Personal Finance Tips for Teens, Part 2

A Guest Post for Teen Financial Freedom.

Please check out the blog and podcast from Teen Financial Freedom. We are blatantly encouraging our personal finance community to follow this team of young people because we want to support their efforts. They’re focused on their own self improvement and financial education, and spreading financial literacy to other teens as well. And that gives us a sense of optimism about the future!

We are not certified financial professionals. For more information please read our Disclaimer.

Financial education is one of the most important areas for teens to focus on now that personal finance information is easy to find online. That’s why we support the team behind Teen Financial Freedom (TFF), and all of the readers and listeners following TFF. In our first guest post for TFF I shared some personal finance tips for teens and now I’m sharing another set of tips in this part 2 post. It’s exciting that financial independence is becoming more attainable for a much broader and more diverse range of people now, especially if you start learning about money as a teen!

With that in mind, here are 10 more personal finance tips for young people. These are all things I wish I had known when I was a teen or at least by the time I was in my 20’s. I hope these tips are helpful for you…

1. Consider Being an Entrepreneur

Whatever your passion is, plan for it, give it your time, and let your enthusiasm drive you!

Teens are natural entrepreneurs, full of ideas and inspiration without old routines and behaviors weighing them down. Teens make fabulous entrepreneurs because they’re full of passion and they’re willing and able to try new things, learn as they go, and problem solve along the way. Most of us have a hard time retaining that intense level of willingness and passion as we grow older so it’s always helpful to start practicing entrepreneurial behaviors when we’re young.

Honestly, it’s hard work to grow a business from the ground up, to build clientele, get paid for your time, avoid going into debt, and become profitable. That’s why I’m impressed by the friends and family we know who’ve made a success out of their entrepreneurial efforts. Being an entrepreneur isn’t all about money, it’s also emotional since building your own business and working for yourself is thrilling!

If you have a business idea then you can start writing a business plan, decide how to structure your business, come up with a name, build a website, and figure out how you’ll get paid. You’ll also need to think about taxes, insurance, any licenses or permits, business bank accounts, equipment costs, staffing needs, and the benefits of collaborating with others.

During the early stages of business development it can be tough to earn any real income but once your business is profitable you can decide how much money should be reinvested into your company to help it grow, and how much should be saved and invested for longterm growth.

Whether you build and run your own business or not, let your entrepreneurial instincts thrive  and make time to work on projects that are important to you. And keep in mind that if your work is all about passion projects, those projects still need to pay the bills.

Being an entrepreneur isn’t for everyone, but being your own boss and running your own business is a great option to consider. And for those of us who don’t become entrepreneurs, remember that carrying an entrepreneurial mindset with you would be a benefit in any career.

2. Open a Brokerage Account

Open a brokerage account as early as possible!

What’s so great about a brokerage account? Our brokerage account is our favorite account because it’s so accessible and easy to use, and it was the key to our early retirement.

With a brokerage account there’s no limit to how much you can invest or when you can make contributions. There are also no limits based on salary with a brokerage account and no restrictions for when you can access your money. And if your investments have been held there for over 12 months the gains are taxed at more favorable capital gains tax rates.

If you start saving and investing for growth in a brokerage account when you’re a teen or in your 20’s, you can start growing accessible funds for whatever you value in life. Maybe you’ll want to use some of those funds to start your own business and feed your entrepreneurial goals, or to start your retirement years early, or maybe you’ll need funds for a gap year so you can travel around the USA or visit other countries. No matter what your plans are, a brokerage account can help you reach all of your saving and investing goals.

There are many different accounts available to those of us living in the USA, and a brokerage account is one of the most useful options for sure. Brokerage accounts are available to anyone regardless of your age or career path and that unrestricted access is an amazing benefit for any portfolio.

3. Build an Emergency Fund

Start building an emergency fund for surprises so you’re never caught unprepared.

An emergency fund can cover you if unexpected expenses make it hard to pay your bills, or you lose your job, or you get sick and can’t work, or if you start a new business and won’t earn income right away. An emergency fund is like a personal finance insurance policy!

