By Barbara Trombley, MBA, CPA
One of my most frustrating issues with being a parent is the lack of school education regarding money and personal finance. My children were required to take history, trigonometry, English, and numerous other courses, but they were never required to take a class about personal finance. I would argue that this knowledge is just as important.
This oversight leaves the instruction about personal finance to parents, and many parents are not good with their own money, resulting in generational problems with financial matters.
How can we teach our kids to have good financial habits? What does that mean? Obviously, modeling good financial behavior is an obvious start. Have a budget and stick to it. Contribute regularly to a retirement plan. Do not be afraid to discuss money in front of your kids. Talk about your household income and household bills and how much of your paycheck goes to taxes, retirement savings, and your emergency fund. Discuss vacations, how much they cost, and how you are saving for them.
One of my favorite ways to involve my children in money talks was to take them with me to the grocery store. I would show them how to shop for generic items, compare unit costs and sizes of items, and use coupons. In general, we should take the stigma out of money discussions and make spending and saving discussions easier to have.
Discussions with your children are not the only way to teach them about good financial practices. Here is a list of eight ways to teach good financial habits.
• Let your teen earn money. They don’t need to get an actual job, although I would recommend this at some point. Your teen can work around the house, cut the grass, do odd jobs, etc. The idea is to get them used to managing their own money. Once they are regularly earning, you can teach them to set aside money for short-term saving (maybe to purchase a big item), long-term saving (maybe for college), and spending now. If they are receiving a paycheck, it is a great opportunity to discuss taxes and Social Security and Medicare withholdings.
• Open a bank account. It’s a great idea to have a child manage their own savings account. Many little ones start with a piggy bank for odd change. When the birthday or allowance money starts to accumulate, it is time for a bank account. Make sure to have access so that you can monitor the account. When the teen gets their first job, they can have their paycheck deposited in a checking account.
• Get a debit card. When your teen gets a checking account, it is the perfect time to get a debit card. They can practice using it and seeing purchases impact the account balance. Your child can get an online login to their bank account and learn to watch the activity.
• Help them set a budget. Teens are notoriously frivolous. Starbucks, dining out, shopping, video games — there are so many more ways for our teens to spend their money than we had as young adults. Discuss with your teens how many hours they would need to work to buy a grande Frappuccino at Starbucks. Talk about how long they would need to save to go to a big concert. If it is easier to illustrate, find an app for budgeting. There are many available.
• Consider credit cards. This is a tricky one. Each of my children was given an additional card on our account when they were 16. This card came with explicit instructions (from mom and dad) on how and when it was to be used, as my husband and I were ultimately responsible for the bill. Our kids understood that the card could easily be taken away if misused. This was a gentle introduction to credit and allowed them to establish a credit score (see the next tip). You could also start with a pre-paid credit card on which you put a certain amount. When each of our children were juniors in college, we helped them apply for their own credit cards. By this time, their money skills were good, and they understood the importance of paying the bill monthly.
“In general, we should take the stigma out of money discussions and make spending and saving discussions easier to have.”
• Explain credit score. Many teens and young adults do not understand the need to build credit. Emphasize that, by using credit responsibly, your teen will build credit and increase their credit score, which is imperative when it is time to finance a car or a house. Explain how people with the best scores are given the lowest interest rates when looking to make large purchases.
• Discuss compound interest. This topic can apply to both credit cards and investments. Explain to your teen how compound interest (paying interest on the interest from last month’s bill) can make a large credit card balance even bigger over time. Consequently, compound interest is your friend when dealing with investment accounts. Earning interest on the interest generated year over year is how many people grow their investments.
• Discuss paying for college. Another hot topic that too many parents avoid is who is going to pay for college and how. Teens need to be included in the discussion about college tuition and debt from an early age. If expectations are set about how much college costs and how much you can contribute, disappointment with a college choice can be managed. Also, one of the absolute worst financial mistakes a parent can let their teen make is to choose a college without regard to the financial burden on both the parents and the student. Letting an 18-year-old be unknowingly responsible for college debt can set them up for a lifetime of money troubles.
If your teen is really interested, find online classes that teach financial literacy. Also, look for books in your library. Particularly savvy teens can open investment accounts easily online and start investing with a minimum deposit. There are many ways to educate our children, and we need to take the responsibility for their financial education.
Barbara Trombley, MBA, CPA is a principal with Wilbraham-based Tromblay Associates; (413) 596-6992. Securities offered through LPL Financial. Member FINRA/SIPC. Advisory services offered through Trombley Associates, a registered investment advisor and separate entity from LPL Financial. This material was created for educational and informational purposes only and is not intended as ERISA tax, legal, or investment advice.