In today’s fast-paced world, financial literacy for teens is no longer a luxury but a necessity. A strong foundation in financial education is crucial for teens to navigate adulthood and cultivate a path to financial wellness and credit health.

If you’re a tween or teen trying to earn money or save for a goal, it can be hard to sort out the mixed messages about money you hear from the media, your friends — and even your family. Sometimes parents don’t like talking about money matters, or they may not always practice what they preach.

How can you be smart about your own money? It’s never too soon to teach yourself effective money management skills that will serve your future. Being a savvy saver and staying on top of your credit during unexpected financial stress is a critical skill to develop. If you’re disciplined, it’s quite simple. In this post, we delve into the importance of financial literacy and provide healthy financial habits to help you be more on top of your earning, spending, and saving.

Why is Financial Literacy Important?

Financial literacy is the ability to understand and utilize financial skills, including personal finance, money management, budgeting, and investing. A solid understanding of these concepts can empower young adults to make informed financial decisions. Financial literacy is important because it can help you:

• Set and achieve financial goals
• Manage their money effectively
• Avoid debt
• Build a good credit history
• Invest for the future

Financial education can also help young adults make better financial decisions throughout their lives. For example, teens who are financially literate may be more likely to choose a college that is affordable and avoid taking on too much student loan debt. Teens with a better understanding of finances may also be more likely to start saving for retirement early and invest wisely. Furthermore, financial literacy can reduce anxiety surrounding money, leading to improved mental well-being.

Tip: Utilize free online financial education resources. There are myriad online resources available that provide valuable information on personal finance. From blogs to podcasts and YouTube channels, you can access a variety of perspectives on financial literacy.

Learn How Budgets Work

A budget is a plan for how to spend money. Budgets help you prioritize your spending and be aware of your cash flow — incoming and outgoing. Practical budgeting can help to make sure you are not overspending.

Understanding the 50/30/20 Rule

Considered one of the fundamental principles of personal finance, the 50/30/20 rule is a simple budgeting guideline that recommends dividing your income into three categories:

• 50% for essential expenses, such as housing, food, and transportation
• 30% for discretionary expenses, such as entertainment and clothing
• 20% for savings and debt repayment

Adhering to this rule helps develop disciplined money management habits.

Creating a Budget

Now is a good time to find an easy-to-use online budgeting tool or app. There are even features designed to help you save for specific goals like prom or college. One of the great benefits of these apps is that you can see all your account balances in one environment. You can learn tips for keeping track of the money you earn and planning ahead.

Tip: Practice the 50/30/20 rule in managing allowances or part-time job earnings. Utilize budgeting apps to track income and expenses. Identify areas where you can cut back and save more money.

Limit Spending

Budgets are about making decisions. How much money do you want to save, and how much do you want to spend? First, figure out how much money you’re earning (through allowance, part-time work, etc.) per week or month. From here, you can identify your needs versus wants. This enables you to set your goals.

Do you have a specific item you want to buy, or an event (like a trip) you want to save for? Perhaps you want to contribute to your college fund. Decide a reasonable percentage of what you earn to set aside. Some banks even have an auto-save feature where you can select a specific, recurring dollar amount to be moved from your checking to your savings account. If it’s out of sight, you’re less likely to spend it.

Tip: Track spending. Record how much money is spent and on what. This can help identify areas where you can cut back and save more money.

Save What You Can

As the saying goes, “It’s not what you make, it’s what you save.” Even if you’re not earning much yet, commit to saving a small amount every time you get money from your allowance or part-time job. If you start setting aside a little bit each time you earn, you’ll have this habit for life. Your future self will thank you!

Tip: Start saving early. The earlier you start saving, the more time their money has to grow. Even if you can only save a small amount of money each month, it will add up over time. Understanding the power of compound interest can be a motivating factor for saving and investing.

Avoid Impulse Purchases

When you see something great that tempts you to spend immediately, consider taking a day and sleeping on the idea. Remind yourself how long it took you to earn the cost of the item. If the video game or pair of shoes you want would cost 10 hours of working at your lifeguard job, you may not be so quick to make that purchase. Rest assured that this is not the only opportunity you’ll ever have to buy that item.

Tip: Take at least 24 hours to think about any purchase over a set dollar amount (e.g. the equivalent of 3 or more hours at your part-time job).

Smart Credit Card Use

Once you hit 18, you may be barraged with invitations to apply for credit cards. When you go to college, it’s a good idea to apply for at least one credit card to start building your credit history. You can use the card to occasionally make a small purchase that you know you can pay off when the bill is due.

Remember, anything you buy on a credit card must be paid off, and credit cards charge interest when you carry a balance — making whatever you bought with the card even more expensive.

If you can’t come up with the money to pay your credit card debt on time, or simply forget to pay it when it’s due, those late payments can lower your credit score. Maxing out your credit card through over-spending will also lower your credit score.

Why should you care about your credit score? A poor credit score makes it harder for you to borrow money later, for example, when you might want to buy a car. A good credit history can help you qualify for loans and credit cards with lower interest rates. Making on-time payments and keeping your credit utilization low helps build a good credit history.

Tip: A good rule of thumb is to never charge on credit what you can’t pay for in full with cash.

Learn More: How My Credit Score Works

By learning how to manage money effectively and practicing good habits like budgeting, saving, and keeping track of spending now, teens can set and achieve their financial goals, avoid debt, build a good credit history, and pave a solid foundation towards a more financially sound future.

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