5 Teenage Money Mistakes (and How to Fix Them)

We’re addressing the most common teenage money mistakes and what you can do to guide your older teens so they can start making good financial choices early in life and enter young adulthood with confidence.

Teen Money Mistake #1: Living Beyond Their Means and Without a Budget

If you want your teen to live within their means as an adult, it’s critical you model this behavior yourself. Most teens live in the moment which means they have difficulty seeing too far into the future, resulting in impulsive buying decisions. You can help by setting a good example.

Guiding your teen to avoid overspending by setting goals and a budget:

• Explain that living within your means is what you do by not overspending beyond the money you already have or know with certainty you will receive.

• Show your teenager that by establishing very specific goals influences how they set up their budget, which then dictates what they will save and spend money on. Show them that tracking their spending and setting up a budget is simple and easy.

• Help your teen by talking about the goals you’ve set for your own life, and what financial goals they might want to set for themselves in one year, two years, and five years. 

Teen Money Mistake #2: Spending Every Dollar They Make

Help your teenager understand that by saving at least 10% of what they earn and having at least three months of living expenses saved up for emergencies are among the most important things they can do to build a strong financial foundation for life.

Guiding your teen toward building a "saver" mindset:

• Ask your teen to track and categorize their spending so they can see exactly where their dollars are going. Ask them what they notice about their spending habits and if they want to make any changes or start spending less in one category to start saving up for something important.

• Give your teen responsibility for some of their personal living expenses while they’re still living with you, such as paying for their own gas or cell phone plan.

• Talk about how to keep their emergency savings in a safe place, like a high-yield savings account or an interest-bearing checking account. Explain that they’ll not only receive a good rate of return, but the money will be easy to get to should they need it quickly, and the funds will be FDIC insured up to the maximum amount allowed ($250,000 per depositor for each ownership category).

• Explain that having three to six months of living expenses saved up can make them feel more relaxed than having only three. (They may not achieve this until they’re working regularly, but it’s important they understand now what they should be aiming for.)

Teen Money Mistake #3: Not Understanding the Difference Between Good Debt and Bad Debt

Not only do credit card companies sell on college campuses, teens could easily wind up overextended on car loans, quick loans, or student loans used to fund an extravagant lifestyle while away at school. Spell out what’s considered good debt vs. bad debt—and the importance of paying off their credit card balance each month.

Guiding your teen on how to tell good debt from bad:

• Explain that good debt is money borrowed that can increase your net worth or significantly improve your personal wellbeing. For example, a loan on an appreciating asset (such as a home mortgage), or a low interest federal student loan that provides marketable skills and paves the way into a solid career.

• Explain that bad debt is money borrowed to buy a rapidly depreciating asset (such as a factory-new car, computers, or other technology), or discretionary disposable goods and services (like fast fashion or dining out). Revolving high interest credit card balances are also considered bad debt.

• If your teen is over the age of 18, shop with them for a credit card. Show them how to compare annual interest rates, fees, as well as any perks or rewards offered.

• Help them understand that paying bills late, such as a credit card, can quickly damage their credit score which may affect their ability to get a job, rent an apartment, or obtain the lowest possible rate on an auto or home loan later in life.

Teen Money Mistake 4: Trying to Keep Up With Social Media Influencers

Help your teen see that social media is full of self-appointed “experts” who work hard to persuade them to indulge in pricey cosmetics, fashion, and other expensive trends. No matter how convincing or attractive these may appear, resist the urge to match other people’s spending habits, vacation reels, or personal values.

Guiding your teen to shop safely on social media:

• Help your teen keep their spending aligned with their own values and financial goals by asking them to list and rank these in order of importance.

• Have your teen track how much time they spend on social media daily, weekly, and monthly, and ask if setting some limits would help them feel better about themselves.

• Watch for social media spoofing, phony websites, health or beauty scams, and fake scholarship scams. Point out that scammers targeting teenagers are difficult to detect and will attempt to take their money and sell them nothing.

Teen Money Mistake 5: Not Protecting Their Credit Scores, Health, or Property

Let your teen know their credit history and credit scores must be guarded, and that most people buy insurance to protect against loss of health, home, are, and income.

Guiding your teen to keep their credit scores, health, and possessions safe:

• Stress the importance of paying bills on time. It’s one of the biggest factors of building and maintaining a good credit score. Given they may not have bills of their own right now, if they’re an authorized user on one of your credit cards, ask them to reimburse you for the charges they make at the end of each month.

• Show them your credit report and help them understand that their credit card spending behavior will be documented and recorded as part of their credit history. With a few exceptions, your teen can stay on your health insurance until they turn 26 years old.

• Help them establish a pattern of regular preventive care checkups, including vision and dental, while they have access to your health insurance, so they can continue with this pattern as they get older and go out on their own.

• Make sure your teen is aware that disability insurance offered by many employers can provide income should they become injured or disabled.

• If your teen plans to rent an apartment after they leave home, talk about the importance of rental insurance and comparison shop providers.

• Should your teen own or lease a vehicle, go over the details of how an auto insurance policy works. In case your teen needs to rent a car, explain the collision damage insurance (and waiver) and why it may not be necessary if it’s already covered by their personal auto policy, by your homeowners policy, or by the credit card issuer used to rent the vehicle.

The Bottom Line

By talking with your teenager about money, setting a good example, and clearing up the common mistakes and misperceptions they may already have, you’ll help them build financial knowledge and skills they’ll carry with them for the rest of their lives. Empowering teens to be smart with their money as they enter into young adulthood is good for them, and good for you.