Personal Finance Tips For Your Kids
It’s never too early to start helping your kids manage their money. How much money is at their disposal is really of secondary importance. Even if the only financial assets they currently possess are an allowance and birthday money, what matters is forming good habits. After all: if they cannot be responsible stewards of $100, how will they ever handle $1,000 – 0r $100,000? If you have not already begun teaching your kids how to handle money, now is the perfect time to start.
Understand Credit
A shocking number of personal finance experts suggest that kids should avoid credit cards. This is incorrect, borderline dangerous advice. Without a personal credit history, your child could find it impossible to rent a car, book a hotel room, get an auto loan or qualify for a mortgage. More importantly, credit is not the problem. The problem is that many young people do not understand how credit works and thus get in over their heads with debt.
Instead of telling your kids to avoid credit, educate them about it. Explain that credit is a lot like fire: a potentially dangerous tool that is extremely useful when some basic rules are followed (like not going into debt for impulse purchases.) If your child is in their mid to late teen years and understands debt, encourage them to get a good, all-purpose credit card and use it for a few responsible purchases.
Automate Savings
(cliff1066™)
Like many adults, your kids may not be very excited about the idea of saving money. Left to their own devices, with all of their money in hand, most kids will opt to spend it on immediate fun instead of a rainy day fund. The solution for them is the same as for adults: turn savings into an automated machine. In his book I Will Teach You To Be Rich, Ramit Sethi writes that even people who struggle to save voluntarily usually succeed once the decision is taken out of their hands.
If your kids have jobs, get them set up with direct deposit and schedule a monthly transfer from checking to savings. If they do not yet work, insist that they save a fixed percentage of birthday and odd-job money. In time, your child will see savings as a regular, automated priority – which will pay off when their income jumps from $100 per week to several hundred.
Get Comfortable With Banking
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One of the biggest financial favors you can do for your kids is helping them get comfortable with banking. Piggy banks are all well and good (and certainly better than nothing) but if your kids have outgrown the training wheels on their bicycles, they are ready to learn about banking. It starts with a checking account and a savings account. Even if your child does not technically need a checking account just yet, set one up for them anyway and explain what purpose it serves.
In an August 2010 article, the Wall Street Journal reported that some 17 million U.S. adults rely on check-cashing services instead of real bank accounts. These services, most of us know, charge extraordinarily high fees and tend to hinder (rather than help) the progression of a solid financial future. If your child can confidently use a bank – and get used to it from an early age – they are less likely to rely on these types of services.
Learn To Prioritize
(Leonid Mamchenkov)
Setting financial priorities does not come easily to everyone, and your kids will probably benefit from a helping hand as well. Above all, the key tip to impart to your kids is that life is all about trade-offs. Unless they hit the lottery, your kids will constantly need to decide what is most important to them and spend their money accordingly. For most kids, this will not become real until they get a teenage job or get their first cell phone or car insurance bill.
Suddenly, their money is not just a open-ended wad of cash, but a precious resource that must somehow cover both bills and fun. Help your child develop prioritizing skills by encouraging them to think about their financial goals. Instead of trying to cram what they “should” want down their throats, ask them what they do want – but emphasize that they are responsible for making it happen. Buying a new car, for instance, is a pipe dream if your child spends every cent she makes on new clothes.
Understand Investing
If your kids seem comfortable with the notions of credit, savings, banking and setting financial priorities, feel free to introduce the stock market. As with the other tips, how old your kids are will dictate how much depth you can go into. Your eight year old is unlikely to understand the mechanics of investing. But your ten year old might, and your twelve year old almost certainly can. What often helps when explaining investing to kids is keeping the discussion manageable.
Rather than bogging them down in abstruse language about P/E ratios and dividends, just explain the basics. If your child takes to the idea and shows enthusiasm, help her get started. Open an IRA or brokerage account and show her how to put some money into an index fund or the stock of their favorite company.
About the Author: Tim Coffman is a freelance writer for Quicken. Quicken offers personal finance software that makes money management easy. Quicken’s products help people get their spending under control with helpful budgeting tips.
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