How to Raise a Money-Smart Kid
Parents often lack the confidence to give advice, so here’s a financial primer for you and your kids
Parents are the go-to resource for financial advice, a survey found. But nearly half of parents surveyed graded their own financial literacy at a C or worse.
So, it’s not surprising that nearly nine in 10 surveyed support making financial education compulsory before high school graduation. Where such programs exist, though, they’re often lacking. A review of state policy found less than half the states scored an A or B for high school financial education, and 30% earned a D or F.
If you’re feeling out of your element, as a parent, I recommend The Opposite of Spoiled: Raising Kids Who are Grounded Generous and Smart About Money and Make Your Kid a Money Genius (Even if You’re Not), each written by a journalist who specializes in personal finance.
Steps to consider:
Teach from your mistakes. If you lack confidence because of hard lessons you’ve learned, that doesn’t make you unqualified, it makes you relatable. Here’s what I learned. I want you to have an easier time of it….
Start early. What you convey to a 5-year-old is different than to a 15-year-old, but you can lay a foundation to carry your kid to adulthood. Consider a three-bucket approach to all financial gifts your child receives: Spending, Saving and Sharing.
You decide the percentages, but guiding a child to think about these “uses” for money is groundwork. Saving might be for a short-term goal (toy or video game) and a longer-term one, college or car down payment. Spending is important, too. Giving free rein to spend some money immediately is what makes saving and sharing easier to stick with. Sharing is charitable giving. That’s not just imparting an important life lesson. Studies show that people who donate are happier.
Once your teen starts working (they should) you can discuss your expectations for the saving and sharing.
Have the college talk…in junior high. In a survey of money attitudes among children ages 8 to 14 and the parents who love them, T. Rowe Price found a gaping disconnect: Nearly seven in 10 kids think Mom & Dad should cover the cost of college, yet 42% of their parents say it’s not their responsibility.
Telling a high school junior or senior you won’t or can’t pay for college gives them little time to hatch a plan. Setting expectations before ninth grade gives you and your kid time to create a financially sound plan.
Share the magic of compound growth. Any online compounding calculator should get their attention; for long-term goals (10+ years off) you might plug in a return of 5% or 6%. For short-term goals, plug in 1%, which you can get in a high-yield online savings account. If they have a job, help them save in a Roth IRA.
And the danger of compound interest. The average interest rate on unpaid credit card balances is around 17%. Spend some time together noodling around with a minimum payment calculator to see how unpaid credit card bills can crush them financially.
Many students are surprised to learn that borrowing for school comes with interest charges. When they are still in high school, spend some time crunching the numbers; online calculators can show them the total cost of borrowing including interest.
Have the car talk. Your child’s first debt experience might be buying a car. Without guidance, they are going to be vulnerable to salespeople pushing what a nice new car they can afford with a long-term car loan, or even worse, by leasing.
Explain the multiple payoffs from buying a lightly used car (3 years old).