Money Management for Teens: A Comprehensive Guide

In your teenage years, you have power — you can take on adult responsibilities.

For starters, you can cultivate your financial independence! No, we’re not saying you should move out and start a life of your own. Instead, we’re saying that ages 13 through 19 (and even earlier) are a prime time to start learning key financial skills. That includes learning how to make a budget, invest, save money, and make sound financial decisions. After all, during your high school years, your parents cover lots of your costs, so any mistakes you make now come with minimal risk.

So why not start learning how to manage your money now, when it’s easy — and much less risky — to learn the ropes? To help you get started, we’ve prepared this guide to money management for teens. Young people of all ages might find this useful — in fact, at UBank, future savers as young as 8 can open a Buddy Account!

Understanding money management for teens

Money management is the process of budgeting, saving, and investing money, as well as setting short-term and long-term financial goals. It’s how you can spend money without putting yourself in a financially difficult spot. Plus, if you get good at it now, chances are that you’ll truly master it as an adult. That’s important — once you’re paying for your own housing, utilities, groceries, and phone bills, you need to be 100% sure you have adequate funds.

You’re probably starting to sense that money management isn’t always a cakewalk, but worry not — you can totally make money work for you. When you’re still in high school or middle school, these obstacles might include not making much money, wanting to do things that cost money, and not having a lot of savings. You also might not have a debit card or savings account, which means you’re working with the cash you get from your parents or doing chores for neighbors.

Nevertheless, it’s entirely possible to start smartly managing your money — even if you’re not a millionaire just yet — well before you reach adulthood.

Creating a budget

Your budget tells you how much money you can spend during a certain period based on how much you earn. Here’s how to create a budget.

1. Figure out your monthly income. If you earn money through a part-time job outside school, this is your income. You might get two paychecks per month — in that case, the two checks’ total is your monthly income.
2. Determine your monthly expenses. Right now, you’re probably not paying for many, if any, recurring monthly expenses. That’ll change in a few years, but for now, you can estimate how much you spend per month on one-time purchases. This includes clothes, getting takeout, in-game purchases and spending money when hanging out with friends.
3. Compare your income with your expenses. It’s wise to base your spending on the amount of money you expect to earn per month. For example, let’s say you’re working 20 hours per week and make $10 per hour. In four weeks (a month), that’s $800 before federal taxes — with taxes taken out, you’re looking at roughly $660. Your spending should come in below this amount so that you can save money.
4. Set spending categories and caps. How much did you spend on your social life last month? Make that your monthly budget cap for social purchases and do your best not to spend more than that. Identify your biggest spending categories and set caps for each that allow you to put aside some money every month to meet your financial goals.
5. Adjust as needed. A budget is never static. If your income goes up, you can increase your category caps or allocate more money toward savings. Additionally, if your spending per category changes, you can raise the cap on one category and lower it for another. Your budget can be as fluid as your finances, especially when your expenses are low.

Saving and investing

The money you save today can go toward great purchases tomorrow or years down the line. Consciously saving and investing money can also make financial emergencies much easier to handle. Learning money management skills now can make these savings much easier to accumulate as an adult when you start taking on more expenses. Here’s how we suggest going about saving and investing.

1. Open a savings account. The money you put into a savings account generates interest. That means banks pay you a small amount for storing your money with them. This isn’t quite the case with checking accounts, which are great for storing your money but don’t earn interest.That said, big banks rarely offer savings or checking accounts to anyone under 18. Here at UBank, though, we’re different. We offer a checking account called a Buddy Account that, though not interest-generating, is great for learning money management skills now. Buddy Accounts are fee-free, so you can use them to build your financial skills without any consequences. Plus, since your parent or guardian has to co-sign for your account, you always have an extra safety net.
2. Set financial and savings goals. Let’s say you’re trying to save up for a Nintendo Switch — that’s a $300 purchase. When you put a timeframe on that purchase, it becomes a savings goal — for example, buying the item within six months. To reach this goal, you can deposit $300/6 = $50 into your account every month.
3. Look into investment opportunities. Certain big-name investing companies, such as Fidelity, offer investing accounts for people under 18. Through these accounts, you can invest small amounts of money into stocks and mutual bonds.This can give you another way to grow your money alongside your savings account. For example, let’s say you invest $50 in government bonds, and your interest compounds semiannually. Let’s also say your interest rate is 3%. You can plug these numbers into the compound interest formula to see how much you’ll earn.

In this formula:

• P = Your principal (initial investment)

• r = interest rate (as a decimal)

• n = number of times compounded per period t, which is usually in years

• t = number of years

For your $50 investment, $50(1 + 0.03/2)(2*1) = $51.51. In some cases, this amount will be more than you could generate through a savings account.

Think about it like this: If putting money into a savings account is like watering a plant, investing means using fertilizer and plant food too. Though sizable growth is never guaranteed — and losses are possible too — it’s still common, and it’s only possible through investing.

