‘Tis the season: Seven tips for teaching your kids about finances
Last week, Marge and Bob called from St. George, Utah. They had concerns about their teenagers. They asked what experience we have in handling financial education for that generation. Their son, Bobby Jr. (age 13) hoarded his allowance, would rather trade than buy new, and was overall parsimonious. Their daughter Jessica (age 16) never saw a bargain she couldn’t pass up, focused on discounts and not what she was spending, and bought things because she “needed and deserved them.” We mentioned to Marge and Bob, in terms of behavioral finance, they actually had a “normal” family! While we haven’t written the book on “Teenage Financial Education,” we certainly have personalized it, and have seven ideas Marge and Bob might consider for financial education homeschooling.
1. Take your teenager to the bank with you. Introduce them to the bank manager and teller. Explain the process of deposits, withdrawals, writing checks, debit and credit cards.
2. Teach accountability. Help your teenagers learn to count change, check correctness of receipts, and prior to purchasing, understanding return policies.
3. Demonstrate how money can grow. Even small amounts of money at low interest can compound meaningfully over a period of time. Start with the “Rule of 72”, i.e. to find the number of years required to double your money at a given interest rate, divide the interest rate by 72. For example, if you want to know how long it will take to double your money at a 4% interest rate, 72 by 4 and get 18 years!
4. Explain how debt can grow. Debt can be insidious! Those of us old enough can remember our grandparents from the Recession telling us, “Don’t spend more than you have” and “Debt is bad.” Teach your teenagers to take out debt only on an asset that grows in value. Debt on a personal home can be acceptable, but debt on a new car, not so much! Teach how credit agencies (like Experian, TransUnion, etc.) track our debt paying record, and how that influences the interest rates we pay in the future, or even our ability to borrow. Discuss your own credit score.
5. Show your children how to budget. Teach terms like “income” and “expenses.” Should your teenager be so fortunate to have a job, or an allowance, ask them to write down the amount they earn in a month as “income.” Then, ask them to list everything they spend money on (e.g., clothes, snacks, school supplies, or video games) as “expenses.” Help them learn how to keep their expenses at 90% of their income, so that they may start saving 10% while they are so young. Show them your paystub and explain the impact of various taxes on your income, and why there is a significant difference between “gross” and “net” income.
6. Take your teenager with you to your investment advisor. Ask your Certified Financial Planner ® to show examples of the financial security that can be obtained by setting realistic goals and achieving them. Discuss a few of the investment vehicles available like stocks, bonds, mutual funds and real estate. Explain how these investment vehicles work, especially compared to a bank checking account, and explain why determining “risk” and “liquidity” levels is important.
7. Introduce your child to Junior Achievement. No education is as effective as practical hands-on experience. Search for your local Junior Achievement program (juniorachievement.org/web/ja-usa/near-you), which provides financial education to our youth, and in many cases gives them exposure to the responsibility of running your own business.
Plant the seed of financial education early in your kids. Discuss your own financial successes and failures. Why have the talk now? These are the kids who will be taking care of YOU some day!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Allen Ostrofe, MBA, CFP®, is President Emeritus of Ostrofe Financial Consultants, Inc., with clients in 32 states and is a registered Representative with, and Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Ostrofe Financial Consultants, Inc., a Registered Investment Advisor and separate entity from LPL Financial. For questions or suggestions, visit ostrofefinancial.com. Branch address: 420 Sierra College Drive, Suite 200, Grass Valley.
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