Step 1: Start early ─ It’s important to start talking with your kids about financial responsibility early. Once your children are old enough to have some responsibility and able to perform small tasks, give them a list of household responsibilities and pay them a weekly allowance for completing those chores.
Help your kids make decisions with the allowance money they earn: How much should go into savings? Developing an understanding of these concepts gives kids the financial confidence that will eventually lead to financial independence.
As your kids grow, teach them by modeling financial responsibility. Have budget discussions around the kitchen table with your children present. Share with them the family budget and talk about the times when you have to make financial trade-offs.
Step 2: Set goals ─ Encourage your kids to set goals; after all, goals are the driving force behind any financial plan at any age. Whether they want a toy or a car when they turn 16, their financial plan will be driven by the gals they set. Teaching your kids to think ahead financially, to defer the instant gratification of spending today in order to achieve tomorrow’s goal, will dramatically increases the likelihood that they will become financially independent adults.
Step 3: Develop a budget ─ When your children are ready (typically in their preteens), help them create and manage a budget. Whether they earn money from chores around the house or from work outside the home, give them the responsibility to pay for certain things. Help them understand the basic concept that expenses cannot be greater than income. Help them live within their means, suggesting ways to tailor expenses.
Sit down with your children at least once a month to go over the budget. Look at where they spent their money in the previous month or week. How do they feel about those spending decisions in retrospect? Do they wish they would have done things differently? When you have these kinds of conversations with your children, you’re showing them how to think about money and how to make decisions.
Step 4: Build credit ─ Developing credit is a very important part of financial planning. Good credit will enable your children to buy a car and buy a home at reasonable interest rates. Unfortunately, credit is one of the areas where young people tend to have the most trouble.
There are a number of ways to help your children prepare for the responsibility of a credit card:
- Prepaid credit cards function in much the same way as debit cards do ─ not letting the cardholder spend above the prepaid amount ─ but at the same time are reported to the credit bureaus like a true credit card, allowing the cardholder to build up credit.
- Once your children have mastered the science of living within their monthly budget, you may allow them to take out a low limit credit card.
Step 5: Save ─ A savings account is a great way to get your children into the habit of saving (and it is a habit, as well as a mindset). As they get older, you might look into higher earning, low-risk investment accounts, money markets, or government bonds as ways for your children to save toward longer-term goals. These kinds of accounts do not require huge upfront investments and typically have higher rates of return than savings accounts. They’re a great start to understanding the different types of investment vehicles and the trade-offs of each.
Step 6: Let go ─ In financial planning, if your children never know what it’s like to be truly self-reliant ─ if they never have the opportunity to make mistakes and correct them ─ they never will become financially independent.
Resist the temptation to bail your kids out every time they are in a financial crisis. When they run out of money before the end of the month, let them fill the consequences of having to eat a sack lunch while their friends go out. Next month, they’ll think harder about spending more than their budget.
Please call if you would like to discuss this in more detail.
Copyright © Integrated Concepts 2012. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.