Now that we’re retired our emergency fund is still an essential part of our personal finance strategy. Our emergency fund is there in case one of our family members needs us so we can hop on a plane and go help, or if a tree damages our home, or if we get into a car accident. When we were still working and saving money we started out by building a 6 month emergency fund. Now that we’re early retirees we keep a two year emergency fund because we have no new income coming in from a W2 job.

You might start with building an emergency fund to cover one month of your bills. Then you can grow it to cover you for three months, and then grow it so it can cover six months. The important thing is to start saving for emergencies as soon as you’re an independent adult with bills to pay and wealth to protect. Let your emergency savings grow over time until it’s the right amount to keep you safe.

Building an emergency fund is a great way to create a parachute for yourself when times are tough. Regardless of the amount you save, saving money for an emergency will help cover your expenses when your income fails or when an unexpected expense surprises you.

4. Invest in Employer Sponsored Retirement Accounts

As soon as you get your first paying job with a company that offers an employer sponsored retirement account, open that account! Especially if your employer offers matching contributions.

Honestly, most employer sponsored accounts offer very limited fund options with higher fees for the account holder so make sure you understand the pros and cons of your employer sponsored retirement account. For example, my last 401k didn’t offer any of the types of index funds I was interested in, there was no employer match, and I lost 1.2% in fees each year (that’s a lot!). My employer pushed their 401k fees off to employees in order to keep fees low for the company.

All employer sponsored retirement plans are definitely NOT created equal. So keep in mind that many companies build plans to benefit the company as recruiting and retention tools and to create tax deduction benefits for the company. Do your research and decide how much of your income should go into your employer’s plan (just enough to get the match?), and how much of your savings should be invested independently.

Perhaps the most important benefit of these types of plans is employer matching funds. If there’s no match that definitely diminishes the appeal. But if your employer sponsored plan offers some kind of match, do the math to find the actual dollar amount your employer would match based on your salary and do your best to contribute enough to get the full match. Don’t leave anything from your employer behind! When you add employer contributions to your contributions, your savings can really add up.

But it makes sense to remember that your own contributions may not thrive in these types of accounts compared to your independent accounts. Which means maxing these accounts out with your own funds might not be the right decision.

Depending on the type of employer you have you might be offered a 401k, a 457, a 403b, a SIMPLE IRA, a SEP, a profit-sharing plan, an employee stock ownership plan (ESOP), or a cash-balance pension plan. Whatever you’re offered, these kinds of accounts can be powerful tools when saving for retirement. And remember, it’s never too early to start!

Employer sponsored accounts aren’t necessarily ideal investment vehicles since they tend to have limited fund options and higher fees. But they’re still worth considering and they’re definitely worth adding to other investments in your portfolio. And if they come with employer matching funds they’re an important part of your benefit package! Just do your research and make sure you know the pros and cons of any account types and any investment options offered by your employer before you dive in.

5. Save as Much as Possible for Retirement

While I was employed I was advised by mentors to “invest 15% of your gross income for retirement.” That advice is faulty at best. Instead of that generic old fashioned rule of thumb I wish I had simply been encouraged to save as much as possible for retirement. 

What’s the difference? If your salary is lower than average saving only 15% is a relatively small amount to invest each year. And even if your salary is higher than average saving only 15% is like ignoring all of the options you might have to max things out. Don’t settle on an old generic percentage that doesn’t take your finances into consideration.

Instead, find out exactly what the contribution limits are for each account you have and max out your saving and investing if you can. The goal is to invest as much as possible without putting yourself in deprivation mode.

Pensions are great retirement plans because they provide guaranteed fixed income when you retire. But some pensions don’t pay into Social Security so if you have a pension like that make sure you understand how your Social Security benefits would be reduced or if you qualify for any Social Security at all. And figure out if you need to do more to save for your retirement years.

