Learning how to budget is one of parents’ most valuable gifts.
What to do about teens and their spending? One reader emailed me after last week's column to say her teenage daughter inherited $50,000 and didn't stop spending until every cent was gone. "She was brought up in a one-income home where money wasn't wasted but that didn't seem to make any difference."
The money could have paid for her tertiary education, or even a deposit on a flat. Instead it was frittered.
Teens are wired to want stuff. It's a rare parent that hasn't heard "I want, I want, I want" from a teenager. Whatever some receive in pocket money or for paid work will be gone by the end of the week.
Some of the stories shared by readers were galling. One teenager's mother was shocked by her nephew's approach to money. "When my 14-year-old nephew came to visit, I gave him cash for his birthday, thinking he would be able to find something he'd like. I'm well aware that middle-aged aunties have no idea what's trending.
"Within two days he'd spent the lot on energy drinks, Coke, iced coffees and meat pies. I can see a life of debt and poverty ahead, because he cannot keep a dollar in his pocket."
Teenagers are living in a tough financial world. There are many more things to buy, their pleasures are more sophisticated, they face a barrage of marketing and advertising and their wants are fuelled 24/7 by social media. Of the goods available to them, there are many more status items than a generation ago, in particular technology such as smartphones.
A US survey found the biggest spending category for teens was clothing. That was followed by food and then accessories, personal care, car, shoes, electronics, video games, music and movies, events, books and magazines, furniture and other items. I'm sure the same survey in New Zealand would find much the same.
The interesting conclusion of the annual Piper Jaffray survey was that teen wallets are shifting from possession-based categories such as fashion and electronics towards "share-worthy" experiences such as events or dining out.
When it comes to financial literacy, teens fall into two distinct age-related groups: emerging (still at school) and independent.
Parents can have the most influence on their children's spending behaviour in their early teen years. The more you can get them thinking about the choices and options related to money the greater the chance that they will learn to spend wisely and save.
Once their children are teenagers, parents can no longer control or veto spending. Rational explanation is needed. But parents have one powerful bargaining chip: money. Doling out the folding stuff can be wrapped around conversations and consequences.
Conversations help teens think and consequences enable them to make a connection between choices and financial results.
Those conversations are best held around the dining table. You also have a captive audience when driving your children to school, activities and friends' houses.
If you need some conversation starters, Google the words "teenagers money conversations" or get hold of The Opposite of Spoiled by Ron Lieber.
It's a good idea to turn the conversations into joint problem solving, rather than a battle of wills. Rather than "you should/shouldn't", try "how can we solve this problem?"
Allowing your teens to come up with solutions helps with learning good financial judgment. If you don't agree with their solution, ask them to convince you. If the argument is good, go with it.
When it comes to consequences, the best way to bring them to bear is to give teenagers allowances covering all of their spending rather than pocket money for treats.
Usually the bank of Mum and Dad covers immovable costs such as housing, food, power/gas, school donations, uniforms and so on, and the allowance covers items in which choice is involved, such as entertainment, eating out, presents, clothing, technology and public transport. Needs versus wants, in other words.
There are always grey areas. For example, public transport to and from school would be an essential for some teens if they have to catch a bus or train to school, but a choice if they lived close enough to walk or bike, which is about 3km for walking and 5km for biking.
An allowance is a tool that gives teenagers the opportunity to learn about money management in a safe environment where they're not going to get evicted or go without food.
The good news is that teenagers love the freedom allowances bring. The sensible parent retains some control, however. Before doling out the next instalment of money, ask for an account of how the previous month or fortnight's earnings were spent or saved.
Financial mistakes made by teenagers are a good thing. Wasting money and having to go without for something important teaches them the value of money and makes them reflect. These mistakes are even more valuable if they lead to money conversations. But beware of moralising. It's best to ask questions than proffer opinions in this situation.
Not giving teens the chance to sink or swim can cause long-term financial harm. One 24-year-old posting on the Motley Fool discussion boards lamented not being given an allowance. "My mum provided a loving and caring environment for me with no allowance. I don't think this helped as I went to university and suddenly had all that money from student loans and didn't have a clue how to budget for a month let alone till Christmas.
"I think all teenagers need to be taught how to manage money and an allowance is a secure way of doing it."
Allowances get complicated when parents are either too poor to pay or are relatively wealthy. If there really is no money in the household, then teens can't get an allowance - and sadly may not learn the financial lessons one brings. At the other end of the scale, affluent parents who can afford to buy their teens everything need to draw a line in the sand.
I've heard of teenagers who get $25 a week, to cover their clothing, public transport, phones, eating out, presents and entertainment. Some families pay more.
A good place to start is by asking your teenager to draw up a list of what he or she spends on these items. That figure may need to be massaged down to a realistic number. But it becomes the basis for a budget. Then arrange to have a sit-down in six months' time to reassess.
Once let loose on their allowance, the only way teens are going to avoid the consequences of having no money is by budgeting.
Parents do need to reassess their judgments of teens' spending. A smartphone and tablet will get a lot more use than clothing or music that we would have spent money on in the past. Smartphones get used all day, every day. What's more, they're an education tool.
They're also a dry run for owning a car. Like cars, smartphones cost money week in week out, they can be lost or stolen and they break down.
Not all teens spend, of course. Some have the opposite problem. They're too frugal to front up with the cash. They can't bring themselves to part with money and, as a result, miss out on some enjoyment.
Parents of these teens are probably quite proud. But you still need to engage in conversations with them and ease their anxiety. You don't want them thinking that money is more important than relationships. Setting them up with a simple budget showing that they can spend and still save is a good idea.