7 Essential Money Insights for Your Teens

Teenage years bring growth — and usually some angst. There may be no better investment for parents than the time spent teaching children the value of money and how to manage it. The lessons they learn early about budgeting, saving, spending and investing can help them become fiscally confident adults.

These lessons don’t just help teens — they can also help parents strengthen everyday money habits at home. Of course, money is a big topic, and knowing where to begin — and how much to teach — can feel overwhelming for many parents. Sharing money tips with teens doesn’t have to be a lecture—start with small, practical habits they’ll actually use.

Help your teen turn small choices into big financial wins with a few simple habits you can teach today.

Insight 1: Balance Your Budget to Stay on Top of Your Finances

The essential math lesson here is that money going out must be less than money coming in. To make that calculation, you first need to monitor your spending and track every dollar you earn, so that you can see whether you’re using your money wisely — or not.

If you’re always coming up short at the end of the month, budgeting will show you where exactly the bulk of your money is going and where there may be opportunities to cut back. Reviewing a monthly bank statement can also help teens see spending patterns, identify fees and catch transactions that may not look right.

Once you’ve tracked your spending for a month or two, you can create a list of everything you buy during the average month by category (e.g., food, clothing, entertainment, school supplies).

If your total spending for the month is greater than your available income, it’s time to look at the categories and see where you can cut back. If your total expenses for the month amount to less than your income, you have a surplus, which is a perfect opportunity to start saving for a bigger ticket item or to begin building an emergency fund for that rainy day.

READ MORE: 4 Spending Habits to Break Right Now

Insight 2: Match Your Savings Account to Your Needs

Deciding where you should save your money will depend on how long you intend to have your money in a certain account, what types of perks the account offers and what type of access you’ll need to your money. Here are three common account types:

• High yield savings accounts: While regular savings accounts let you earn interest and typically require only a small minimum deposit to open, a high yield savings account can offer more competitive interest rates and help deposits grow more over time.
• Money market accounts: These accounts combine features of a regular savings account with those of a checking account. Money market accounts usually have a slightly higher interest rate than a basic savings account, and you may be able to write checks on the account. A higher minimum deposit, however, may be required to keep it open, and banks typically charge a monthly fee.
• Certificates of deposit (CDs): With a CD, you agree to leave your money untouched for a set period of time, anywhere from 30 days to five years. The longer the term, the higher the interest rate, and when the time limit is up, you can withdraw the money. There are typically no monthly maintenance fees with a CD, and online banks may require lower initial deposits. If you don’t need the money right away, this option will give you the best bang for your buck, but early withdrawal of the money typically triggers a penalty fee.

Banks will advertise two types of interest: annual percentage rate (APR) and annual percentage yield (APY). The APR is typically listed for credit or loan accounts and is simply the rate of interest on an annual basis. The APY, typically listed on savings accounts, money market accounts or CDs, factors in compound interest applied to the balance — which shows you the value of saving over time.

Synchrony Bank does not have a minimum balance requirement to open any of the accounts above. Encourage your teen to select the best fitting option to start them on their savings journey today.

READ MORE: CD vs. High Yield Savings Account: Which Is Right for You?

Insight 3: Save Consistently for Long-Term Goals

The sooner teens start saving for bigger goals — like a car, college or their first apartment — the more time compound interest has to work in their favor.

When interest compounds, it means you’re earning interest not only on the money you deposited, but on all the interest you’ve earned thus far. Over time, compound interest helps savings grow because your balance builds on itself continuously over time.

LEARN MORE: Money Know It to Grow It- Compound Interest

Now, let’s say you’re able to save that $20 monthly over 10 years. At the end of that time, you’ll have $3,628.12, thanks to compound interest. For comparison, if you’d put that same money away in your piggy bank, you’d have accumulated just $3,400 over the same time period.

Insight 4: Learn About Tax Brackets and Effective Tax Rates

The United States uses a progressive tax system, meaning different portions of income are taxed at different rates as earnings increase. As teens begin earning money, it’s helpful for them to understand that taxes and withholdings can reduce the amount they actually take home.

