As a child, I can’t remember ever discussing money or credit with my parents. I did however observe the way they dealt with their finances, good and bad, which led to me eventually adopting some of their bad money habits as a young adult. Unfortunately, this is common amongst most households. For some it may be taboo to discuss money and finances with your children, however as parents we must overcome the reluctance to have these tough conversations with our kids. The lack of conversation regarding money in the household along with the lack of financial education in schools has continued the cycle of poor money management skills amongst young adults. Break the cycle by talking to and educating your children about money and credit. We’ve composed five important financial tips you can start teaching your children today!
Pay Yourself First
Whether your children work outside of the home or earn an allowance, make them pay themselves at least 10% of their earnings! I always encourage saving more if possible. You want them to understand that in order to build wealth they need a high savings rate. In our household we make our children save 50% of what they earn since they do not have any financial responsibilities right now. This will help them develop a habit of saving that will benefit them in the long run.
Delayed Gratification & Opportunity Cost
It is important to teach your children the concept of delayed gratification especially when it comes to spending money. Make them aware that if they hold off on spending their money now, they may have a bigger long term reward in the future. A simpler way to explain this to smaller children is to show them opportunity cost. “If you buy this, then you will miss out on buying that!” While in the store with my then five year old son, he saw a game he wanted. I simply explained that if he bought that game now it would cut into the money he was saving to buy a gaming system he wanted. He thought on it and put the game back! Kids are capable of grasping these concepts at an early age; it is up to us to teach them!
How to Use Credit as Leverage
It is never too early to start talking to your children about credit however, it is a must that you start having these conversations once your child is in high school! Talk to them about the advantage of having a high credit score in terms of investing; not obtaining cars, clothing, and jewelry. The more available credit you have, whether it is a high credit limit on a credit card or a high line of credit, the more you can take advantage of different investment opportunities. This is why it is important to teach your children early not to use credit for liabilities, only assets. If you have credit cards with a low balance and high credit limit it would be a great idea to start adding them to your accounts as an authorized user as early as possible. This will allow them to build their credit history without them having to take out loans and cards themselves. One of the misconceptions young adult have about credit is that you have to get in debt to build it. No, you just have to use credit strategically! Credit should never be used to obtain items you cannot afford to pay for with cash but rather a way to establish and build good credit history. If you cannot afford to pay your balance off each month then you don’t need to make the purchase.
Alternatives to Student Loans
Because most parents don’t discuss money with their children, it is no surprise that the cost of college and how it will be paid for isn’t discussed either. This usually leaves the hopeful student to rely on Sallie Mae or other student loan lenders to fund their tuition. This usually leads to massive student loan debt in the future for the student that is almost impossible to repay! Don’t let this happen to your children. Have an honest conversation with them early on about what their plans are regarding college and how you all will pay for it. Discuss all possible expenses and decide what is feasible for your budget and what simply is not! There are several alternatives to student loans. Make sure to discuss all options for your personal financial situation. They may need to start off at a community college, an in state university, or somewhere close so that they can stay at home. Outside of academic and/or sports scholarships the school may offer, there are several foundations that offer private scholarships. Fastweb is a great site for finding scholarships that your child may qualify for.
Teach Them as You Learn
For some, it may be intimidating talking to you children about money when there are certain concepts you don’t quite understand yet. It is okay to not have all the answers and to still make mistakes with money. but don’t let this stop you! You can all learn together! Be honest with them about your past and maybe even current money mistakes! Trust me, they are watching and observing anyway, so it is better to explain to them the mistakes you may have made and how you plan on doing things differently in the future. There are so many great resources on financial literacy. Take the time to educate yourself on them and then educate your children. Learn anything from how to create a monthly budget together, to changing your money mindset for a better financial future!