To become captains of their financial destiny, your kids need to master these three skills.
In a recent Capital One 360 poll, 87% of 12- to 17-year-olds reported knowing at least an average amount about managing finances. Or not. That study also found that 24% of them think a debit card is used to borrow cash.
And a Charles Schwab poll found that fewer than a third of teens understand how credit card interest works and four in 10 can't budget.
Parents' money talks with high schoolers tend to start and end with "How much do you need?"
"The more you teach your kids before they go off on their own, the better prepared they are," says Daniel Hebert of Jump$tart, a coalition promoting financial literacy.
The most critical skills to impart:
Managing on a limited budget
The key word is limited. "Teens need to know that money is finite," says Anton Simunovic, founder of ThreeJars.com, a money-management site for kids.
How to build the skill. Figure out what you're spending for junior's clothing, entertainment, and gifts for friends. "Then give that amount to your kid and let him pay for those things," says Jayne Pearl, author of a series of books on kids and money.
Set teens up with a checking account and debit card, and when they mess up, resist the urge to bail them out.
"It is important to make them responsible for their financial actions while the consequences are not serious," says Jeffrey Arnett, a psychology professor at Clark University and co-author of When Will My Grown-Up Kid Grow Up?
Paying yourself first
"You want to get your child in the habit of putting something aside," says Stephanie Bell, spokesperson for Junior Achievement USA.
A good goal is to stash 10% of every allowance, paycheck, and birthday check. And nothing provides better motivation than an understanding of how money makes money -- a.k.a. compound interest.
How to build the skill. Use an online calculator to show your teen how compounding works, says Beth Kobliner, author of Get a Financial Life. (Try the Simple Savings Calculator at Bankrate.com.) You might also sweeten the pot by offering to match her with, say, $25 for every $100 she banks.
Steering clear of credit debt
Just 9% of college kids pay their credit cards off every month, a study in the International Journal of Business and Social Science found. Help your child understand the value of being in that minority.
How to build the skill. The next time you pay with plastic in your child's presence, point out that it's borrowed money and that compounding works against you when you carry a balance. Later, show her your bill, specifically the box illustrating how long it will take to pay off and how much it will cost if you fork over only the minimum.
Make sure she understands, too, that you're "graded" on your use of credit; regularly paying late, for example, could result in a higher rate on a car loan. When she's ready for her own card -- around age 21 -- "ask for a $500 limit," says Hebert. Well prepared as your child may be, it never hurts to use training wheels the first time out.
|3 to 5||Money is used to buy things.||Teach your child to identify coins and bills; play pretend store together, and use real money.|
|You earn money by working.||Talk about the various jobs people do.|
|Smart shopping will help you keep more of the money you earn.||Compare prices aloud at the supermarket.|
|6 to 9||You can't buy everything you want.||Start your child on an allowance; let him or her choose how to allocate the funds.|
|Banks keep your money safe and pay interest.||Open a savings account together.|
|It is important to set aside money regularly.||Encourage your kid to save a portion of his or her gifts and allowance.|
|10 to 13||The earlier you begin saving, the better.||Use an online calculator to show the difference between starting at age 10 vs. 20.|
|Credit cards are borrowed money.||Talk about how you pay your bill in full to avoid owing interest on the amount you spent.|
|You pay taxes on income.||Review a paycheck -- yours or a sample from the web -- to show how much Uncle Sam takes out.|
|14 to 17||Interest earns interest.||Use an online calculator to explain compounding; offer to match some of your child's savings.|
|A college degree ups your earning potential.||Investigate careers together at bls.gov/ooh/, noting median entry salaries and required education.|
|You have to budget for your expenses.||Give your teen money to manage some of his own costs; open an account with a debit card.|
|18 to 22||401(k)s and IRAs help you save more.||Use an online calculator to show how money grows faster in tax-advantaged accounts.|
|You need to be prepared for emergencies.||Help your child figure out a goal for a cash cushion; explain the importance of health insurance.|
|A good credit score will save you money.||Show your kid how to get a free credit report at annualcreditreport.com; review it together.|
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