10 Money Lessons to Help Your Kids Avoid Debt
When it comes to teaching financial literacy, parents play a vital role in how kids will manage their money in the future. Here are ways to raise smart money managers.
Teach them to save. Many families are only one job loss, medical crisis or legal issue away from falling into serious financial trouble. Understanding the value of saving is a simple first lesson in personal finance. Provide a piggy bank for your youngster to collect change. Later, open a personal savings account in your child’s name for him to squirrel away half of all his earnings and monetary gifts.
Budget together. Demonstrate to your kids how you manage expenses like groceries, bills, mortgage and car payments, while still setting money aside for savings like college, retirement and emergencies. If your own financial history is spotty, talk about how poor budgeting decisions have caused you problems.
“There is nothing wrong with being honest with children and letting them see you improve yourself. It’s actually a very valuable and humbling teaching opportunity,” says Tonya Jensen, Credit Law Center, Lee’s Summit.
Discuss the importance of living within your means by prioritizing necessities and carefully choosing the types of items you purchase on credit. Stress the importance of paying off credit cards to avoid getting saddled with long-term debt.
Help them understand debt. Do your children receive a weekly allowance? Next time they ask to borrow money, create an I.O.U. and bill them for your loan.
“When it’s payday, lay out the money that they are to receive. Then, go back to the debt they owe you and take it away,” recommends Latoya Goree, director of the University of Missouri-Kansas City (UMKC) Office of Financial Literacy.
For example, if your child receives a $10 allowance and owes you $7, lay out 10 one dollar bills and take away seven to collect on the loan. Your child will realize he’ll have to manage on $3 until next payday.
“This gives them a visual example of what it means to be in debt and how it feels in the moment,” Goree says.
Teach them to plan ahead. Maggie Root, Lenexa, says that any money her sons, ages 12 and 17, earn or receive is divided three ways: 50 percent toward extras, 30 percent for education and 20 percent for charity.
“By expecting our boys to plan for college, advanced degrees, etc., this gives them more ownership of their future,” Root says. “We’ve noticed that our oldest is intent on getting higher ACT scores so that he can qualify for scholarships, thus using less of his nest egg for education and maybe using that for something else once he’s out of school.”
Offer incentives. Root’s oldest son, Jack, uses a portion of his earnings from his part-time job toward his car insurance.
“We agree to pay for his vehicle and tags as long as he meets our requirements for academic and leadership performance,” Root says. “If he makes the scholar roll, we will pay his insurance the following semester.”
Balance a checkbook. Open a checking account for earnings to cover expenses like gas, insurance and entertainment. Although many people now use debit cards and bank online, kids still should learn how to write a check and balance a checkbook.
Establish a positive credit history. According to the U.S. Federal Reserve, the average credit card debt of U.S. households is roughly $5,700.
“Credit affects every area of our life and future,” Jensen says. Teens can open a CD credit builder loan through a local bank, which will count as an installment line of credit.
Another option is to add your child as an authorized user on your credit card.
“Parents don’t even have to tell their child or give them the actual card,” Jensen says. “This will build their credit and give them instant history for a revolving line of credit.”
But proceed with caution. If disaster strikes and you have to file bankruptcy or are unable to pay the credit card off, your child’s credit score will be damaged too.
“I would rather the student or the child acquire credit on his or her own merit. But a parent should be diligent in helping to educate their child about wise use of credit,” Goree advises.
Borrow smart. If kids get in the habit of only making the minimum payment on credit cards during their college years, they’ll start off their careers under a burden of debt. Plus the accrued interest can negatively affect their credit score, making it harder for them to buy their first home or a car.
Student loan debt is another area where young adults can get into trouble. Encourage your children to borrow only what they need even if they qualify for more. “If they borrow too much, it affects their ability to maximize their income later,” Goree says.
Raise an investor. Root helped Jack set up a small investment account to manage. “He really took to it and has used this in his high school business class,” Root says. “He has a good understanding of the stock market compared to his peers.”
Check to see whether your child’s school participates in the Stock Market Game, which is a national competition for grades 4-12. The game provides $100,000 in virtual cash for student teams to invest in real companies. UMKC, which sponsors the Stock Market Game for Missouri schools, has reached 17,000 students this year.
Give back. Help your child understand the value of giving back to the community. “Charitable giving builds character,” Goree says. “It builds commitment to the community and it builds integrity as you are producing productive citizens for society.”
Financial Literacy by Age
- K-6: Learn to save. Make choices: “What purchases are you willing to give up in order to have what you want most?” Consider offering allowance for extra household chores at around age 10.
- Middle school: Learn the basics of budgeting. Manage first-time earnings into savings and weekly expenditures.
- High school: Budget earnings, discuss credit cards. Plan for future needs like college or for a new car. Learn about investing and the importance of charitable giving.
Source: Latoya Goree, UMKC
Freelance journalist Christa Melnyk Hines and her husband are the parents of two boys. Her latest book is Happy, Healthy & Hyperconnected: Raise a Thoughtful Communicator in a Digital World.