Traditional retirement accounts like 401k’s, IRA’s, and Roth IRA’s all have annual investing limits so do your research to find out what the limit is during any given year. For example, this year in 2022, the employee 401k contribution limit is $20,500. Think about your real circumstances for income along with your real budget and expenses, then set your own investing goal with a targeted annual dollar amount to contribute.

One of the most important things you can do to take care of yourself is to save as much as possible for retirement. Old fashioned advice tells people saving 15% is enough, but that’s not true for most people. There’s also a lot of wrong advice telling people they have to pay off all debt before they can start saving for retirement or accumulating wealth. Instead of following old fashioned and bad advice, remember that investing is about longterm compounding growth so even if you start with very small amounts, the sooner you start the better.

6. Invest Safely and Consistently

Invest consistently and go for base hits instead of home runs! Do you know how often people swing for investing home runs and miss? You don’t need to be Warren Buffet or Suze Orman to be a successful investor and achieve financial success.

Investing consistently and safely also means you don’t want to put all of your investment eggs in one asset class basket. Diversification will help you avoid being handcuffed to the risk profile of a single asset class (like crypto). Diversification isn’t typically a one time step but rather an ongoing process as you add more money to your portfolio over time.

Since every investment has its own yield and return you can choose whatever investment options fit with your strategy. For example, you might start by investing in a US Broad Market ETF, and then add an International Broad ETF, and then add to one or the other in turns over time. This type of investment strategy brings great diversification since you would then hold broad market funds to track with various indexes around the globe.

Every investor needs their own strategy, uniquely designed to fit their age and risk tolerance. To build your own strategy you need to know when you might start drawing down on your portfolio and you also need to know how freaked out you would be during normal (or unusual) market volatility. If you’re young and won’t need your money for decades, having all of your investments in equities (or a high percentage of equities) in your portfolio will expose your money to the historical direction of the market… which is good because that historical direction is UP!! In other words, if you don’t need to withdraw money from your portfolio anytime soon that volatility is probably a good thing since normal volatility helps create longterm compounding growth.

So, remember there will be bear market years as well as bull market years and that’s why safe and consistent investing leads to longterm growth. Most importantly, don’t treat investing like gambling.

7. Be Generous With Your Money

Give. No matter how much money you have, make sure giving and being generous are part of your life and part of your budget. Giving is just part of being a good human!

LIke any kind of spending it’s helpful to have a budget for giving so you have a plan to follow. Without a budget to act like a roadmap, some people have a hard time getting started with giving and other people give more than they can reasonably afford. Create your own unique giving budget and make sure your total budgeted amount for giving fits within your overall spending ability. Start by adding categories for the types of giving you want to do (maybe you want to give to 503(c) organizations, or individuals, or family members). Plug in an overall total amount to give for the year, add any specific amounts you want to set for certain people or organizations, and then fill in the rest. After a couple of revisions you’ll have a detailed budget for giving that you can adjust at the beginning of each year.

Being generous with your money or time can make a big difference in other people’s lives. If you’re feeling fortunate you’ve probably noticed how obvious it is that many people are not so fortunate. With that reality in mind, know that any kind of selfless giving is a good thing. If you have a dollar to spare, share it with someone who really needs it. And if you have an hour to spare, volunteer and help others with your time.

There are more options for giving than you can count so look for something that works for you and make giving part of your lifestyle. Be generous with your money, and your time, and your kindness. That’s one way that you can help make this world a better place!

8. Avoid Adoration of Finance Gurus

Be wary of anyone who claims they are The Expert.

There are tons of people out there preaching about how you should invest. But investing isn’t rocket science and the basic concepts aren’t secrets anymore. So we don’t need gurus telling us how to manage our money!

Personal finance gurus who are just focused on gathering followers are not focused on what’s best for you. Use your critical thinking and research skills to make sure you understand what people running businesses in personal finance are saying and what they’re selling. Take an interest in personal finance because taking care of your wealth is part of taking care of your health, not because a paid advisor wants to steer a percentage of your money into their wallets.

