By FPA member Jeanne Gibson Sullivan, CFP®
Last Updated: May 21, 2012
What to Do with Teenagers (Financially Speaking)
Being the parent of a teenager may mean living a chaotic life in an emotionally charged household with headstrong young individuals who think they know everything. In the midst of this storm, there are important financial steps to take to keep your life calm.
- When Your Teenager Works
- Many teenagers have part time jobs. This is an excellent way for them to learn responsibility. Decide with your child up front what expenses their paycheck should cover. Help them understand the withholdings from their paycheck. Consider opening a Roth IRA for your child, maybe matching their contributions.
- Each phase of childhood brings new expenses. There are two big potential expenses with teenagers – a car and college. Make sure that expenditures for your children do not compromise your own retirement. Have candid conversations with your child regarding what the family can afford.
- Emergency fund – now it is more important than ever to make sure you have an adequate emergency fund to cover unexpected costs related to your teenager, even if you will have the teenager pay (speeding tickets, high school events, tutors) – teach the teenager to have an emergency fund also!
- Auto Insurance & Umbrella Coverage
- When your teenager gets their driver’s license, add them to your policy immediately. If they are driving the family car, they will be considered an “occasional driver”. If they have their own car, typically the car is still owned in the parent’s name, but the issues may be more complicated. Use the opportunity to check your coverage.
- An umbrella policy provides additional liability coverage for your home and your automobile and is essential coverage for all, especially important when you have teenage drivers in the family. Be sure the new driver is added to your umbrella policy, it may not be automatic.
- Estate Planning
- Establish Trusts. Hopefully by the time your child is a teenager you have amassed some savings and still have life insurance. If the worst were to happen and one or both parents pass away, be sure to have trusts in place to distribute money to them on your terms after you are gone. Provisions can be made so everything for their health, education, maintenance and welfare is provided while they are still young and the remainder can be distributed at an age specified by you, even spread out over several years. Without a trust, money could be distributed to them outright at age 21.
- Your named guardian may no longer apply when the child turns 18. A typical strategy for a family with young children is to name a guardian to take care of the children in the event something happens to both parents. In many states, when the child is 18 years old, they are legally considered “too old” to need a guardian.
- When your child turns 18, it may be advisable for them to have their own health care proxy. Without one, it may be difficult for a parent to obtain medical information about their children who are 18 or older if they are hospitalized for any reason.
- College Savings
- It is never too late to start saving for college. As your child gets closer to college age, it is important to be conservative with your college savings as you will need the money soon.
- Financial Aid
- The year before your child graduates from high school is the critical year for financial aid consideration (if your child graduates in the Spring of 2013, then 2012 is the base year). Familiarize yourself with the financial aid process, know what is countable (your income, your student’s income, non-retirement assets). If you know the schools where your child intends to apply, find out if they rely solely on FAFSA for financial aid determination or if you will also need to fill out the CSS Profile form and their deadlines. There may be some strategies you can implement to improve their financial aid eligibility, such as spending down a custodial account for the child’s expenses, such as camp or lessons (hopefully not speeding tickets!).
Best of luck navigating the teenage years!
FPA Member Jeanne Gibson Sullivan, CFP® is a financial planner and principal of Financially in Tune in Wakefield, MA and a parent of two teenage sons – a freshman in college and a high school junior.