In an age of credit cards, debit cards, and mobile payment methods understanding finances is the foundation of financial freedom and planning for the future. So what can you do to help your child develop healthy financial skills?
Children learn a lot about finances just by watching their parents over the years. Once they start earning money on their own, though, they may need some hands-on guidance, supervision, and feedback.
Results from a 2015 international assessment show that more than 66% U.S. teens talk about finances with their parents weekly or monthly. It’s paying off, too. These teens have higher literacy scores – meaning they have better money sense – than teens who don’t talk to their parent about money.
When is it Time to Have the Talk?
It’s never too early to talk about money with your child. The age of your child, however, will determine how you shape the conversation.
Let’s say your teen or young adult has either just started earning money or is becoming more independent. He may need help figuring out how to manage his funds and make good financial decisions. Consider these talking points about earning, spending, and saving money:
Many kids are often surprised when their first paycheck is smaller than expected. Explain how federal and state taxes are deducted from each paycheck. Note the difference between gross pay, the amount before taxes are taken out, and net pay, which is the amount after taxes are taken out.
Spending and saving
Warren Buffett once said, “Do not save what is left after spending, but spend what is left after saving.” Managing money can be difficult, so practicing healthy money habits early is vital. Encourage your child to open a bank account and save at least 10% of her paycheck – that’s a dime for every dollar earned. It may seem small at first, but over time the amount will grow. Goal setting also helps incentivise savings. It’s easier to save money when there’s an objective.
Budget, budget, budget
“I don’t make enough money to have a budget.” “I’m not good at math.” “I keep track of what I spend in my head.” Whatever the excuse, anyone who earns money can and should have a budget. Budgets don’t have to be fancy – just something to allocate how funds will be spent and saved in the future (not after it’s already gone).
Credit cards – worth the risk?
If your child is an older teen or young adult, understanding how credit cards work is the crux of financial literacy. It’s easy enough paying cash for lunch, but buying a car? Not so much. Credit – and more importantly, good credit – has many financial benefits. Good credit makes it easier to get lower interest rates on loans. Also, landlords, utility companies, and even cell phone service providers often look at a person’s credit to determine creditworthiness.
Don’t worry if you’re not a pro when it comes to finances. There are plenty of ways you can learn new financial skills and share them with your child. If you’d like to become more financially savvy, check out Boston Builds Credit, which offers free workshops and financial coaching.
Bank of America
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