Make sure you get tips, ideas, and inspiration from a diverse range of people. And especially make sure you’re getting some of your info from people who are offering ideas without trying to sell you something.

On top of fees and commissions, keep in mind that anyone who gives financial advice that’s tied to their own biases about people is also selling their judgement and prejudice, and we don’t need that. Even if someone is legitimately an expert, they’re still just a regular person same as you.

The bottom line is that you should always do your homework and make independent choices that meet your needs and goals. There are tons of voices out there in the world of personal finance and it pays to learn as much as you can rather than just letting one guru tell you what’s best for you and your money.

9. Remember Frugality Can Lead to Deprivation

One of the typical ways people control their spending and work towards financial independence is by being frugal and basically spending as little as possible. But taking frugality to an extreme can put you in deprivation mode unnecessarily and lead to a habit of prioritizing wealth accumulation over everything else.

When frugality is done well, it leads to good habits of being thoughtful with your money and prioritizing saving over spending. And when frugality is done really well it can also make room for generosity and giving. But when frugality is taken too far it can become a negative habit or even an obsession that impacts many different parts of your life, including your relationships.

Some people think the biggest downfall of being frugal is social awkwardness, maybe because it’s uncomfortable to say no to friends who want to spend more than you do. But really the biggest problem with extreme frugality is deprivation at a level that takes the fun out of life unnecessarily. Feeling like you can’t spend money on food or clothes because you want to win a frugality contest isn’t a good thing, just like deciding you won’t tip people in service positions because you’re being frugal isn’t a good thing.

It’s easy to overdo it with frugality, so remember that spending doesn’t have to be 100% about needs vs wants. Deciding you have to avoid spending money on things you can survive without, even if you have enough money and your spending isn’t reckless, that’s not being frugal. There’s nothing wrong with buying things you want, as long as you can afford what you want and you budget and save for those purchases.

Living below your means and taking control of your spending are great behaviors for teens (for everyone). But you don’t have to optimize everything to reach your goals. So don’t over do it, just take all of the good aspects of frugality and add them to your mindfulness routine. Save more, invest more, and give generously.

10. Build a Written Plan

Build a written plan for your financial and emotional goals. And make sure the plan you outline is one you can stick with.

No matter where you are on your personal finance journey, or where you are in life, take some time right now to think about your goals and make real plans for what you want to accomplish. Take time to consider your circumstances and goals, and make sure you have a plan. Where do you live? Where do you want to live? Who are the people you want geographically close to you? What do you want your life to include, and what will it take for you to get there?

Setting goals and writing them down helps keep us organized. Make sure your plan includes timelines for accomplishing goals and make note of any costs associated with your goals as well.

And if you’re not able to follow your plan don’t give yourself a hard time about that. Even good plans need to be reevaluated, changed, and updated. The important thing is to keep trying. Be patient and surround yourself with information and people that support your goals.

As you work on your plan focus on all aspects of your life, not just on money, and remember that people have different goals and needs for each phase of life. So review and update your plan regularly as life evolves and your goals change.

Wrapping It Up

There’s a ton of information available online these days, which means you can search any question you have and find advice on every subject there is. The tricky part is sifting through the advice to gather enough information to help you decide for yourself what’s best for you. So here are 10 personal finance tips for you to consider…

  1. Consider being an entrepreneur 
  2. Open a brokerage account
  3. Build an emergency fund
  4. Invest in employer sponsored retirement accounts
  5. Save as much as possible for retirement
  6. Invest safely and consistently
  7. Be generous with your money
  8. Avoid adoration of finance gurus
  9. Remember frugality can lead to deprivation
  10. Build a written plan

Thanks for Reading This Post!

I hope some of these personal finance tips are useful for you. If you have questions or if you want to chat you can reach me at All Options Considered. My wife and I blog about life and personal finance, and we always like to meet new people and share ideas.

Here’s one more plug to check out the blog and podcast from Teen Financial Freedom!

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