Mortgages or rent payments, credit card interest rates, overdraft fees—these are all important financial concepts that most adults need to understand. But where, when and how do we get this understanding? Today’s teens handle AP calculus, honors geometry and algebra, but few are exposed to basic consumer math. In fact, formal money training seems to end after kids grasp the differences between the various coins and how to make change, which leaves life’s more complicated financial lessons to be taught at home. Unfortunately, this doesn’t always happen. According to the recently released 2012 Global Financial Literacy Barometer commissioned by Visa, American parents spend much less time talking with their children about money management issues than do parents in other countries—more than one-third less time in fact. Studies also show that the use of debit and credit cards by teenagers is increasing while their knowledge of basic information about credit is decreasing.
Kids rarely see money change hands and often don’t know how to protect their cash. As convenient as virtual allowance systems or prepaid debit cards are, however, it is important for kids to learn to handle actual cash.
Talk Money Management
Fortunately, it’s never too early or too late to talk money management with your kids. “As sobering as the statistics may be, I’m always encouraged by how quickly kids can sharpen their financial skills when presented with a lesson that engages their interest,” writes local financial expert Janet Bodnar. Bodnar, author of Raising Money Smart Kids and a personal finance editor at Kiplinger.com, offers parents insights on just how to do this. Some tips from Bodnar and other financial experts include:
Give them the power: There is no better teacher than experience, which is why all parents should give their children an allowance, starting as young as age 3. Parents can choose from dozens of allowance systems to follow (see resources), but the most important factor is to be consistent. With their own money, children can make mistakes while the stakes are lower. Overspending, burning through cash too quickly, buying a low-quality item rather than patiently saving for a higher-quality version, losing money or even having it stolen are all valuable life lessons for our children to experience when the literal and figurative cost isn’t too high. For learning to occur, it is important that we parents bite our tongues and allow our children to make mistakes and then not rush in to rescue them afterwards.
When kids have full power over their own money and are given the room to learn from their mistakes, they typically grow to become more cautious spenders. “When she was shopping for clothes with my money, my daughter only wanted to go to higher-end retailers such as Abercrombie and Nordstrom,” says one Rockville mom. “Once we started giving her a clothing allowance, she started noticing how much farther her money would go if she shopped at Kohl’s or Target instead.”
Keep it real: With so much “virtual” spending via debit and credit cards these days, kids rarely see money change hands and often don’t know how to protect their cash. As convenient as virtual allowance systems or prepaid debit cards are, however, it is important for kids to learn to handle actual cash. In fact, cash can help them slow down their spending; studies show that paying with money is more painful than paying with a credit substitute. “Kids need to feel the pain and learn this discipline before they move on to more sophisticated payment systems,” Bodnar suggests.
Graduate gradually to more responsibility: Just as teenagers aren’t yet given a full driver’s license but start with a provisional license when they pass the test, it is safer to provide graduated training before awarding them with a no-limit credit card. Once your child is handling a cash allowance well, you might choose to add checks and teach him how to reconcile a bank account. Next, he can earn the privilege of an ATM card, preferably one without a debit option (you might have to shop banks for this). When he has demonstrated the ability to keep the ATM card and password safe while still reconciling his account, you can introduce a debit card. Although most kids under 21 no longer qualify for a credit card without an adult co-signer, parents of teen drivers might want them to have a credit card for emergencies. If that’s the case, Bodnar recommends keeping the teen in charge of his portion of the bill under your supervision, which protects both parent’s and teen’s credit rating.
Model savvy spending and saving: Involve your kids in coupon clipping, comparison shopping and sale ad scanning. For kids old enough to use the Internet, this can include shopping for the lowest prices on the items they want. Online shopping provides a great opportunity to talk about return policies, taxes, shipping and handling fees, online security and ways kids can get lured into misspending. Talk with them about your daily decision-making process as you spend money, whether it’s what items you select at the grocery store or where you buy gas.
Introduce goal setting and budgets: “Budget” is not a four-letter word, though many Americans seem to feel it is. Knowing how to live within a budget is an incredibly important life skill. Budgets do not have to be spelled out on a complicated spreadsheet with every penny assigned to a line item. When my daughter was leaving for college, we talked about how much money she had saved for the year and what her costs would be. She subtracted the big-ticket items she would have to pay for, such as sorority dues, spring break trip and a small emergency fund. She divided the remainder by how many weeks she would be at school. This determined her weekly budget. She then could choose whether to blow that money at Starbucks every morning versus making her own coffee and having money for other things.
Whether we train our children formally or informally, recognizing our role in their financial education can be an investment that pays big dividends down the road for both parents and children.
By Robbye Fox