Managing debt and credit

You’re unlikely to take on debt in your early teens, but in your late teens, you might take out student loans or receive credit card offers. Properly paying off these loans is just one example of where the savings skills you’ve learned come into play. These loans are much easier to pay off when you know how to set aside money for them each month. Some tips for doing so include:

• Make timely debt repayments. We simply can’t overstate the importance of budgeting for loan payments or paying off your credit card bill on time. That’s because outstanding debts generate high amounts of interest that you’ll need to pay. The interest on student loans can be especially aggressive, with some borrowers paying more than they first owed. This can also happen if you sign up for a credit card and start using it without plans to pay it off.
• Don’t use more than 30% of your credit card. Finance experts generally advise that the percentage of your credit card that you use stay under 30 percent. For example, if your credit line is $1,000, you should use at most $1,000 * 0.3 = $300 of your credit line. Do your best to only use credit cards for purchases that, based on your income, you’ll be able to pay off within a month. This should keep you under that 30% maximum.
• Balance your income and your debt. You should work to keep your debt-to-income ratio (DTI) — your debt divided by your income — under 35 percent. For example, on your $800 monthly income, solving for x in the equation x/$800 = 0.35 gives you $280. This figure is in line with the advice to use at most 30% of your credit card.

Making wise financial decisions (and avoiding mistakes

Two factors called your credit score and credit history reflect how smartly you take on and manage debt and meet your financial obligations. Your credit score is a number ranging from 300 to 850 that reflects how likely you are to repay your debts on time. Most entities seeking your credit score will look at your FICO score, though some will look at your VantageScore instead. In either case, your credit score is a number that represents your credit history, which is a full timeline of how you’ve managed your debts.

Landlords or mortgage lenders will review your credit score or credit history (or both) when deciding whether to approve you to rent an apartment or buy property, as will credit card companies and auto lenders. Learning to spend smartly now can help you avoid damaging your credit history throughout your lifetime, making it easier to access certain needs.

Some common spending mistakes and their solutions are below.

• Not separating needs and wants. Everything costs money, even the necessities — housing, food, water, utilities, transportation. These necessities should form the bedrock of your spending and budget. Pretty much everything else is a want, not a need. Not that we’d ever tell you not to spend on wants — they’re what makes life great! Instead, spend carefully on your wants, and only buy items you know you can afford.
• Not maintaining emergency savings. Keeping emergency money available but untouched is among the smartest financial decisions you can make. This can help you instantly pay off unexpected expenses, thus keeping you out of debt. Create room in your budget to set aside the equivalent of three to six months’ worth of your typical monthly expenses for emergencies.
• Overusing credit cards. We’ve said it already, and we’ll say it again: Use credit cards only to delay payments you know you can afford later. Credit cards aren’t cash — they offer you money to borrow, which is why their interest rates are so high. If you do use a credit card, paying off your balance well ahead of its due date ensures you won’t pay any fees.
• Not regularly reviewing and adjusting your budget. Becoming an adult doesn’t guarantee that you’ll earn as much money as you want. That’s why it’s never too early to master the art of reviewing your budget. Look at the gap between your spending and income, and see what you can do to increase this gap so you can save more. This could mean, for example, setting lower budget caps on your wants to fund your emergency account.

Setting and tracking financial goals

At any age, smart financial goals can lead to smart saving and, when the time comes, spending. These goals can fall into one of three categories:

• Short-term goals. These goals typically cover at most a year and pertain to hundred- or thousand-dollar purchases.
• Mid-term goals. Over roughly one to five years, you’ll save to pay off a loan or fund a down payment.
• Long-term goals. Across more than five years, you’ll save for the biggest possible purchases, such as your college education or a house.

Here’s how to set dollar amounts for these goals and track your progress:

• Determine the amount you’ll spend. This is easy if you’re saving toward a relatively modest one-time purchase. It’s harder when you’re thinking about big things like home ownership since home prices and mortgage rates change so often. For the latter purchase, speak with an expert — our team here at UBank, for example, is super well-versed in mortgages.
• Connect your bank account to an app. Budgeting apps abound, and each of them offers its own way to track your spending and savings. These apps are the most automated way to see whether you’re saving enough money to reach your goals.
• Use a spreadsheet. Though at least partially manual rather than fully automated, a spreadsheet gives you the power to lay out your data however you’d like. This extra bit of control can be super helpful as you master money management.

Seeking financial knowledge and resources

There are very few things you can truly do alone, and making smart financial decisions is certainly easier with experts in your court. This can take the form of continued reading — a basic internet search should bring up tons of articles and videos for building your knowledge and skills. It can also take the form of asking your parents, mentors, or financial professionals for help or advice.

Sounds like too much? It’s not — when you visit any UBank location, we’ll take care of you no matter your financial questions or needs. We’ll be stoked to speak with you whether you know literally nothing about money management or you’re already getting great at it. Regardless of where you’re at, we’re here for you.

Managing your money properly can start at any age

Anyone at any age can start managing their money well, even if they haven’t in the past. You, though, might currently be young enough that you’ve barely (or never) had to manage money — and that’s great! A clean slate is a great place to learn from, especially when you’ve got the experts at UBank in your backyard.

Visit any of our locations to open a Buddy Account and chat with financial experts about money management. There are no questions you should be afraid to ask — we’ll be thrilled to answer them all. We’re here to make your life easier today, tomorrow, and well into your future.