Kids & Money

A Parent's Guide to Teaching Kids about Money

There is a major epidemic of financial illiteracy in the United States today with the nation’s teens. With only 24% of students and 20% of parents saying that students are very well prepared to deal with the financial challenges that await them after graduation, it is important that we make financial education a priority, and provide our kids with the knowledge and skills they need to manage their money, stay out of debt, and save for retirement. Teens today use the “ask and you shall receive” method: Dad I need this or Mom I need that. The list is endless and recycles often. By the end of each month, most parents don’t know how much they are spending on their teen’s “needs”.

An explosion of financial products means that people have to be increasingly more financially sophisticated. That also means we all need to understand the fundamentals of budgeting, banking, saving and investment.

Here are some helpful tips from AAA Fair Credit Foundation about the basics of establishing good credit:

Common Credit Terms to Know

• Interest: the amount the creditor charges you to borrow money.
  • Interest accumulates when you only pay off the minimum amount due to your credit card company each month.
  • Interest compounds on itself! If you only make the minimum payment, over time you'll merely be covering the cost of the interest, not even the original amount owed. You'll essentially be paying a lot of money, with nothing to show for it.
    • For Example: If you pay $50 in cash for a pair of jeans, the jeans are paid off, but if you use a credit card, you will pay interest on that $50 and soon may end up with nothing more than borrowed time and an empty wallet.
  • Paying off your credit card bill every month is a wise first step to maintaining good credit.
• Credit: Your credit is your spending history. Employers and other institutions use it as a way to gauge your reliability and their risk of lending you money. If you pay off your bills in a timely fashion, you are seen as reliable and thus will qualify for more loans and other opportunities, such as lower insurance premiums, mortgage rates, and even college scholarships.
• Credit Report : Your credit report is simply a record of your bill-paying history.
• % APR: APR stands for Annual Percentage Rate. The APR is designed to measure the "true cost of a loan." It prevents lenders from advertising a low rate and hiding fees. The best thing to do is use the APR as a starting point to compare loans.

Let Your Children Use Money

• Give your children a limited amount of control over decision-making. A monthly/weekly allowance is a good place to start.

Allowance Tips:

• Making your children accountable for their money by striking an agreement on what the allowance covers.
  • For Example: you may agree that their allowance covers certain items
  • Another Example: If you decide to give your children a $15 weekly allowance, knowing that he or she will also spend $10 a week on school lunches, try combining these into a $25 a week allowance, explaining that they must budget for all that is included.
• Encourage children to save their extra money for a major purchase, such as college or a car.
• For Example: A college student who eats several meals out when they have a prepaid meal ticket can shrink their checking account. Let them know that if they want the latest electronic gadget they've been eyeing they should be thrifty with their meals and save for their big purchase

Let Your Children Observe Your Money Moves

• Use hands-on tools. Demonstrate smart money practices by demonstrating how to navigate through your own credit card and bank statements.
  • Example #1: Have your children help you make your grocery list and show them how to comparison shop, pointing out how much money you save through comparing prices and using coupons.
  • Example #2: Invite your children to sit with you while paying bills so they can see how much all your monthly obligations like utilities, phone bills, the mortgage, and insurance, add up.
• The more children see parents practicing good money skills, the more they'll learn.

Use Motivational Tools

• Offer to match your kids' savings with an additional 50 cents for every dollar they save. This is a great way to illustrate the relationship between building a savings account and the positive rewards that follow. When you put money into a savings account the bank rewards you with a small amount of interest in your favor.
• Show them how a bank works. Once they save some money, help them get their own personal account and check book. If they have their own account they may be more motivated to save.
• Share personal stories about the various types of financial scenarios.

Know Your Limits

• Teenagers are notorious for testing their limits, so don't rush to bail them out if they overspend and find themselves short on cash.
• If your teen complains that they don't have Friday lunch money because they've already blown through their weekly allowance, have them make their lunch for school that day or use some of their own spending money. This exercise will help them avoid overspending down the road!

Get Teenagers Involved In the Car Buying Process

• Explain how auto insurance works. Explain how much the premiums increase when they start driving, as well as how much that premium rises if they have an accident or traffic violations.
• Discuss issues such as what their car can be used for (is there a driving curfew and can they use the car to give rides to friends all over town?), who is responsible for gas and maintenance, and who can actually drive the car.
• Make your teenagers financially responsible for any raises in insurance due to their carelessness.

One Safe Credit Building Option

• There are now ways that you can put your teen on a simulated credit card and manage their account.
• Visa Buxx (a Bank of America program) allows parents to put money on the card (what they've set aside for books, gas, clothes, vacations, or emergencies) and then load money from their credit, check card, or checking account onto it. Parents can even set up regular, automatic transfers for dispersing allowance.
• Though it sounds like a credit card, it's not. Purchases are deducted immediately from the card. If the balance is too low, the sale will not go through. It's like cash, but smarter, safer, and an easy tool for teaching teens about budgeting and financial responsibility.

Suggested Children’s Personal Financial Literacy Reading List: Download PDF

Additional Resources:

• 18 Ways to Teach Children ... The Value of Money
  
• Allowances? .. or Work? .. or Both?
  
• 10 Commandments of Personal Finance
  
• Are Your Children Getting Hooked on Credit?
  
• NEFE High School Financial Planning Campus
  
• The Financial Literacy Teaching Guide

Recommended Books for Children