Begin teaching kids money management skills early
Teaching teens the basics of saving, following a budget and the principles behind responsibly managing checking and credit accounts can instill healthy financial habits that will serve them well as adults.
But many U.S. teens aren’t being taught these skills, according to a report released last month by the Programme for International Student Assessment. The organization, which evaluated financial literacy among thousands of 15-year-olds in 14 countries, concluded that one in five American teens lack basic-level skills, more than in Russia, China or Poland.
“Financial literacy is a key component to understanding general money management and credit basics, but a majority of American teens are not financially literate,” said Heather Battison, vice president at credit reporting company TransUnion. “This is why it’s imperative for parents to have conversations with their teens about money in order to start a good foundation for financial literacy and help prepare teens for financial independence.”
Here are some ways parents can begin teaching their children money management skills.
START EARLY
Teaching kids good financial habits can begin when children are around 5 years old, or when they begin asking for an allowance, according to a guide for parents published by the National Endowment for Financial Education (NEFE), a nonprofit on financial literacy.
Parents can expect their child to spend their allowance all at once, but should use that as an opportunity to discuss how to treat the next week’s allowance, for example.
“There are many things at actually quite a young age that children will understand,” said Ted Beck, the NEFE’s president and CEO.
As children hit their preteen years, NEFE’s guide also suggests parents explain how budgets work, as well as the basic principles of investing. The lesson could include playing at being an investor by identifying a company their child knows and encourage them to track the stock’s gains or losses.
FOCUS ON SAVINGS
Encourage kids to set aside money they get for doing chores or presents in their savings account. This will help show them the importance of saving for a big purchase and how bank savings accounts work.
When a child is between 5 and 10 years old, is an ideal time to set them up with a savings account, which can help them learn the value of saving and compounding interest, even at today’s low interest rates.
Many banks offer savings accounts tailored for young children as well as teens. Capital One Financial offers a savings account for kids with no fees or minimum balance and currently offers a 0.75 percent annual percentage yield.
SHARE ANY MISSTEPS
Parents should be open to discussing their own financial mistakes with their kids, as long as the concepts in the lesson would be something their children are old enough to understand, Beck said.
ENCOURAGE CAREFUL CREDIT USE
Kids under 18 are not allowed to open a credit card account on their own. Use of prepaid gift cards in high school can help establish good credit use habits.
Parents with kids going away to college may want to add the student to their card to cover books or emergency expenses. A shared card account also can help parents keep tabs on their kids’ spending and payment habits.
Either way, parents should make sure their teen knows that credit cards are loans and that there is a cost to not paying off balances right away.