It also helps to know the difference between gross pay (what you earn) and net pay (what you actually take home after taxes and withholdings). Employers typically withhold payroll taxes—Social Security and Medicare (FICA)—and may also withhold federal and state income tax based on the W-4 information you provide, so your paycheck can be noticeably smaller than the hourly rate you agreed to. Many teens with part time jobs may earn less than the amount that triggers federal income tax, but payroll taxes still apply, and state rules vary. Encourage teens to review their pay stub each payday, keep good records, fill out their W-4 thoughtfully and use online calculators or speak with a parent or tax professional to determine whether they should adjust withholding or expect to file a return and possibly receive a refund.

Insight 5: Learn About Credit Cards

Using credit cards responsibly is a great way to build a positive credit history, so long as you pay your bill on time each month. If you don’t understand credit card basics, however, you can wind up spending more for your purchases over time. Here are some common terms to be familiar with before you start charging:

• Annual fee — Some cards charge a fee for every year you use the card. The upside is typically some sort of reward or cash back offer, but before you take on one of these, make sure you’re going to earn enough in rewards to balance out the fee.
• Balance transfer — Many credit cards offer the option to transfer the balance from one card to another for a lower-interest or introductory offer. That can be a way to take advantage of a lower rate while you pay down a balance, but be sure to read the full agreement so you understand when the new interest rate will take effect.
• Cash advance — Many credit cards offer the option of taking a cash loan from your account. In an emergency, it might be worthwhile, but be aware that the interest rate will be higher than on regular purchases and interest begins accruing immediately, so the debt can add up quickly. Banks also usually charge a fee for cash advances.
• Credit limit — This is the total amount you can charge to your credit card. The amount will depend on your credit history, income and overall debt. While your limit may start out low, you can request an increase after some period, when you’ve shown you can pay your bills on time.
• Minimum payment — This is the lowest amount you have to pay each month to avoid a late fee. Just keep in mind, you will still pay interest on the remaining balance, so the amount you owe will keep rising if you only pay is the minimum each month.

READ MORE: 22 Credit Card Terms You Need to Know

Insight 6: Understand That Investments Make Money in Different Ways

When teens begin learning about investing, it helps to understand the two main ways investments can grow. Either the investment pays out income, such as with a bond, or it increases in value, like a stock. Each comes with a level of risk, higher or lower depending on the potential reward.

• Stocks — Also called equities, these shares in a public company are traded on the open market and rise and fall depending on whether investors are optimistic about that company’s prospects, as well as on other factors, such as how the economy and the markets are generally faring. The goal, of course, is to try to buy the stock when it has a likelihood of appreciating in value; the higher the risk, the more money you can potentially make or lose on that investment.
• Bonds — When you purchase a bond, you are effectively lending money to the company selling it — or in the case of U.S. Treasury bonds, you’re lending to the government. The bond issuer, or the borrower, promises you, the lender, to return the principal when the bond matures, as well as a set rate of interest. The amount of interest you’ll earn will depend on 1) the company’s credit rating — those with lower ratings will pay higher interest because they are riskier, and 2) the maturity date — the longer the term of the bond, the more interest you’ll make.

Some stocks also pay dividends, or set payments to shareholders each quarter, but if their earnings fall, they may decide to cut the dividend.

READ MORE: 10 Lessons You Should Learn Before Investing

Insight 7: Build an Emergency Fund

It’s hard to predict when you’ll need a financial cushion, which is why building an emergency fund can be so valuable.

To avoid needing to take drastic measures to pay the rent, such as taking high-interest cash advances on credit cards, start building an emergency fund — a dedicated pot of money set aside for those unanticipated financial curveballs life throws your way.

A best practice that is usually recommended it to build an emergency fund that can cover three to six months of essential living expenses.

A high yield savings account can be a practical place to keep emergency savings because the funds remain accessible while still earning interest. But remember that you can start small; putting aside $20 a week can help you accumulate $1,000 in the first year. Consider putting your savings on automatic pilot by scheduling a transfer from your checking account to savings a day or two after you receive your paycheck.

Ready to start building your savings? Learn more about Synchrony Bank’s savings options and how to open an account online.