How to raise a teenager with good financial literacy, by a teen expert (and #4 is a shocker)

Financial literacy is such an important life skill to share with the next generation and one that isn't taught in schools enough.

I'm a teen and tween expert and have written many an article as GoodtoKnow's resident expert such as 4 ways to help your teen handle boredom over summer, and what to do if your teen never leaves their room as well as multiple books to help guide parents and carers as they raise the future.

There are over 10 million young people between the ages of 18 and 30 currently in debt in the UK. While for some the cause is undoubtedly linked to the current cost-of-living crisis, unemployment, disability or similar, for many the debt is linked to a lack of financial literacy. Financial literacy describes an individual’s ability to understand money management and skills such as budgeting, saving, and investing.

Sadly, too many children reach their teen and early adult years with few money management skills with parents mistakenly believing that school will teach their young people all they need to learn, but this is untrue. Encouraging the development of financial literacy in teens (and younger children) is something all parents should embrace. The difficulty here is that many of us were never taught these skills by our parents and we can struggle with knowing where to start, especially if our parents had low levels of financial literacy themselves.

Research has shown that children aged between 12 and 16 are most likely to grow to have high levels of financial literacy if they believe their parents are good at managing money. Like most things with parenting, the best place to start is usually with a good hard look at ourselves and our own spending habits and considering whether we are good role models.

My tips below will help you as the adult in your kid's life to kick start the knowledge and skills today.

How to teach teens financial literacy

1. Give them pocket money if you can
2. Encourage them to find a part-time job
3. Embrace entrepreneurship and other ways to make money
4. Consider charging them rent
5. Teach them terminology and how consumer credit products work

1. Give them pocket money if you can

Giving teens (and younger children) pocket money is proven to increase financial literacy in adulthood. It’s a great practical way to help your teen learn about money management, saving, and budgeting and to understand the value of items and their quality (for instance they will learn that poorly made, cheap items often break easily and are ultimately a false economy). If you do choose to give your teen pocket money you should agree on ground-rules up front, for instance, what is the money expected to cover? (in my family, it covers their clothing, social activities, and snacks when out without me).

While it may be tempting to base pocket money on your teen’s willingness to complete their chores or their homework, making it unconditional is actually a better way to raise a respectful individual who helps out around the house and works hard because they are driven to do so by their own motivation, rather than attempting to control behaviour by the presence or absence of rewards. Another ground rule you may want to consider is what the pocket is allowed to be spent on. In my family there are no boundaries here because the money is theirs and I believe they alone should decide how to spend it. Many parents worry that giving their teen free reign will mean that most of the money ends up spent on junk food or sweets, however research indicates this is not the case.

How much pocket money should you give your teen? This is obviously dictated by your household budget (and what they are expected to cover) and I prefer to err on the side of less is more. The average pocket money in the UK is currently £5 per week, however this has fallen steadily since 2019, when it was £7.55 per week, a reflection of the current state of most families’ stretched budgets.

2. Encourage them to find a part time job

Entering the world of work as soon as possible is a great way to encourage financial literacy in your teen. Unfortunately, it is harder for younger teens to find part-time work today than it likely was when you were a teen. I started my first Saturday job just before I was 14, but now most companies will not employ teenagers until the end of year 11 (when they are 16). One exemption here is a local paper round, who usually offer employment to those over 13.

3. Embrace entrepreneurship and other ways to make money

If your teen is struggling to find paid employment, embracing entrepreneurship and other ways to make money is helpful. I’ve always wondered why we don’t talk about self-employment more in career guidance at school. With 13% of adults in the UK working for themselves, it seems a great omission.

There is no lower age limit for registering as self-employed and it’s a great way to foster business acumen in young teens who may be keen to follow an alternative career path. If your teen is passionate about something, talking about ways they can use their passion and skill to make money is a perfect way to foster financial literacy. Other alternatives to make a little money include selling clothing on Vinted, Depop, eBay or similar, babysitting, pet care (do check into insurance), weeding or mowing lawns, car washing or running errands.

4. Consider charging them rent

Yes, it sounds harsh, but if your teen earns a good salary I would encourage you to broach the rent discussion sooner rather than later. Paying rent helps them to learn how to budget in a safe environment. In addition, contributing to the household budget can foster a sense of self-esteem, not to mention take the edge off of money worries for parents. If you are in the fortunate position of not needing a financial contribution from your teen, then consider charging them rent and saving the money in a savings account for them.

This money can then be given to them as a surprise lump sum to help them towards a deposit for their first property, a car or similar. How much rent should you charge? Again, this is entirely up to you, although a good starting point is to consider 20% of their monthly take home pay.

5. Teach them terminology and how consumer credit products work

Too many teens and young adults struggle to understand the difference between a credit card and a debit card and between saving and investing. Many do not understand how interest works (both in terms of saving and borrowing) and have no idea what terminology such as APR and AER mean. Payday loan companies and credit providers such as Klarna are all too easy for older teens and young adults, with immature impulse control skills, to take out and often find themselves in a very hard situation. Similarly understanding different types of financing cars, such as PCP or HP can help them as they age. Discussing all of these with your teen while they are safe at home with you is an important step towards financial independence.

Embracing financial literacy with your teen now will pay dividends (pun unintended) in the future and may also bring unexpected benefits for your own money management and understanding too.

Some books to help, include:

Your Money Matters – by Martin Lewis

Deborah Meaden Talks Money – by Deborah Meaden

Rich Dad, Poor Dad – by Robert T Kiyosaki

For more help and information on finances, we have covered the 50/30/20 budgeting rule to try and 7 easy ways families can save money without trying and how to talk to kids about the cost of living crisis.