As a parent, you may be willing to help them get set up or you might let them find a way to cover their expenses on their own. No matter which approach you take, you can prepare them for what to expect. Talking to your child about finances may help them make better-informed financial decisions, especially as they start out on their own. Here are 10 financial planning tips for high school students that can help set them up for success.
Setting Up a Budget
Budgeting is a great first step in taking control of finances. You can teach budgeting to your high school student way before their finances need to be separated from yours. For example, you could conduct a budgeting exercise with them. Help them earmark their allowance according to their needs, such as paying for going out with friends, saving up to buy something, and so on. Or you could lend your child money for a large purchase, but charge them interest to drive home the concept of borrowing costs. Such exercises, though basic, can help your child start thinking about financial decisions and the trade-offs that result. Once they get comfortable with the idea of budgeting, you can then have more informed conversations about real-life financial situations. For example, if your high schooler is planning on going to college, create a college budget that includes their school expenses. If they are planning on working, help them estimate how much it will cost to live on their own. Show them how much they need to save up for a deposit on an apartment. They will also need to budget for expenses such as utilities, clothes, food, and fun.
Prioritizing Spending
Merely creating a budget is not enough to achieve financial goals, and sticking to it is not easy, either. It is important to talk to your teen about prioritizing their expenses. Clarify the difference between essential expenses for needs and non-essential expenses for wants to help them classify their spending. Another approach is setting financial goals. You could have your high schooler set short-term goals, such as saving up for a deposit on their first apartment or for the down payment on a car. Then encourage them to put money aside for those goals. “Reviewing expenses can be a valuable process, and you may be pleasantly surprised as your [child] gains more independence and becomes more mature,” said David Haase, a private wealth planner at New Jersey-based retirement planning company RPT Wealth Strategies, in an email to The Balance.
Making Plans for College
Completing a college degree or pursuing vocational training can improve your child’s financial future. If your high schooler is planning on college, experts suggest you have some serious conversations about money—even before they fill out their applications. College tuition is a big financial commitment and other related costs can quickly add up as well. Student loans, scholarships and financial aid, and parent contributions are some options to meet the expense, but they may not be enough. “Have an open discussion about this before the child winds up applying to only dream schools that parents cannot afford, and that would take way too much in student loans to accomplish,” said Catherine Valega, a Certified Financial Planner (CFP) and Chartered Alternative Investment Analyst (CAIA) with Green Bee Advisory, in an email to The Balance. Over four in 10 adults who attended college in America have had to take out loans to finance their education, a 2021 Federal Reserve survey found. According to the New York Federal Reserve data, outstanding student debt stood at $1.59 trillion in March 2022, and nearly 5% of that debt was delinquent or in default for more than 90 days. While all of this sounds daunting, careful planning and preparation by both the parents and the child can help. You can help your high schooler create a college budget and determine how much money would be required to cover college costs. Then you can work together to devise a plan for them to stick to that budget.
Establishing Their Credit
It is important for your teen to establish credit at this stage in their life. Making on-time payments for a car loan or on an apartment can help them do this. One option is for them to build their credit using a credit card, but if they just run up a balance they may end up hurting themselves in the long run. Impress upon your high schooler that part of establishing good credit is making sure that they pay off their balance in full and on time each month. Minor children under 18 years of age cannot apply for a credit card at all, and if your child is under age 21 they will need to show proof of ability to repay. One way to do this is for the parents to add children as authorized users to their cards. In fact, a number of experts suggest going that route. Jan G. Valecka, a Dallas, Texas-based investment advisor and Certified Financial Planner, added her college-bound children as authorized users to her credit card with a monthly limit. “They can use the card, establish their own credit score FICO, we pay and can talk to them about budgeting. The limit protects us if they lose their card. I show them the bill and how much they have spent vs their budgeted amount. [It] works great,” Valecka said in an email to The Balance.
Thinking About Insurance
When they are in high school, your high schooler can be on your health insurance and car insurance. It is important to explain to them that they need the proper coverage once they graduate. You have the option of keeping your kids on your health insurance even after school. Same goes for car insurance. But have that conversation as a family. Talk about the reasons why that may or may not work for your family. There are age limits and other restrictions on how long children can be covered by their parents’ insurance. Remember, your kids will have to get their own insurance at some point. Keeping them on your policy just delays that step.
Planning for Future
College could offer the first taste of financial freedom to your child. Financial decisions and habits they get into now could have effects on their future finances. Creating a financial plan is a sound practice that could benefit your child now and even years later. Creating a financial plan brings together values and financial goals. One way is to start early and communicate the family’s approach clearly to your children. You can do that by identifying spending priorities or reviewing financial decisions if they diverge from family values. A teen heading to college will likely make bigger financial decisions in the coming years. This can include things such as buying a new car, purchasing a home, or getting married. Although these events may sound like they are in the distant future, planning for them sooner rather can later can be very beneficial. You could suggest creating a five-year plan that will outline the steps they’ll want to take to meet those goals in the next few years.
Creating an Emergency Fund
Your child will incur expenses that they do not expect—from car repairs to medical bills. You may be willing to chip in on these now, as their parent, but soon they will be responsible for these expenses. An emergency fund can help them cover the unexpected and take the pressure off. You could suggest they start by saving one or two months of income. Then, they can build up to a year’s salary as they work on meeting other financial goals. “If the student is working a part-time job, share with them that they need to put aside some money each pay period (at least 10%) into a savings account for emergencies,” said Haase. But he added a word of caution for the parents as well. “I will leave it up to you to determine if the emergency is truly an emergency. Usually, a midnight pizza is not an emergency,” Haase said.
Thinking About Retirement
For teens heading off to college, retirement may seem too far off to worry about. But when it comes to retirement planning, it’s better to start now. One way to do that is to talk to your teen about the power of compounding. If your minor child is earning income doing small jobs or working part-time, consider helping them set up a custodial brokerage or individual retirement account. If they’re working full-time and qualify for their employer’s 401(k) plan, encourage them to make contributions each month. Explain to them how those contributions will come out of their paycheck automatically. The sooner they start saving, the more likely they’ll meet their financial goals at retirement.
Balancing Checkbook and Using Money Apps
While a lot of banks are now moving away from overdraft fees, they haven’t quite gone away yet. Getting your child to understand the importance of balancing their checkbook each week can go beyond helping them save money in overdraft fees. It’s a useful way to monitor their bank account. Not only will it help your teen understand how the money is flowing in and out of their bank account, but it can also alert them of any unwanted or fraudulent charges. Using an app that handles both budgeting and balancing your account can make it much easier.
Being Smart With Money
Lessons in becoming smart about financial decisions don’t need to start when your teen is getting ready to head to college. It also doesn’t mean merely talking to them about financial pitfalls they need to watch out for. Modeling sound financial behavior will provide a good example for your high schooler. This includes paying your bills on time and carefully evaluating decisions such as when to take on additional debt for a car or on credit cards. Starting out with solid financial habits can help build a good foundation. Instead of spending years recovering from their mistakes, your child could start out ahead thanks to their wise choices.
