By Lynette Tan
If you’ve only got a minute:
- Financial literacy empowers teens, building a strong foundation for their future financial well-being. Developing these skills early helps teens control their finances and establish good habits like saving and budgeting.
- With digital payments being used commonly, teenagers need to understand the various payment methods, related fees and safety of using these payments.
- Besides earning and saving money, financial concepts such as compound interest and investing can teach teenagers how to “make your money work harder”.
A teen's relationship with money shapes their future financial health. Mastering money management now, from handling allowances to navigating online shopping, empowers them to make informed decisions and build lasting financial well-being.
Budgeting and spending
Budgeting is a fundamental financial skill for teens. It involves tracking all income (allowance, job earnings, gifts) and categorising expenses to create a realistic spending plan. Giving teens a monthly allowance (rather than weekly or daily) empowers them to manage their money effectively.
Setting clear expectations, such as no additional funds if they overspend, encourages responsible budgeting. Guide them to identify needs, wants, and savings goals, then allocate their allowance accordingly. Budgeting apps or spreadsheets are helpful tools for tracking progress.
Open communication about financial responsibility is crucial for teens. Discussing the consequences of poor budgeting—like overspending, debt, and damaged credit scores - helps them understand the long-term impact of their choices. Proactive conversations about these potential pitfalls are far more effective than dealing with the repercussions 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
Digital payments are essential in today's world, and teens need to understand both their benefits and risks. This includes knowing various payment types, practising online security, recognising scams, understanding transaction fees, tracking spending, and using these 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
Empower teens to shape their future by setting long-term financial goals. Whether it's funding their university or travel, these aspirations motivate saving. Help them break down large goals into smaller, achievable steps. Early and consistent saving, coupled with the power of compounding, can significantly impact their long-term financial success.
A clear savings plan, integrated with a budget, allows them to allocate funds strategically. Introduce various saving and investment options beyond a basic savings account, explaining the trade-offs between risk and return. This is also an opportune time to discuss financial protection through insurance, including existing family policies.
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.
Transparency in family finances is a powerful teaching tool for teens. Sharing how you manage your finances and make decisions provides valuable learning opportunities. Engaging teens in family financial discussions, such as budgeting and saving for shared goals, fosters collaboration and demonstrates the interconnectedness of family finances. This open approach normalises conversations about money and builds a sense of shared responsibility.
