Do you feel comfortable talking to your children about money? It can be a tricky topic, and of course it’s only one of the many tricky topics and conversations with teens. But by being open with your kids about money, you can share your values as well as teach them basic financial management skills. According to a report by the Consumer Financial Protection Bureau, the teen years are critical for establishing strong financial decision-making habits that can help them navigate their financial lives well into the future.
We host an annual Financial Literacy Night for teens and young adults, usually in New York City office in the summer. And I recently spoke at the Lenox Library in the Berkshires in honor of the Federal Reserve Board’s Money Smart Week and Financial Literacy Month, covering many of the same issues, for the young and not-so-young. These are some of the topics I cover:
Handling an income
Whether kids earn an allowance or work a part-time job, they likely need some guidance on what to do with the income. Help them set up a “spending mindset” from the beginning: How much do they spend on themselves? On friends? How much to save for the future or a big goal? Do they allocate some to donate to charity for those less fortunate? Automating a percentage to each will help them save and keep a clear eye on their goals.
With that first paycheck, sit down and help them review the information on the pay stub or online statement. The terms can be confusing, even for adults sometimes: gross pay, net pay, federal income tax, state income tax, Social Security tax, and Medicare tax. It can be distressing to see how income taxes cut into your take-home pay – I remember being shocked by how tiny my first paycheck actually was after taxes.
Building a plan
I hate the word “budget,” because of its negative connotations of scarcity. I like to call it “allocation of resources” but the process is the same. List the sources of income, then list the expenses. If they are out of college, they may have non-discretionary expenses such as rent, a car payment, a cell phone bill. I always suggest adding an expense line item here also for savings, to make sure you “pay yourself first.” Then the discretionary spending such as meals out and entertainment. Subtract total expenses from total income. Hopefully the number is positive, but if it’s negative there is the chance for a good conversation.
You can help suggest ways to earn more money or cut back on expenses, but resist the temptation to bail them out. The point of establishing a budget is to give your child a taste of what it’s like to earn an income and pay expenses without running out of money each month.
Your child may be ready to start saving for larger goals such as a new computer or a car and longer-term goals such as college graduate school. Encourage them to put those goals in writing to make them more concrete. Consider offering incentives, such as matching what they save toward a long-term goal. Studies show that this type of parental help is much more effective in raising a money-smart adult than helping them out with their expenses or wants. It helps them build a sense of accomplishment to watch their money grow, and it reinforces healthy savings habits.
Getting familiar with credit
While credit card companies now require an adult to co-sign a credit card agreement before they will issue a card to someone under 21, your kids might get letters in the mail with credit offers. Good credit history will help them get lower rates in the future, and bad credit history will haunt them for years. So it’s worth establishing and maintaining good credit by paying bills on time, and not using credit to spend beyond their means. How is credit card interest calculated? These are important lessons.
Being a smart consumer
Encourage them to be mindful of how they spend money. Teach them the difference between “needs” and “wants,” and to ask themselves hard questions before big purchases.
• Do I need this?
• Why do I want this?
• Can I afford this item?
• Do I need to buy it now, or can I set aside money to buy it later?
• Am I getting a good deal, or should I shop around?
It takes a lifetime to build good money habits, but a focus on skills and also on the emotions of money in the early years can set a solid path for them.