You wouldn’t talk to a toddler about personal finance any more than you’d discuss the fine points of anatomy or religion, for example. And yet, there will come a point when you need to sit your kids down and give them instructions on how to properly manage money. Its funny how many parents are willing to have important conversations with their kids pertaining to relationships and drug use, but they don’t find it relevant to discuss the ins and outs of budgeting, investing, and planning for a financial future.
The truth is that most adults are just as lost on this score as kids because nobody ever taught them. But if you want your children to be successful in life, then you need to arm them with the tools to do so. You can start by taking courses in personal finance to prepare, and then look for signs that it’s time to start teaching your kids about money management. Here are a few situations that may clue you in.
1. Opening a bank account. There are all kinds of ways that kids get money. Once they have reached school age, you’ll likely start giving them an allowance as compensation for completing chores. They may receive monetary gifts from relatives on their birthdays or during holidays. And if they have a coming-of-age event (bar mitzvah, confirmation, quinceañera, etc.) then they will likely receive large cash gifts. For this reason, you should help your kids to open a savings account early on, and take the time to explain the value of saving for a rainy day.
2. First job. Once your kids start getting paychecks they’re going to need a bank account, and probably a checking account. This is a good opportunity to discuss the idea of tracking finances because they will either be writing checks or using a check card. This means that they could end up spending without knowing how much is in the account. You’ll need to teach them how to fill out checks, deposit slips, and a record (such as a bank ledger) so that they don’t end up overdrawn and owing fees. And you should also discuss pre-tax withdrawals from their pay for a 401K. The sooner they start saving for retirement, the more the money will compound.
3. Driver’s license. Once your children are able to drive, it is likely that they’ll want a car. Even if they’re just borrowing yours, they’re required to have insurance and you’ll probably want them to pitch in for fuel. If you’re smart, you’ll make them earn the privilege by paying for it. This means they’ll need to hold a job and manage their finances responsibly. And it’s a good life lesson as long as you clearly outline consequences for failing to pay their portions (keys repossessed, for example) and then stick to your guns.
4. Graduation. Upon graduation, kids will be looking at heading off to college and living on their own. If you haven’t already discussed how to manage money and plan for a financial future, now is the time. Once they’re gone they’ll start forming bad habits that will be hard to break. So help them to leave the nest fully prepared to create a budget and squirrel some money away. They’ll thank you for it by not moving back into the basement after college.
5. Credit card. Unless you want your kids to end up with the horrible interest rates attached to credit cards for poor credit, you’re going to need to teach them how to use credit responsibly and build up a good score. You should start them with a secure credit card (low limit, requiring collateral) though the bank as soon as they have jobs. Then help them to track spending so that they can afford to pay off the card at the end of each month. In addition, show them their credit reports (you can order them free annually) before and after so that they can see their FICO score going up because of their good decisions.