Parents all want their children to have a better financial situation compared to their own. It is never too early, or too late, to encourage your child towards the goal of financial success. Regardless of their age, it's essential to lead by example and involve them in your finances early on. Here are some ways to teach your children about personal finance before they start getting credit card applications in the mail.
START THEM EARLY
Open a savings account for your child and get them excited about seeing the balance grow. As they start to receive gift money from relatives, and earn money from summer jobs, help them understand the importance of saving a percentage of all their earnings. Explain the concept of compounding interest. Learning about interest in conjunction with a savings account will help later on in understanding the benefits of early investing and smart use of credit cards.
Set small balance goals that your kids can pretty quickly attain. If necessary, as encouragement, consider contributing to their savings account when they reach the goal. When their balance has grown high enough, help them choose from next step options like a high-yield savings account, one or more CDs, and eventually investing.
If your kids can start investing as soon as their first job and take advantage of the first company match offered to them, they will be better off in the long run. Deciding what to invest in can be controversial. However, there is overwhelming agreement surrounding the concept of investing a set amount each month from the start of your first job. To take the stress of investment decisions out of the equation, consider one of the computer-controlled (i.e., robo) investment accounts offered by many banks.
Get your child accustomed to reviewing investment statements. If you are investing in an Education Savings Account or a 529 Plan to fund your child’s college tuition, review the account documents with them. Aside from financial knowledge, there might even be added benefits from this, such as motivation to study harder.
INVOLVE THEM EARLY
Share with your kids your monthly household budget. Even if they are not responsible for paying anything, having an understanding of how much things cost and how incoming monies get distributed will be helpful. When your kids do obtain a steady income, help them set up a zero-dollar budget. This type of budget assigns every dollar earned to a specific purpose, whether purchases, savings, or investing.
The concepts learned from using a savings account and learning about investing will translate well into using credit cards wisely and to your child’s benefit. Emphasize the importance of paying off the card in full monthly. Demonstrate how just a few months of not paying your balance in full can quickly increase the price of your initial purchase way beyond its original cost. Already having a foundation and a desire to save and invest, and seeing the financial benefits of it, will make the desire to pay no interest much stronger. If your child has as a goal taking advantage of their company's retirement plan match, they will not want to waste any money on interest.