Essential money skills for teens

By Lynette Tan

If you’ve only got a minute:

• Equipping teenagers with the knowledge and skills to manage their finances effectively can build a solid foundation for their future financial well-being.
• Building money management skills during the teenage years will give teenagers more control of their money while guiding them towards establishing good money habits like saving consistently and managing their expenses.
• With digital payments being used commonly, teenagers should be aware of the many different payment methods, security awareness and related transaction fees.
• Besides emphasising on earning and saving money, parents can introduce concepts such as compound interest and investing to teach the concept of “making your money work harder”.

Empowering our teens with sound money management habits will significantly impact their lifelong financial well-being. Teenagers are on the cusp of an important period where their relationship with money can impact how they can better navigate their financial journey for the rest of their lives.

From managing allowance to grappling with the allure of online shopping, the pressures of modern life can quickly lead to financial missteps. Equipping teenagers with the knowledge and skills to manage their finances effectively is not just about teaching them to save. It’s about empowering them to make informed decisions, set realistic goals, and build a solid foundation for their future financial well-being.

Budgeting and spending

Mastering budgeting is a cornerstone of financial literacy for teenagers. This involves creating a realistic budget that tracks all sources of income – allowance, part-time job earnings, gifts – and carefully categorising expenses.

Parents can give teenagers greater control over money by giving them a monthly allowance (instead of weekly or daily) so that they can learn to budget better. Do give them a heads up that you will not provide more money to them should they go “bankrupt” before the end of the month. This helps them to “ration” their money and ensure that they keep to set budgets without running out of money too quickly.

You can guide them with budget setting by asking them to pen down their needs, discretionary spend and savings goals, before getting them to allocate their allowances accordingly. Budgeting apps or spreadsheets are valuable tools for tracking income, expenses, and progression towards savings goals.

Failing to budget effectively can lead to overspending and potentially accumulating debt. This is an ideal time to discuss the consequences of financial irresponsibility, such as difficulty meeting essential expenses, accumulating credit card debt, and the long-term impact on credit scores. Openly discussing these potential pitfalls helps teenagers understand the importance of responsible financial planning and the long-term implications of their choices. It is far more constructive to address these concerns proactively rather than dealing with the fallout of impulsive spending later.

Action steps for parents: Help your teen set up processes to track their expenses and have a weekly, followed by a monthly budget. Discuss the consequences of using up their monthly allowance before the end of the month.

Digital payments

In today’s digital world, it is important for teenagers to be acquainted with digital payment methods. Not only would they need to know the different types of digital payments, it is also crucial for them to understand related concepts such as online security, scams, transaction fees, tracking transactions and how to use such payment methods responsibly.

Understanding different payment methods: Familiarity with debit cards, credit cards, mobile payment apps (Paylah!, Paynow, Apple Pay, Google Pay, Buy Now Pay Later schemes etc.) and online banking platforms. This includes knowing the differences and potential risks associated with each.

Online security awareness: Recognise and avoid phishing scams, malware, and fraudulent websites. Understanding the importance of strong passwords, 2-factor authentication, and regularly reviewing account statements for unauthorised activity.

Tracking online transactions: Regularly check online banking and payment app accounts to monitor spending, identify errors, and detect suspicious activity.

Budgeting and expense tracking: Use budgeting apps or online tools to track spending across different digital platforms and ensure that spending stays within allocated budgets.

Understanding transaction fees: Awareness of potential fees associated with online transactions, including currency conversion fees, processing fees, and late payment charges.

Other than understanding digital payments, there is a need to help teenagers develop the awareness of spending responsibly. It would be wise for parents to talk to their children about spending wisely, learning to delay gratifications and the implications of debt.

Action steps: Parents can introduce the different payment methods to their child and talk about the pros and cons of using them (such as getting cashback or cash rebates). Review their digital transactions with them monthly to help them establish it as a habit.

Some ways to encourage teenagers to sit on their impulse before making an online purchase include not linking payment methods to a shopping app, waiting for a week to revisit their purchase decision and to delete unnecessary shopping apps on their mobile phones.

Saving, protecting and investing

Setting long-term financial goals is crucial for teenagers. While seemingly distant, aspirations like college tuition or a post-graduation trip provide powerful motivation for saving. Visualising these goals and breaking them down into smaller, achievable milestones makes the saving process less daunting. This involves understanding the importance of starting early, and the power of consistent savings and the opportunity to reap higher returns from compounding. A clear savings plan, integrated with a budget, allows teens to allocate a portion of their income towards their chosen goals.

Besides using a basic savings account, parents can introduce different ways of growing their money. The differences in interest rates and accessibility should be clearly explained. Furthermore, it is useful to educate them on the risks they may encounter like illness and accidents, and the importance of insurance planning. It is timely to share with them the insurance plans you have bought on their behalf.

Some teenagers may already be working part-time to earn some extra cash. As such, teach them to work their money harder through high-yield savings accounts, time deposits, or even through investing.

Low risk investment products include Singapore savings bonds and Singapore Treasury bills, while higher risk products include money market funds, Index funds and exchange-traded funds (ETFs). The latter offers diversified exposure to a range of companies, reducing individual stock risk. Explain that these are ways to make money grow faster than in a savings account, but also carry a level of risk. It’s essential to stress that investing involves potential gains but also potential losses.

Finally, the concept of compound interest should be introduced -the earning of interest on interest over time - showcasing the remarkable growth potential of regular savings and investing. Illustrate this with simple examples, showing how small, consistent contributions can accumulate significantly over time. This helps teens grasp the long-term value of saving and investing early.

Action steps: To illustrate how compound interest works, use an online compound interest calculator to show your child how small, regular contributions can grow significantly over time. Vary the parameters (contribution amount, interest rate, time) to illustrate the impact of different factors. You can also use your CPF account to show them a real-life example of how compound interest works.

Parents can model responsible financial behaviour, demonstrating how they manage their own finances and make financial decisions. This provides a valuable learning experience through observation and participation in family financial discussions.

Engaging teenagers in family financial discussions and decision-making processes is also beneficial. This helps them understand the bigger picture of financial management including how decisions impact the entire family's well-being. Age-appropriate discussions about budgeting, saving for family goals (e.g., a vacation or home renovations), and investment strategies can provide valuable insights and demonstrate the importance of collaboration in financial planning. These discussions help to make the topic of money less of a taboo and foster a sense of shared responsibility.

Ready to start?

Check out digibank to analyse your real-time financial health. The best part is, it’s fuss-free – we automatically work out your money flows and provide money tips.

Plan with DBS  Plan with POSB

Speak to the Wealth Planning Manager today for a financial health check and how you can better plan your finances.

Let's Meet

Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.