10 tips to raising money-savvy teens

When it comes to financial literacy, today's graduates fail to make the grade. Asked about basic financial concepts, high school seniors correctly answered only 48 percent of the questions, down from 52 percent in 2006, according to the Jump$tart Coalition's recent survey on financial literacy. College students didn't fare much better, with college seniors scoring a 65 on their survey, administered for the first time in 2008.

Why do so many miss the mark? It starts in the home. Whether they lack confidence in their own money management skills or assume that their children's schools will cover it, many parents don't talk about money with their kids, and those who do often miss the fundamentals.

"A lot of the basic stuff is overlooked by parents just because they assume that their kids know it, and they don't," says Janet Bodnar, author of "Raising Money-Smart Kids."

"Why would they? Unless you tell them, there is no reason they would know that your family insurance bill is going up by $1,000 a year just because they start to drive."

Before they leave the nest, boost your brood's financial literacy with these 10 money management lessons.

1. Balance a checkbook

Of the high school seniors surveyed, only 45 percent have a checking account, and one out of four have no bank accounts at all. Once they leave home and set up an account on their own, those without parental training often make costly mistakes. Some 30 percent of college students admitted to bouncing a check.

As soon as teenagers start earning income from a job, it's time open a checking account, even if it's a joint account with a parent, says consumer adviser Clark Howard, author of "Clark Smart Parents, Clark Smart Kids." Teach them how to write checks, use a register and reconcile their account with their bank statement.

Mistakes will happen, so look for kid-friendly options, such as accounts that charge teens lower overdraft fees. And though he refers to them as "piece-of-trash fake Visas" on his radio show, debit cards are a good choice for teenagers, Howard concedes. Because there's a finite amount of money they can tap, it's like training wheels for credit cards.

2. Budget money

Over a third of the college students surveyed had paid a credit card bill late, and while some just forgot to pay it, others put off writing a check because they ran out of money.

Start teaching your kids how to budget their money as soon as they bring home their first paycheck. With no value judgments, sit down with your children and ask them what they plan to do with their money. Once you know their goals, whether it's buying a car or an iPod, you can talk about what they need to do to get there.

"Priorities are good because you teach the concept of finiteness," Howard says. "There's only so much money."

Before they go away to school, have them set up a budget for expenses. It will increase their awareness about money flows, ingoing and outgoing. After graduation, show your children how to make a household budget. Using the starting salary of their chosen profession as a guide, have them calculate their after-tax income and then figure out how much they can actually afford to pay for the basics, such as rent, food, utilities, insurance and transportation, as well as vacations and entertainment.

3. Finance college

Don't forget to factor student loan payments into the monthly budget. Of the college students surveyed, two-thirds carry some student loan debt, with 70 percent of those students shouldering $10,000 or more.

To keep your teens from getting in too deep, work the numbers together. Tell them how much you will kick in toward their college expenses and help them figure out a plan for covering the rest. If their answer is "student loans," Bankrate's calculator shows the true cost of a loan, which may help your children understand this is not easy money. FinAid offers a more extensive set of calculators for student loans with varying terms.

Seeing that they'll be on the hook for $575 a month for 10 years if they take out $50,000 in loans may give your children the incentive to look for ways to cut costs. They might consider commuting or attending a state school.

4. Establish credit

College loans make up only part of the debt load that students carry after graduation. Because two-thirds of college students surveyed have one or more credit cards and 83 percent got their first one by the end of their freshman year, it's easy to graduate owing thousands more.

"They hand them out like candy on college campuses," Howard says. "I look at it as part of the freshman year survival kit: Don't flunk out, don't get arrested and don't take on debt."

Although Howard advises against freshmen or sophomores having credit cards, he does encourage college students to apply for two during their junior or senior years. "It's the only time in your life that someone will give you credit with no proof of income and no credit history," Howard says.

5. Identify wants vs. needs

Because some teenagers think of credit cards as free money, remind them that when they charge something, they're taking out a loan that must be repaid. As such, they should only use credit cards to meet their needs, not their wants. Some 11 percent of high schoolers surveyed thought it was OK to borrow against future income to go on vacation or buy sale-priced clothing.

