Talking to kids about budgeting and credit is important. But what’s the best way to go about it? The experts at consumer research group NextAdvisor.com have put together a list of 6 potential pitfalls to help parents prepare talking to kids about finance- and how to get around them.
1. Avoiding money talks altogether
Most children have a genuine curiosity about the world around them and are prone to exploring topics on their own. Though they lack the maturity to navigate certain issues by themselves, it’s entirely possible to take advantage of this natural inquisitiveness and slowly guide your child to understanding money over time. By leaving them in the dark or making the topic off limits, you’re giving them cues that might discourage them from thinking critically about finance as they get older. If your kid asks you a money or finance related question, make sure to address the question in an age-appropriate manner. It’s okay to leave out the finer details of something like home equity for a four year old and simply elaborate on the rest later when they’re a bit older. By gaining familiarity with finance, kids can begin seeing it as a necessary part of their lives rather than a mysterious, incorporeal and forbidden force.
2. Not allowing kids to manage their own money or see you budgeting
Budgeting is the cornerstone of any fiscally responsible individual’s financial plan, and that’s why it should be the first thing you should teach your kids about money. While a number of parents already have practices in place that can aid in this process, such as giving out allowances, they often fail to tie this to any broader financial themes. Although giving your child an allowance will begin to help them understand the basics of income, it alone will not teach everything. To supplement the practice of handing an allowance, you can have your kids save for major purchases or items they want, such as certain toys and games. You can also set savings goals for them and have them put aside the money into a savings account. Finally, when they’re mature enough, you can share your own budget and expenses with your child to show them what it’s like to manage an “allowance” at a higher level. Learning how to budget also includes learning about saving. Make sure they understand the need to put aside money for long-term goals and emergencies. This also means teaching them about various saving strategies such as investments that yield interest for the money they've put aside. While the concept of a 401k, Roth IRA or any other type of retirement plan may be a little complicated for young children to understand, an online savings account will be the best place to start, as it earns more interest than an account through a brick-and-mortar bank. Visit our online savings accounts reviews to learn more.
3. Not teaching them about credit
A lot of discussions about financial responsibility tend to revolve around simply managing expenses, which is great, but it leaves out the other side of managing debt and credit. You should develop a strategy to help engage your child in managing their credit. Just like you would give them allowances and savings goals to teach them about budgeting, you could give them a prepaid debit card to manage in order to help them learn about credit. Minors are ineligible to apply for a credit card or request a loan, but that doesn’t mean you can’t begin putting a system in place to make them ready for their first card or loan. A plan for building credit begins with a discussion about credit with your child. This can be as early as you feel your child is ready. You don’t need to wait until they’re a teenager; simply discuss the concept of credit over time so they can understand it. By the time your child is in middle school or high school, they can be made an authorized user on one of your existing credit cards. If you teach them to repay everything they charge, this is a solid intermediary step that will allow them to transition into becoming a credit-responsible adult when they’re able to get credit cards and loans in their name. Make sure you explain to your child the circumstances in which they should use the card and monitor their activity. A handful of banks have a certain type of authorized signers for minors of a certain age (usually around 15 years old) that allows the minor to act similarly to a co-signer — meaning the credit card history and its payments reflect on the child's credit reports. Oftentimes the primary cardholder needs to call the bank to inquire or request this type of authorized user. On the other hand, with most banks an authorized user’s actions will not impact their own credit reports or scores, as the card is only connected to the credit of the primary account holder. In both circumstances you don’t want to make your child an authorized signer unless you completely trust they understand the money has to be paid back, as prematurely making your child an authorized signer may land you some unexpected debt.
4. Scaring your kids away from ever borrowing
Because of the nature of financial reason-ability is framed around expenses, a lot of people come to believe that debt itself is inherently bad and something to be avoided at all costs. Responsible people don’t live above their means and should only buy things they can afford, right? However, credit assessments are a huge part of life. Everything from renting an apartment to even certain types of employment opportunities may require a credit check. The fundamental paradox of credit is that in order to have a good score, you need to go into debt. A lot of young adults not only have a limited credit history, but they also don’t understand this aspect of credit and thus fear borrowing. When emphasizing to your kids the importance of budgeting and living within their means, make sure to also talk about the necessity of credit. It's especially good to instill the importance of only using credit cards or loans for purchases they can already afford, or for purchases that have substantial long-term value (such as a house or college degree) for which they have developed a financing plan. They need to understand that the goal isn’t to avoid debt, but to avoid taking on unnecessary debt or debt which they cannot finance, such as excessive credit card debt.
5. Failing to talk about taxes
You don’t need to have your child look over your shoulder while you file your tax returns, but you should sit down with them when they’re old enough so they can understand the basic aspects of tax returns, including how to properly file and how to ensure they receive their tax refund in a timely manner. At the very least, let your children know that paying taxes is something they’re expected to do as soon as they get their first job. If you have assets or other types of taxable items, like property and investments, make sure you also share this with your child.
6. Avoiding discussions about net worth, income or assets
Sometimes kids ask “Are we rich or poor?” While this is definitely a less-than-ideal topic, it’s likely going to be brought up. This is a touchy subject for parents, but at some point your child will need to know this so they’re aware of any ongoing financial issues affecting the family. While this conversation should be had when your child is older and more mature, aspects of it might be present when talking about other aspects of finance, such as tax forms or budgeting. Similar to the other topics listed above, it should be introduced gradually when your child seems to be gaining the maturity to understand finances.
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