If you teach your kids the principles of personal finance, the positive effects can last them a lifetime.
Of course, the skills that are required to manage finances have changed a lot in the last 20 years. Checkbooks used to serve as the record of personal finance decisions, but most kids today have never seen one, and will likely spend very little time ever “balancing” them.
A new set of financial skills is needed to navigate personal finance. Make sure your children understand all of the following…
How to Create a Monthly Budget that Includes Automatic Withdrawals
The modern kid usually manages a lot of subscription services. Maybe Netflix for movies, Spotify for music, Twitch for streaming and probably a few more. When you’re teaching modern budgeting skills to your children, you should start with teaching them how to budget around these services.
This is a good opportunity to teach your children not only about the importance of budgeting enough money for the charges but also timing when charges will be applied to their accounts throughout the month.
How to Draw Interest with Savings
You should teach children to save money as early as possible. However, you can do a lot better for them than having them stash their money in a piggy bank. Most banks offer savings accounts for even young children, and that means you should take the first steps toward teaching your children about collecting interest.
Children’s saving accounts are not going to generate much interest—probably not more than a few cents a year. However, that’s still an opportunity to teach them to choose the option where their money makes money for them, over the option where it doesn’t.
How to Choose Purchases with Lasting Value
Once your child has started to build savings, they are likely to get excited about the increasing value of the things that they can buy. This is the perfect time to make a lesson out of purchases that result in a lasting value, and those that don’t.
Guide your child toward high-quality purchases that have a resale value when they get bored with them. That means durable products from quality brands that have a market of collectors or second-hand enthusiasts. Try to help them understand that if they care for these things, they can become “assets” instead of just temporary satisfaction.
How to Manage Debt
It may nearly be time for your child to get their first credit card. Giving a child a credit card be a stressful decision, but it’s important that they learn how to manage credit before they’re fully independent. Having credit is an intoxicating feeling, and you don’t want them to experience it for the first time when they don’t have anyone to give them guidance.
Managing debt involves three skills that need to be taught together
- How to track debt: Fortunately, in the age of technology, it’s easier to track debt than ever before. Teach your child to check their balance online regularly so that they always know the total amount that they owe and when it changes. This is a good way to catch identity theft early in addition to being a prudent financial skill.
- How to understand interest: Your child’s first credit card will likely have an awful interest rate, but that’s why it’s important to keep the initial credit limit small. A painful interest rate is a great teaching tool as it will no doubt frustrate your child to see the effect that interest has on the total balance.
- When to refinance: When it comes to larger balances, a significant amount of money can be saved by transferring the balance to a new card with a lower interest rate. Make sure that your children understand that this is an option. If possible, supervise the first time they do it.
How to Develop a Lifelong Savings Plan
Your child may be young now, but life moves quickly. Almost no one feels that they started saving early enough. Many people don’t even seriously consider what’s going to happen to them in retirement until they’re middle-aged.
That’s why it’s necessary to start teaching your children to have a long-term plan now. Talk to them about their financial goals for the year, for the next 5 years, the next 20 and even retirement. Teach them about long-term savings vehicles such as IRAs.
It may be hard to convince them to take these discussions seriously at this stage in their lives, but you can help them develop it as a skill by constantly keeping it on their mind.