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One of the most valuable gifts you can give your children is financial literacy. The majority of schools aren't assuming this task. In fact, only a third of U.S. states require a high school graduate to have taken a single personal finance class, according to a recent study by the nonprofit Council for Economic Education. Even then, those lessons may fall short.
Thankfully, you can help bridge the gap. After all, you've been earning, paying bills, dealing with credit, and planning for the future for many years. Along the way, you've made mistakes and had successes. Now it's time to pass on what you've learned and teach your kids about finance, money management and credit so they can be better prepared as they enter adulthood.
Teach Your Kids How to Budget
A budget is a financial plan based on your income and expenses. Learning to budget is one of the most basic and essential steps in financial education because it teaches you how to set goals, live within your means and manage your money responsibly.
The early days of pushing your toddlers in supermarket shopping carts was a start to their budget education, as they watched you considering one loaf of bread over the other. When they're a little older, backing those experiences up with conversations and exercises will help them understand why you checked the price tag and returned one loaf to the shelf.
For preschoolers and kindergartners, tell them you have a certain amount of money with which to spend on things like food. Once you've used it up, you stop shopping. Keep all discussions simple and convey a can-do attitude. For example, when you find a necessary item on sale, get excited and tell them that you now have extra for something else on your list. These talks should be fun, not frightening.
Exercise: At the store, have the kids read the numbers on price tags out loud to you. Soon they will become familiar with the costs of common items.
When your kids reach elementary and middle school ages, you can get more detailed. Gradually introduce the various things that comprise your budget, including housing, car payments, gas, utilities, clothes and entertainment. Explain the finite nature of a paycheck and the power of prioritizing and saving. A Hawaiian vacation may not be in the cards this summer because your home needs repairs, but if you start socking money aside now and everyone is willing to reduce unnecessary costs, you could make it a reality for next year.
Exercise: Give a reasonable allowance. Encourage your kids to save a portion by matching a percentage of the amount they set aside.
You can be more candid with teenagers. Focus on problems and solutions. If bills are making you anxious, tell them why and what you're doing to alleviate the stress. On the other hand, if you got a raise, share your excitement and how it will impact your spending and saving plans. They should know that budgeting is a flexible process. You should emphasize the idea that you (and eventually they) control money, and not the other way around.
Exercise: Open a checking and savings account in their names. It should come with a debit card that they can use to make purchases. Have them develop their own monthly budget and begin to manage it with allowances and earned cash.
Show Your Kids Healthy Spending Habits
You can teach your children healthy spending habits with the following techniques:
- Arrange a scavenger hunt. While shopping, ask younger kids to find a specific item at the lowest price. Have older kids scour the internet for the best deals on purchases you need as a family or on something they want for themselves.
- Set expectations. Before entering a store, clearly state that you will stick to your list. Verbalizing this intention can keep both you and your kids in spending line—and help you avoid fights as you pass the toy aisle.
- Openly manage your bank accounts. On a regular basis, explain that you are about to review your accounts to examine your spending history and make sure everything is correct.
- Deliberately select a less expensive option. Your kids need to see you making tough consumer choices. It can be as minor as packing a picnic lunch instead of dining at amusement park restaurants, or as major a decision as purchasing a basic car over the luxury model. Assure your kids that the difference in cost will be put to better use.
- Indulge occasionally. If you are coming out ahead financially and want to do something a little extravagant, go for it. It's also important to demonstrate to your kids that you enjoy the fruits of your labor.
- Switch "can't" for "want." When you're sticking to a budget and your child asks you for something unnecessary, say, "I worked hard for this money and I don't want to spend it on that right now." It's a far more powerful phrase then saying you can't afford something.
- Let them practice with plastic. Bank and prepaid debit cards are great tools for kids between ages 10 and 16. They can make withdrawals and purchases without the danger of debt, and learn how to spend within a limit.
Teenagers may be ready for a credit card. By making them authorized users on your accounts, they can charge (as long as you agree) but won't be liable for payments. In many cases you can arrange for authorized users to have a lower credit line, making it safer for you. Explain how being an authorized user helps them start building credit and why that's important. More on that below.
Let Your Kids Earn Their Own Money
Give kids from 7 to 17 income-earning opportunities, and encourage them to be both ethical and creative. The possibilities are virtually endless:
Elementary and grade school kids
- Host a lemonade or baked goods stand
- Sell gently used toys, games and clothes in supervised garage sales
- Do challenging chores that have a monetary value
- Create and sell artwork, such as holiday cards
High school students
- Become a tutor
- Babysit for local families
- Provide party help, such as serving or cleanup
- Walk dogs and provide other pet care services
- Start a car washing business
- Scour thrift shops for things they can sell for a profit online
- Obtain a part-time or summer job
Whatever your children do, monitor their activities and be available for advice about setting fair prices, collecting payments and managing proceeds.
What Kids Should Know About Credit
Your children need to be aware that each time you use your credit card, you're borrowing money from the issuing bank. When you repay the balance in full within about 30 days, you avoid interest that increases the cost of your purchases.
Highlight that when you charge and repay responsibly, credit cards are the fastest way to establish an impressive credit history. Lenders notify credit reporting agencies about how you are treating the account, and that activity is then listed on your credit reports. By consistently paying your bills on time and in full, you're proving that you are financially capable, which makes qualifying for additional credit products easier. The better credit cards come with rewards such as cash back or points that you can trade in for things like airline tickets and hotel stays.
Teenagers especially should be aware that a credit report filled with positive data will help them rent an apartment when the time comes. So if you do give them access to your credit cards, establish rules for use because that account will probably appear in their credit files. If they overcharge or buy something you don't approve of, address it immediately. You might want to revoke their privileges until they're more responsible.
Finally, another upside of being your children's financial teacher is that you gain a deeper understanding of their personalities and aptitudes. You'll discover what they naturally gravitate toward regarding earning opportunities, the things they most enjoy doing, if saving comes naturally or is a challenge, and their attitudes about borrowing. As you go along, keep tabs on potential fraud issues that can affect minors. With Experian's free Child ID Scan, for example, you'll find out if their Social Security numbers have been compromised. After that, you'll know you've done everything possible to ensure they have a clean report and are prepared to make wise money and credit moves after they leave home.