If you have a high school age children, you’re probably confident that their school is giving them a good grounding in things like Shakespeare, Calculus, Geography, and Chemistry. But did you know that they're likely not getting any education about personal finance?
Given that your kids will soon take off for college, it’s important that you take these last few years to teach them the critical lessons about personal finance and money that they’ll need to survive and thrive financially during their college years and beyond.
Here are four important financial lessons for you to teach your children.
Teach Them to Build Credit
Building credit is a critical thing for young people to do as soon as they're able to and that means getting a credit card as soon as they turn 18. While many parents might be concerned that their children will rack up credit card debt, if you teach your kids how to treat credit responsibly then them getting a credit card shouldn't be cause for concern.
If your kids are not yet 18 and they can’t qualify for their own card, you can start talking to them about credit cards and how they work. Explain to them how a credit score is calculated so that they understand why it’s so important to pay their bills on time and to have old credit accounts on their file.
Caution them about how they should never use more than 20%-30% of their available credit since using more would affect their credit score. Plan to get them a student credit card as soon as they’re able to and coach them through using the card for the first few months.
Teach Them How to Budget
One of the most difficult things kids have to have to learn is how to budget their money responsibly. One way to teach your kids how to budget effectively is to help them create a budget for their allowance money or any money that they make by working. Make sure that they allocate a certain proportion of their income towards their savings, big purchases, and an emergency fund just like they would if they were adults.
You should also talk to them about your household budget and how you allocate your money. As your child gets closer to the age when they will move out or go away to college, you should have a more in-depth budget conversation and help them create a budget that they can use during college.
Teach Them About Student Loans
Many students take out student loans without fully understanding the impact they will have on the rest of their lives. As a parent, it's critical that you talk to your kids about how student loan work and how much they might be paying each month on their loans once they graduate and start working. Make sure that they understand how those payments could affect their budget and potentially lead them to putting off life milestones like getting married, having kids, and moving out on their own if they take on too much debt. It's important that they understand the impact their student loans will have on their lives.
If they’re concerned about student loans, encourage them to spend more time searching for scholarships, to consider going to a cheaper school, or to work part-time during college.
Teach Them to Spend and Save Responsibly
It’s important that your kids learn to live below their means in order to stay in good financial shape and save for big purchases like buying a home or life milestones like retirement. Before your kids go off on their own, teach them how to be frugal. When you go to the grocery store, talk to them about why you use coupons or buy things on sale in order to save money. Share with them your tips for how to spend less and tell them where you allocate the money you save. Maybe you put extra money into a college fund for their education or maybe you’re saving aggressively for retirement.
Make sure they understand the importance of saving for retirement early. Many young people don't start saving for retirement until they're in their 30s, at which point they lost valuable years and have to save more in order to make up. Encourage your children to open a retirement savings account as soon as they're able to. Make sure they know how to save and spend responsibly.
Keep the Lessons Coming
Always look for opportunities to teach your kids a financial lesson. Your kids learn by what you do, so tell them about what you’ve done wrong but also about your mistakes. By doing so, you’re setting them up for success later on.