Your child is about to leave the nest and strike out on their own, but do they have the financial knowledge to not trip right out of the gate? It is unavoidable that they will make a few financial mistakes, but you can help them to avoid the biggest pitfalls. With solid conversation, real-life calculations, and letting them test their personal finance skills while you still control the purse strings, you can help your child gain a strong financial footing before they move out.
1. Teach Them How To Make (And Stick To!) A Budget
There are many different ways to craft a budget, each with its own pros and cons. The important thing is having one and sticking to one. Sit down with your child and show them your own family budget. Remember that transparency and vulnerability with your children in financial conversations speak volumes! Explain to them how you determined different category amounts, how you track expenses throughout the month, and how you manage surplus funds or overdrawn line items. Mention that adding a bit of “fun money” every month is not irresponsible and often encourages better adherence to the budget as a whole! Have your teenager build their own budget and stick to it, using either their paychecks or allowance as income and shifting cell phone or gas payments to their responsibility.
2. Show How To Balance A Ledger
There’s something to be said for paying with cash and check, with physically writing down the total amount or seeing the bills change hands. In today’s culture, where most transactions are done digitally or using a credit or debit card, the financial exchange’s reality can become a bit abstract. Encourage your child to keep a physical ledger or check register, whether or not they use checks, and record every purchase they make when it’s made. Teach them actually to open the monthly bank statements and balance their ledger. This can avoid that sinking feeling of logging in to the bank website and seeing that funds are significantly lowered than they estimated they would be.
3. Compare and Contrast Bank Interest Rates and Fees
All banks are likely the same in the eyes of your teenager. Show them the differences in interest rates between various banks and how they would affect their savings account. Get into the weeds of financial lingo and explain what APR and APY means. Print out some of the fine print pages from different banks and show your child the bank fees and how they differ from each other. Is ordering checks going to accrue a fee? What happens if the account is overdrawn? What sorts of saving accounts do they offer?
4. Look Toward The Future With Retirement And Investing
Your teenager may scoff at the idea of preparing for retirement now, but show them the figures! Using Excel formulas or online calculator websites shows them the compounding interest value, even in a simple savings account. Show them how even small contributions to a Roth IRA now could become significant by the time they’re at retirement age. Explain what a 401(k) plan is if a future employer includes matching contributions in their benefits package. Then revisit that budget you made together – what percentage of income do they have put aside to save? Could it be increased? Could it be divided between savings and investing?
5. Illustrate debt
The biggest pitfall on the financial road of your child is a poor concept of debt. While not all debt is bad, all debt can be dangerous. If you have a mortgage, find your paperwork and show them how much of the monthly payments is interest. Work out the calculations for the interest rates on auto loans, credit cards – even their own student loan, if they’ll have one. Using credit card interest rates, show them how quickly debt can spiral. One of the most important things you can teach your teenager is how crucial it is to get out from under debt quickly.
6. Get Into The Weeds About Credit Cards
Conversations about bad debt often center around credit cards, and rightly so. However, credit cards can be a useful tool if used wisely. Whether we like it or not, credit scores are how most banks determine loan eligibility and amount. If you decide to let your teenager apply for a credit card, firmly set and explain some boundaries. Stress how crucial it is for balances to be paid off in full monthly. Give them a heads up that many retail businesses will often reward cards that are actually credit cards, and the perks are rarely worth the temptation.
7. Teach Them To Be A Smart Consumer
Sometimes money does need to be spent on a necessary purchase. Many children striking out on their own have a sizable list of necessary purchases as they buy furniture and appliances for their house. Teach them that the cheapest option isn’t always the best value – quality and longevity are things to consider as well. Help them to consider which features on appliances would actually improve their experience and which are more niche or flashy. With furniture, solid wood will cost more but last much longer, saving money on repeat purchases – and solid wood furniture can be found at second-hand stores for a fraction of the cost of even new boxed furniture!