Teach your teenager financial responsibility

By Julie Bawden-Davis

Just a few more years and your children will spread their wings and leave home. When they go, help them soar financially by teaching them how to manage money now. Before they leave the house is the ideal time to demonstrate how to navigate the financial world, and the best way is through real practice. Most banks have custodial accounts that allow you to give your child a "grown-up" experience you can monitor. Use these six tips as a guideline for getting started.

1. Develop a budget

Your teen may only have a small amount of money to work with, but that doesn't mean the funds shouldn't be managed. Learning how to budget $50 a month imparts the same lessons as handling $500. The key is to teach respect for money and how to use it in a way that leads to lifelong wealth-building and security.

Sit down with your children and review their monthly income sources, such as work, allowances and occasional monetary gifts. Then have them list all of their potential expenses and allocate 10 to 20 percent for savings. This can be done on paper, but there is also a wide variety of online tools that can help with budgeting.

2. Discuss the use of saving accounts

If you haven't yet opened your child a savings account, now is the time to do so. For accounts that already exist, review the balance and check the interest rate. Use this opportunity to compare savings interest rates. If you find a better interest rate elsewhere, walk your child through the process of switching accounts. Make sure to monitor and discuss the resulting additional amount your child earns in interest.

3. Open a checking account

As the primary vehicle by which most people pay their bills, a checking account offers you a chance to show your child how to set aside money for necessary expenses and pay for financial obligations. Your teen can prepare for eventual tasks such as paying the rent by using the checking account to fund items such as gas for his auto and gifts for family and friends. Teach your child the importance of monitoring the checking funds and how to balance the account. Most checking accounts offer an accompanying debit card, but consider one only after you've discussed its responsibilities with your teen.

4. Consider a credit card

Whether you decide to get your teen a credit card will depend on a variety of factors, maturity level being the most prominent. Allowing for a credit card may be something you decide to do after your teen has used a debit card responsibly for a period of time.

Several options exist when it comes to credit cards for teens. Prepaid credit cards are filled with a predetermined amount of money and pose no risk to your credit. Secured cards also have a preset limit that is tied to a deposit held at the bank. And unsecured cards are your standard credit cards. The latter cards should only be given to children who have demonstrated sufficient financial maturity and constraint when it comes to spending.

5. Teach about savings vehicles

When children eventually leave the house, it's important they have a good grasp of savings products and their uses, such as what constitutes a money market account and when would be a good time to open a CD.

An ideal way to teach about the various savings vehicles is to use them. If your child has a savings account and no plans to spend the money soon, transferring the funds into a CD gives you the opportunity to show how higher interest rates yield more savings. This also gives you a chance to discuss topics such as early withdrawal penalties.

Besides sharing your own wisdom, suggest that your child visit one of the various online sites that exist to educate teens about the financial world.

6. Have weekly money meetings

Even when you're keeping tabs on your children, it's important to hold them accountable for their spending and saving. Regular meetings give you a chance to evaluate their financial performance and offer suggestions. You can praise them if they stuck to a budget and met a savings goal or calmly discuss and seek solutions to issues such as overspending. Having a regular discussion creates an open environment in which your teen feels comfortable asking financial questions. Regular meetings also teach them to closely monitor their own finances.

By taking the time to show your children how to manage money and the importance of doing so, you help ensure that they enjoy a lifetime of financial fitness.