Needs vs. wants
Many kids consider movies and designer jeans needs, but they should understand that needs are the true essentials – such as food, clothing, and shelter. Wants can make life easier, but kids need to learn they must address and pay for their needs before spending on their wants.
Financial goals, budget
One of the best ways for young people to learn about managing money is for them to set and achieve a simple financial goal. Younger teens can benefit from opening a savings account and choosing something to save for – an item of clothing or sports equipment, for example.
Help your teen figure out how much to save each week to reach the goal in a reasonable amount of time. It’s a good lesson in prioritizing and an introduction to planning for long-term goals.
Know your personality
We all emphasize different things in the way we manage money. Some people are primarily spenders, while others are savers. It’s important to identify what kind of money personality your teen has, so that you can encourage him or her to plan accordingly and avoid blunders.
For example, people who are likely to immediately spend their loose cash may want to make sure it’s not quite so readily available. Instead, they should be prepared to deposit it directly into a savings account. It is important to be aware of children’s financial weaknesses and recognize that their money personalities play an important role in shaping their financial future.
Pay yourself first
Whether teens have a job or earn an allowance, they should get into the habit of putting a percentage of earnings into savings. By making the contribution automatic, it becomes like paying a bill. Suggest starting with 10 percent, and encourage them to think of the practice not as a sacrifice, but as an investment in the future.
Start saving early
Starting to save early is more important than saving a large amount. Explain how compound interest works, using examples that teens can relate to.
For instance, the Rule of 72, which is a simple formula for calculating how long it takes money to double at any given time, is an easy way to show how crucial it is to start saving early.
Under this rule, the number of years required to double an investment is equal to 72 divided by the interest rate earned.
Let’s say your bank offers 4 percent interest on a money-market account. Since 72 divided by four equals 18, your money will double in 18 years. Such examples show your teen how much can be earned by putting away a few dollars a week.
Article Source: http://www.boston.com/business/personalfinance/articles/2008/12/27/five_basic_tips_for_talking_to_teenagers_about_making_wise_financial_decisions/