Financial Literacy Starts at Home
Even if you've never created a written budget, you probably budget regularly when you decide whether spending money today will leave you with enough to cover the mortgage, groceries or utilities next week. Investopedia offers a free sample budget worksheet geared toward teens. If your child has a hard time making their wages from a part-time job or allowance money last, sit down with them to work through this simple worksheet on a monthly basis. This activity can help them plan how they manage their resources before they head off to college.
Now that your child is in high school and starting to think about colleges, majors and careers, it's a good time to discuss income. Regina DeMeo, a volunteer teacher for Junior Achievement, an organization dedicated to bringing financial literacy to children, says it's important to explain to your children that the career they pick has certain expected salary ranges. You can easily find that information in the Occupational Outlook Handbook or Salary.com. DeMeo, who is also a family law attorney from Bethesda, Maryland, recommends discussing potential salaries with your child, as well as what it takes to get that kind of job in terms of education and experience. From there, she says, you can help them work backward to see what their budget may look like on a monthly basis.
The starting salary of your child's chosen career should also be taken into account when determining where they will go to college and how much student loan debt they may need to take on. Many experts recommend that your total student loan debt at graduation should be less than your annual starting salary. When student loan debt is less than your annual income, you should be able to pay back the loans within 10 years.
When your children are with you at the store, they may see you pay with a credit card, but they may not understand the relationship between the card and the payments you'll need to make later.
The financial literacy website TheMint has a simple debt calculator tool to help children understand the real cost of credit. This tool can show them how long it will take to pay off a senior class trip or concert tickets, and how much more those decisions can cost in interest. They may find they will still be making monthly payments long after the experience is over.
Saving for Retirement
It can be difficult to get children to understand the importance of saving for retirement. After all, retirement may be more than half a century away, whereas the new video game console they want is here and now. As soon as your children start earning income, help them open a Roth IRA. Just $1,000 invested into a Roth IRA when your child is 17 could be worth more than $50,000 by the time he's 67 (assuming 8 percent annual gains).
Once you've taught your child how to create a secure financial footing, it's important for them to know how to protect it. Accidents and disasters happen, and if you aren't adequately insured, they can leave you in financial ruin. Health and auto insurance are a great place to start since your child regularly experiences going to the doctor and may be driving their own car. How much does their doctor visit cost? What is covered by insurance and how much do you pay out of pocket? A fender bender or a trip to the emergency room with a broken bone can be a teachable moment.
Actions Speak Louder Than Words
Amber Berry, a certified financial education instructor, money coach and personal finance blogger from Sacramento, California, says children learn a great deal more from what their parents do than what they say. For that reason, she recommends that parents carefully consider their words and actions surrounding their money behaviors and focus on productive conversations.
To put that advice into action, Berry offers the following tips:
- If parents are fearful or stressed about money, children may associate money with stress. But when parents talk openly about money, it can normalize the conversation for children once they are old enough to understand the ins and outs of money management.
- When children only see a parent spending and shopping, they might think spending is the only thing money is for. As an alternative, take your child along to the bank to deposit money into savings. Allow them to see that you spend and save. It will greatly open up their perspective.
- If parents argue about not having enough money, the child may internalize that fighting is an appropriate response to running out of money. Instead, practice proactive problem-solving such as reducing expenses, meal planning, coupon clipping or earning extra money from a side job or working overtime. This shows children that when mistakes happen, you need to identify the problem and then figure out how to fix it.
Resources for Parents
Berry recommends YouTube and the public library as great free resources on college financial literacy for parents. Start with simple topics, like how to make a budget, responsible spending and using credit cards wisely.
Even if parents have made some financial mistakes, they can still set a good example for their children and teach them to be fiscally responsible. It's important to start teaching your children early so they can begin practicing good habits while they are young.
"It's far easier to teach this to kids," DeMeo says, "than to adults who've made a mess of their finances, especially by the time they come to me."