Smart Money Sense Starts Early!

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Every parent hopes their child will make good financial decisions as an adult, but making that hope a reality requires more than wishful thinking. Children who grow up without gaining a working knowledge of money and credit have a harder time as adults. Providing age-appropriate financial education at each stage of childhood can save them from making serious mistakes as young adults and later in life.

If you’re a parent, strive to be a model of good money and credit habits for your children. You can give them additional tools for financial success by taking time to talk as often as possible about earning, spending and saving. Don’t miss any opportunities to positively shape your child’s financial attitudes and habits. Remember that if you don’t teach them about money, they could have to learn some hard lessons on their own.

Giving young children an allowance in exchange for completing household chores is a good starting point for their financial education. You can lay the foundations for smart spending by encouraging your child to use his or her allowance for small purchases. Stress how important it is to put some money aside for savings. Buy your child a bank to kick off the saving habit, then provide some guidelines on when savings can be spent.

Children learn about spending by watching what their parents do with money. Unfortunately, they may not gain a complete financial education this way. An allowance provides opportunities to talk with your child in detail about budgeting and setting financial goals. These discussions will help you play an active role in influencing your child’s attitudes about spending and saving.
When my two sons were young, I remember how some parents objected to paying their children for chores that they should do for free as members of the household. I see now in hindsight that another value in earning an allowance is that it teaches children about working for pay. They learn early that if they don’t do their chores, they don’t have spending money later when they want something.

Teenagers who have a job and have demonstrated that they can manage their own money are usually ready for a prepaid debit card. This is the perfect time to help your child open a bank account if they don’t already have one. A parent is required as a joint accountholder for children under age 18; if the child overdraws the debit account, the adult will be responsible. Explain the difference between debit and credit cards, especially the fact that a credit card represents borrowed money. Also explain the value of building a good credit history through the responsible use of credit cards.
Young adults are faced with a variety of credit options by the time they graduate from high school. Once they turn 18 they can open a credit card, though they may need a parent as a co-signer. Parents can also make a teenager or young adult an authorized user on their own credit card to help them understand how credit works, including the importance of paying the card off in full each month to avoid paying interest. A joint account allows a parent to monitor their child’s purchases and payments and use them as a talking point when discussing financial responsibility.

Before giving your child a credit card, discuss credit card spending limits. Make sure they understand that if they don’t pay off the balance on their credit card each month, they may soon reach the spending limit and be unable to use the card until they pay a portion of the balance. Most of all, emphasize that credit doesn’t provide free money and that they’ll eventually have to pay for whatever they buy on credit. Credit card fees, including annual membership fees and late fees, are also important topics for discussion. You may want to suggest that your child set up automatic payments to avoid late fees and missed payments.

Going to college means student loans for many young adults. This form of debt can potentially follow them for decades. Before your child takes out a student loan, make sure you discuss interest rates and minimum payments. Explain how missed payments can damage their credit history. Many young adults become aware of their credit score when they try to rent an apartment or decide to make a major purchase such as a car. Teaching children early that a high score can mean lower interest rates can help motivate them to practice good credit habits.

Feeling responsible for your child’s attitudes about money can be overwhelming at times. For additional resources to help your child develop good credit habits, the Consumer Financial Protection Bureau has a website called Money as You Grow that provides age-appropriate tips and activities for teaching money skills. ■

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