when they were younger and pocket money was handed to them in cash. Unlike a card, cash has no transaction records and no strong label of individual ownership. By introducing these basic banking instruments, it may help teenagers understand, that not just money itself may be finite, but that their money is both finite and observable on a ledger.

Teaching the idea of interest through a bank account

In numerous global studies on financial literacy, one of the largest being a survey of 150,000 adults in over 140 countries, it has been found that less than 50% of adults understand the nature of both interest and compound interest (Standard & Poor's Ratings Services, 2014). It is essential to help your teenager understand this very important tenet of money management: the time value of money.

For teenagers, the idea of interest and compound interest can be easily shown during the periodic reviews of their account’s transactions where the bank has deposited the interest as an explicit line item. Parents may wish to divide this topic into two separate parts. First, learning how interest is earned. Second, qualitatively understanding how a bank can afford to pay out the interest. Depending on your judgement of how ready your teenager is, you may want to lead these conversations further to the ideas of loans and investments. Moreover, you might also wish to introduce how different types of bank accounts have different interest rates with different terms and conditions.

The key learning point here is how compound interest grows slowly at the beginning but accelerates over the long run. If you believe your teenager is comfortable with these topics already, you may want to capitalise on how math taught in school relates to real-world financial planning.

Establishing and using credit

Understanding how and why a bank pays out interest to their bank account can be useful for your teenager to understand what a personal loan and a credit card are. While they may not be ready for such financial products, it is important to develop their financial literacy when they are at the cusp of adulthood.

You may wish to explain credit with this juxtaposition. When money is deposited at a bank, interest is earned. However, when money is borrowed from a bank, the principal must be paid back with interest.

You could illustrate this principle by drawing up a hypothetical scenario of taking a loan for a big-ticket purchase. Interesting ideas surrounding trade-offs and opportunity cost could emerge from this conversation. We list a few:

• Why do they need to make this purchase now?
• How expensive is the item they would like to have relative to other items in their budget?
• What utility would this item bring to them if they acquired it now as compared to owning it later?
• How long would it take to repay the loan?
• How much interest would they have to pay so that they can have it now as compared to later? Is the immediate utility worth the interest?
• Will there be other big-ticket purchases in the foreseeable future? How does the current item compare to the future purchase in terms of value?

Parents may also choose to explain the principles behind a personal loan, perhaps in the form of a credit card. Here’s a quick primer on credit cards to get the conversation with your teenager started:

• A credit card is issued by a bank or financial institution to enable the credit card holder to purchase goods and services on credit.
• Most credit cards have spending limits—the credit limit is the maximum amount that a cardholder can spend on credit.
• Credit cards enable bigger purchases without the need to carry too much cash.

Teenagers generally don’t hold credit cards, although cards like the Citi Clear Card² are available to applicants below the age of 21 with parental consent and acceptance of payment liability.

Creating and following a budget

Creating and adhering to a budget is another core part of staying financially healthy.

Assuming you and your teenager take up the habit of reviewing monthly transactions across their bank account, debit and/or credit cards regularly, there are spend and save patterns that can be observed.

Using this data, you may wish to introduce to your teenager how to project their finances further into the future on a realistic basis. This is an advancement from the notion described earlier of “What should I do next month?” to “What should I do for the next 3, 6 or 12 months?”.

Parents may also model how they create, adjust and follow the household’s budget at the present moment. . If you still have possession of your budgets and financial plans from different stages of your life, you might be able to share diverse lessons as well as many cherished memories with your teenagers.

Practising responsible spending

Responsible spending is a core component of adhering to a budget, and a key part of money management. Responsible spending means not spending more than you earn and taking responsibility for your expenses by not overdrawing your debit card or missing a credit card payment.

Parents can model responsible spending for their teenagers by showing them how they set up reminders for themselves to pay their bills on time.

Creating an environment of financial education

Instances arise every day that enable parents to teach their teenagers about money, whether or not they are ready to own a financial product. Nevertheless, we hope that by creating a nurturing environment of financial education, you are empowered to help your teenager take charge of their own financial future as they grow to become young adults.

Sources

David Allen Ammerman, C. S. (2019). Childhood Financial Socialization and Debt-Related Financial Well-Being Indicators in Adulthood. Journal of Financial Counseling and Planning Vol 30 Issue 2, 213-230.

Ministry of Education Singapore. (2023, 02 27). 2020 Mathematics Syllabuses Secondary One to Four (Express/Normal (Academic)). Retrieved from Ministry of Education Singapore: https://www.moe.gov.sg/-/media/files/secondary/syllabuses/maths/2020-express_na-maths_syllabuses.ashx

Disclaimer:

• 1: To open a Basic Banking Account with Citibank Singapore, the individuals must be a Singaporean or PR aged 18 and above. Visit this page for the full eligibility criteria to open a Basic Banking Account.
• 2: Terms and Conditions apply for Citi Clear Card.

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