We've all heard horror stories about older teens and young adults mismanaging their finances so badly that they incur mountains of debt by their mid-twenties. Those that get into trouble generally lay blame at the door of predatory credit card companies or huge college loans. In fact, we parents can take steps right now to help our children avoid many financial traps and learn to handle their money responsibly. We can help them avoid the bad start that comes with poor credit. As with most important life skills, the teaching starts almost at birth, and the sooner you start, the better off your child will be.
It can be tough to teach about money matters when you don't have the cash for practical lessons, but skills such as these truly are built from infancy. It's a very sound idea to move this teaching high on your priority list and help give your kids the very best possible start on the road to financial success.
Start from the beginning. You, the parents, need to be setting the best possible example. Make sure that you are running your household on a written, planned budget. This not only will show your children how it is done, but it will also help you have the bits of cash you will want for allowances and even college savings plans. The less money you have, the greater your need for a sound spending plan!
Not sure how to begin? Here are the basics: Start by writing down what you spend each day for one to three months. Account for EVERYTHING. This is one time when it's good to be obsessive. After you have an idea about where your money goes, categorize your expenses. Don't forget to account for quarterly and annual bills. If the bills are larger than your paycheck, you either need to cut back on some optional expenses, or reduce what you pay by shopping with coupons or looking for bargains. And as you budget, set aside a few dollars to use to teach your child financial skills. It's well worth skipping a sandwich out, a few cups of coffee, or a case of pop each week.
Once your own financial house is in order, focus on the kids. What and how to teach will depend strongly on their age and stage. Little children, for example, need to start with little bits of money. Open a child's savings account at your local bank. Most will allow a minor to hold an account with no minimum balance to encourage kids to save. Require that a certain percentage of all money the child gets go into the savings account. Many families use 50%. For some, donation to the church or a charity is also an important habit to build, and these parents require that 10% of any income be given to a good cause. That will leave 40% or so for your child to use as he or she sees fit.
Where can little children get money? Many times, it comes inside of birthday and holiday cards. It's also a good idea to set up a list of chores that can be paid with a few coins around your house. Many parents have good luck with giving a small weekly allowance in exchange for routine chores and separate payment for unusual effort around the house. For example, when the kids were little, we paid them fifty cents for doing small loads of dishes by hand. They wrote their chores on a note posted on the fridge, and money was doled out at the end of the week according to who put the most effort into housekeeping.
As children grow, so should their financial responsibility. Allow them to use “their” money as they see fit (within reason!), but also you can consider giving them their share of the family clothing budget each month to manage. If the budget allows $100 per month for clothing for your family of four, then it follows that each person gets roughly $25 per month. If an ambitious child spends the $75 that she saved up for a single trendy garment, then she may find herself shopping at the local Goodwill store for jeans when she accidentally rips a pair the following week. Some families also involve lunch money in the fray. If lunch at school costs $3.00 per day, the child is given $15 for the week for lunch. That allows him or her to choose an extra ice cream for dessert from time to time, but usually also means that he or she will need to pack a lunch somewhere along the way to balance the budget.
If you've managed to enforce the mandatory savings deposits at the bank, the youngster may have amassed several hundred dollars by middle childhood. Your job is to see that whatever of that savings necessary is preserved for a start on adult life, but some of the total should be considered discretionary for the child. This will allow the good feelings that come with saving for a dream, whether it is a new video game or a fancy pair of shoes. Every acquisition is more meaningful (and usually will be more appreciated) if children have scrounged and saved the money on their own.
In the teen-aged years, teaching fiscal responsibility takes on a new urgency. Most of us realize that our time and influence are slipping away. We need to teach those sound decision-making skills before the kids leave for school or adult life. If possible, allow your child to get a part-time job. As long as it doesn't interfere with education or health, young people gain many, many skills from working as teens.
Consider getting your teen a debit card with parental controls. These programs allow your child to carry plastic, but at the same time help you teach responsible use of credit. Many major credit card companies and banks offer programs with prepaid cards. Set up an account with your child, reach an agreement about who is responsible for loading cash onto the card, and monitor the activity on the card to make sure it's being used wisely.
For children who are leaving home to head off to college, you might want to discuss keeping at least one bank account in the child's name with parents as signers. This will allow you to help out in emergencies. Consider having bills (like credit card or cell phone) and bank statements sent to your primary residence even when they are in your child's name. This way, you will be able to monitor what's being paid, whether payments are made on time, and whether or not fees are being incurred. Most banks and businesses offer on-line accounting, so you can use this tool, as well. Be sure that both of you understand the terms of financial contracts and that your child sets up some accounts and a credit card in just his or her name as soon as it is feasible. Paying these bills on time and in full will build your child's credit score, and will eventually help him or her to take loans for life's larger purchases.
And the ultimate goal, of course, is to “launch” your young adult into the world of finance without damage to either one of your credit scores. Start right now, and teach your child how to budget and manage his or her money. Help him or her to understand credit, learn to check the credit score, and get the most out of sensible credit card usage. Teach as much as you can about savings and investment, and help your child learn where to go for reliable financial advice. Stress the importance of sound money management and hopefully, your child will become successful as an adult while avoiding the pitfalls that can come with debt and credit use.