When it comes to big expenses, most of us parents are giving our teens too much credit and too little credit, all at the same time. How so? On the one hand, we’re giving our teens too much credit (in the form of dollars) by covering big ticket items for them — often when we can’t even afford them ourselves. On the other hand, we’re giving our teens too little credit (in terms of respect for their capabilities) by assuming they can’t handle paying for at least a portion of these major expenses on their own.
Here are 4 big expenses that your teen is perfectly capable of paying for, despite your assumptions otherwise:
- Emergencies. Like adult life, teen life is punctuated with unplanned financial “emergencies” — a broken iPhone here, overage charges on the family data plan there, that first parking or speeding ticket, and so on. To date, I’ve always dealt with those financial emergencies by extending short term loans to my offending teenagers and aggressively “garnishing” their wages until paid back. While that instills accountability (good), it also encourages relying on credit to cover emergencies (bad). There’s a better way that I hadn’t considered until reading Rachel and Dave’s book: insist that your teen save up for an emergency fund of a couple hundred dollars (they recommend $500 by the end of high school). I think that’s a brilliant idea: an accountability message and a debt-free message all wrapped up in one nice package.
- A Car. I’ve always shared Dave’s “buy used, buy with cash” car mantra. As Dave says: a “new car smells...like depreciation.” So true! When my daughter naively declared that she wanted a new Jetta for her first car, I had her plug the figures into the FamZoo savings planner to see just how many decades of allowance that would take. That was an immediate epiphany! Daughter: “Uh, nevermind.” Dad: “How about a used Honda?” Indeed. What I hadn’t considered was the “401DAVE Plan” in which the teen saves up for a used car and the parent matches the teen’s savings dollar for dollar. I love those kinds of matching arrangements between parent and child. Mutual skin in the game is always good. Dave describes how each of his three children bought cars this way: used car + cash up front + parent matching. Share these excellent stories with your young teens to set expectations early — ideally before they start lobbying for a car.
- College. Who’s job is it to save for college? The parent’s, right? Not so fast — especially if it comes at the expense of parents saving properly for their own retirement. The college chapter in Smart Money, Smart Kids (which is subtitled “Don’t Graduate from I.O.U.”) really changed my default thinking on this topic, particularly in light of the fact that student loan debt now outweighs credit card debt in this country. If you are struggling to save for your kid’s education (or even if you aren’t), you need to read this chapter. Dave and Rachel prescribe excellent college savings strategies for the full spectrum of financial situations. As with the 401DAVE car plan, I particularly like the hybrid approach with the child contributing through part-time and summer earnings.
- Retirement. This one isn’t explicitly mentioned in the book. A teen saving for retirement might seem like the craziest of these four suggestions, but it might just be the smartest. Teen’s have one huge thing on their side when it comes to investing: time. For any teen who makes some W-2 income from a summer or part-time job, there’s a perfect opportunity to leverage a terrific tax-advantaged investment engine: the Roth IRA. Mix in some parent matching and you have one terrific arrangement: the “Family 401k”. It’s my all-time favorite family finance tip. Check out the details in this post for more details.
So, when it comes to your teen’s big expenses, dial back the financial credit, dial up the responsibility credit, and match them in the middle.
The full “Smart Money, Smart Kids” review series:
- Teaching Kids Good Money Habits the Ramsey Way: Introduction
- Setting a Good Money Example for Your Kids: Sufficient? Necessary?
- Connecting the Dots Between Money and Work for Your Kids
- Striking a Balance with Kids and Money
- 4 Big Things Your Teen Can Save For