"Kids need to understand the many factors you consider when you make a financial decision," says Brette Sember, author of "The Everything Kids' Money Book."

"It just looks too easy to a child when you make the purchase -- they don't see all the thinking you've done to get you to the point where you do whip out the plastic," Sember says.

6. Deal with debt

Whether they racked up debt buying pizza and beer or charging car repairs, a third of college students surveyed have an outstanding balance of $1,000 or more on their credit cards, and half carry a balance some or all of the time.

While paying the minimum looks like the easy way out, plug the numbers to find out the true cost of debt. Assuming they charge nothing else, it'll take nearly 22 years and over $4,100 in interest to pay off a $3,000 credit card balance with an 18 percent interest rate if they only pay the minimum.

"It's a real eye-opener," says Bodnar, who is also the author of Kiplinger's Money-Smart Kids column. "It does a lot more than even lecturing kids on credit because they might forget the lecture, but they will remember this."

7. Pay taxes

Of the college students surveyed, only a third prepare their own taxes, leaving the vast majority ignorant of the basics. A mere 39 percent knew that interest earned from a savings account is taxable, while less than half understood that when your salary doubles, your taxes double, at least.

Starting with the first paycheck, sit down with teens and explain what's on the stub, showing them where their money goes. To estimate withholding on a higher salary, use the 25 percent rule: 10 percent for federal taxes, 10 percent for Social Security and Medicare, and 5 percent for state taxes.

When it's time to file a tax return, don't do it for them. Teach them the ins and outs of the system by making them an active part of the process, from tracking down receipts and W-2s to doing the calculations.

8. Consider all costs

For many teens, buying a car is their first major investment. But few understand the true cost of ownership, and they often leave expenses such as maintenance, repairs, gas and insurance out of their savings plan.

Even if you're planning to cover most of the costs so that they can focus on school, not work, break down all of the expenses, from how much the family's insurance premium increases when they're added as a driver to the cost of new tires. And make them responsible for paying a portion of the expenses, especially gas.

"It's a great budgeting tool," says Bodnar, whose son, a freshman in college, has bought his own gas since high school. "It's an incentive for him to get his summer job, and it's an incentive to hold down the cost as much as he can." Though kids who rely on the family gas card don't blink twice when it costs $80 to fill up the tank, Bodnar's son is keenly aware of the price of a gallon, and he buys his gas from a station that offers a discount for paying with cash.

9. Save for the future

While teens see the value in saving for a car, few have the ability to see 30 years down the road. Although 80 percent of college students surveyed have savings accounts, most admit that they lack adequate savings, with 60 percent saying they have slightly less or much less set aside than they should at this phase in life and a mere 7 percent having any form of retirement account.

To motivate them to save for the future, use a compound interest calculator to show them the "miracle of compounding," says Neale Godfrey, author of "Money Doesn't Grow on Trees."

"The miracle works to your detriment with debt, but in your favor if you're saving money."

Once they start working, have your teens open Roth IRA accounts. As an added incentive, Howard matches his daughter's contributions dollar for dollar. To add even more diversity to the portfolio, Godfrey advises young adults to buy and hold stock in the companies that make the products they use every day.

10. Stretch a dollar

Even young children can learn the value of a dollar.

"Don't make money the biggest secret in the household," Godfrey says. "Get them engaged in the process."

Give young kids an allowance and make them responsible for some of their expenses so that they learn how to set priorities and manage their money. Interactive Web sites such as specialize in teaching youngsters the value of money in a fun way. Teens with part-time jobs should pitch in, too, saving money for college or their senior year expenses, such as their prom outfit and their class ring.

When it's time for back-to-school shopping, set a realistic budget and involve them in the buying process. Teach them how to shop the sales and find deals on trendy clothes at consignment shops, such as Plato's Closet. If they come in under budget, let them keep 100 percent of the difference.

"Kids will spend unlimited amounts of money as long as it is yours," Bodnar says, "but when their money is on the line, it is a whole new ballgame."

Posted:July 22, 2008