Talking about money with your kids
We live in a consumer-oriented society where money is part of daily life. American kids are always seeing advertisements encouraging them to buy, buy, buy. Once they leave high school, young adults are often flooded with credit card offers. Yet, most lack a basic understanding of personal finance. Some are piling up thousands of dollars in credit card debt. This is why talking about money is so important.
You play a role
As a parent or guardian, you have the opportunity to educate your children about smart money management. Understanding the fundamentals will help them to become financially self-sufficient, with the knowledge to take advantage of financial opportunities. Teaching your kids to develop a healthy relationship with money can have a positive, lifelong impact — and improve your own financial knowledge, skills, and attitudes along the way. You can help them to build healthy, lifelong financial habits just by talking about money with your kids. Share your thoughts with them about how you make your daily spending and saving decisions.
Kids want to learn
Most kids are interested in money and recognize money management as an important step toward maturity and independence. Talking about money with them and teaching them about personal finance will show that you recognize they’re on the road to becoming responsible young adults. By gradually giving them more financial responsibility, they’ll gain experience in planning, making choices, and learning to live independently. It’s never too early to begin teaching your children the basics of good money management.
a timeline for talking about money
Age-appropriate money fundamentals
As soon as your children can count, you can introduce them to money — dollars and cents. When they’re old enough to shop with you, you can introduce them to the ideas of spending, saving, and how money is used to store, measure, and exchange value. You can engage your preschooler by keeping things simple and direct. Talking about money can include teaching them the value of coins as well as everyday things, like toys and food. Talk about saving for the future. Even small children see ads all the time, so it’s important to make sure they understand the difference between a want and a need. You can also discuss why and how financial choices are made. An important concept for preschoolers is also deferring or delaying spending.
Tips for talking about money
Most kids are interested in money and want the rewards of having money management skills. Here are teaching tips you can use to help them learn.
Make it a (daily) conversation
Engage your kids in age-appropriate conversations about money.
As soon as your children can count, you can introduce them to money — dollars and cents. It’s never too early to start.
Discuss the fundamentals
Once kids understand the idea of money, introduce them to basic concepts about how to use money wisely. The Hands on Banking program offers money management education designed for students from 4th grade through college.
Encourage your kids to:
- Set goals and save for them
- Make money grow with interest
- Recognize needs vs. wants — and make tradeoffs
- Be a smart shopper
- Keep good records
Let kids make decisions
Talking about money is no substitute for hands-on practice. Giving kids an allowance provides them — on a small, manageable scale — to make their own decisions and their own mistakes — and live with the consequences. Consider an allowance in an amount sufficient to cover essentials and some items that are just for fun. This approach will help the child recognize the difference between needs and wants and set spending priorities. Help your child to create a personal budget and map out a spending plan. Encourage your children to routinely save part of the allowance they receive.
Discuss the pros and cons of a part-time job
Having a part-time job can be a good way for young people to learn more about earning money and how to manage it. However, be sure that school remains their top priority.
Start slowly with credit cards
Credit cards can provide financial flexibility and convenience, but many young adults get in trouble with credit card debt. One option to consider is getting a low-limit credit card for your teens while still in high school. You can teach them how to manage a credit card account, including how to save receipts, check their monthly statements, and charge only what they can afford to pay off completely each month. By learning to be responsible with credit early, your children may be less likely to have debt problems in the future.
Teach a commitment to charity
Encourage your kids to make a habit of giving to charitable causes. Ask them to consider what causes they care about personally and how they would like to make a difference in the world around them. Save any requests for donations you get in the mail and ask your kids to help decide where your family should make donations. Also, encourage your kids to volunteer and consider volunteering with them. Volunteering can be a powerful experience for both parents and kids in terms of recognizing community needs and the benefits of giving back.
Allowance as a Teaching Tool
Often kids are ready for an allowance in elementary school. Giving kids an allowance provides them with an important opportunity to learn and practice money management skills they’ll need throughout their lives. On a small, manageable scale, an allowance lets them make their own decisions and their own mistakes — and live with the consequences.
Helping teens build solid financial skills
Teens are used to instant gratification and a few can have a hard time understanding “no.” Include them when you’re talking about money. This could be discussions of the family budget, challenges the family may be facing and any longer-term goals or priorities. Talking to your teenager about personal and family goals can help them become an informed consumer.
Establishing good credit: a key concept for teens
Start by explaining the importance of establishing good credit and credit score. Institutions and creditors determine an individual’s creditworthiness based on their credit history, or how well debts are repaid. A credit score is a snapshot of a person’s credit risk at a particular point in his or her credit history. Credit scores help lenders determine how likely you are to repay your debt on time. For teens with no credit history, no score can be computed.
You can help your teenager understand that one of the keys to getting the right apartment or qualifying for the loan they will want someday at a good rate may be a strong credit score. Make it clear that once someone has created a bad credit history, it can take a long time to recover. Remind your teen how stressful debt can be and reinforce the point that the credit history they establishes now will increase in importance as they gets older and needs to apply for loans, such as for a car or college.
Be sure to impress upon your teen that responsible use of credit cards is a common way to help establish a good credit history and that paying off the balance each month in a timely manner is an important safeguard against becoming a credit risk.
Potential teen finance pitfalls
At this stage your teen may be itching to get a job to earn extra cash. You’ll want to emphasize the wisdom in balancing work during the school year with school performance. While employment can provide valuable experiences, studies have shown that employment may interfere with academic performance for teens who work 20 hours or more per week.
Easy access to savings (maybe too easy)
If your teen is earning a paycheck, they may find it easier to access their savings account with an ATM card, a move you may or may not decide to support.
Overspending with credit cards
If your older teen (or college-bound student) wants a credit card, you might take the opportunity to have a serious talk or two about spending. In general, teens with credit cards are less price-conscious, more likely to spend more, and more likely to overestimate their savings than those who pay cash.
Keep in mind, teens can’t get a credit card in their own name before the age of 18. Young people between 18 and 21 need a cosigner or verifiable income to get one. If you decide your teen should have access to a credit card, they would need to be added as an authorized user or joint account holder on a parent’s account.
Problem behaviors to watch for
- Paying bills late
- Not paying off credit cards in full
- Getting lots of late fees
- Not communicating when problems arise
- Bouncing checks
Let them practice
With children who are mature enough to take on a project, like planning a family vacation, to help instill the value of money, diligence, and hard work. When thinking of the next family vacation, ask your children to plan it out with a specific budget. International destinations provide an added element of learning about foreign exchange. Creating a vacation schedule, pricing out airline tickets, hotel, and rental cars, and then explaining the rationale provides an exercise in understanding how much things really cost, as well as project management, organization, and leadership skills.