Updated: Jul 27, 2019
The first 18 years or so that a child lives under their parent or guardian’s roof are very crucial. Children learn almost everything from their parents and they either go to one of two extremes. Whether they like it or not, children are usually either just like their parents in certain areas, or they specifically choose to be the complete opposite of them. One thing they pick up, whether good or bad is how well their parents handle their finances. For this reason, I think it’s imperative to give our children a great jumpstart by introducing positive financial principles to them as early as possible. Here are a few tips to help get you started.
1. Start the conversation as soon as your child starts their first job
No, I’m not talking about their official first job with a W2. I’m talking about that first wad of cash from babysitting, cutting grass, or shoveling snow, etc. When they come home with their big bucks overflowing out of their tiny pockets, take some time to count it together with them. This is a great opportunity to set the stage for how they view work and their earnings going forward. Discuss how hard they had to work, how long they had to work and how they feel about the amount of money they made. Then ask them if they have a plan for the money. Maybe there’s a toy they want to purchase or some candy. Whatever it is, make them set aside a certain amount for their piggy bank to save for a rainy day.
This is also the best time to introduce your child to tithing. Teaching them to give 10% off the top at the very beginning will more than likely help them continue this biblical principle into adulthood.
Whatever you do, DO NOT let them spend the entire amount they made. The goal is to teach them not to live paycheck to paycheck. So even if you have to help them and put up a few dollars for them to get the item they worked hard to get, that’s ok. Make sure you continue this practice every time they bring home money to establish a habit. You can also do this with gift money they receive on birthdays and holidays.
2. Take them to the bank to open a checking and savings account
This is something you might try during the teenage years. Most people only use their debit cards and on-line bill pay, but everyone should at least know how to write a check, so make sure you school them on checking writing. Go over the checkbook register and show them how important it is to keep a good record of what they’re spending in order to avoid overdraft fees. Make sure the banker goes over their deposit and overdraft policies, as well as any bank fees associated with the account. Your child needs to know if they deposit a check, it may or may not be available to withdraw immediately. Plus, they need to understand how fast overdraft fees can eat up their hard-earned money.
3. Get ahead of the credit card scheme
As soon as your child turns 18, the vultures (I mean the credit card companies), start swarming in with multiple offers of 3.375 inches x 2.125 inches of shiny new plastic. It’s so easy to get caught up in opening numerous accounts, especially different cards for their favorite shopping spots. It’s even more easy to run up balances, but extremely hard to pay it back down to zero. If your newly grown person isn’t careful, they can set themselves up for severe credit debt before their next birthday.
Having one major credit card in the event of an emergency is not a bad idea, but make sure they understand why it’s so important not to go credit card crazy. They should know that if they can’t buy it with funds from their bank account, they shouldn’t charge it because they really can’t afford it.
4. Teach them to pay their bills on time
Whether it’s their credit card bills, car insurance, rent, etc., they need to learn how important it is to pay all of their bills on time every single month, no matter what. When they are first starting out, they don’t even have a credit score or history, so once they start acquiring credit, everything they do will greatly impact the building of their credit score and history, whether it’s good or bad.
Those 30, 60, and 90-day late marks will stay on their credit report for at least 7 years. That will greatly impact the interest rate they receive when it is time to finance a large purchase such as a car or house. The higher the interest rate, the more they will pay over the life of the loan.
Unfortunately, it’s much, much easier to lower your score than to increase it. You can help your children by having them pay their own car insurance bill or something small while it’s still in your name (have them pay you, so you can make sure it’s paid accordingly). That way you can monitor them and counsel them whenever they don’t have the full amount or don’t pay it on time.
5. Charge them rent
If you have a child that is 18 or over, not a full-time student and still living at home, it’s okay to charge them rent. It doesn’t have to be a large amount of money, but set a specific amount that they are to pay every month on a specific date. This will prepare them for when they do move out and get their first place to stay on their own.
If you feel bad accepting money from your child, don’t tell them, but open a separate account and deposit the rent they pay you into that account each month. Once they do move out, gift the money back to them, because they’ll need it for moving or furnishing their new place anyway.
6. Teach them to start saving for retirement as soon as possible
This discussion should take place when they land their first full-time position. It’s a great time to educate them on the importance of retirement savings, even though it may seem so far away for them. The reality is, the sooner they start, the better off they will be in the long run. Before they start acquiring the large bills and debts we all encounter upon adulthood, they should start saving at least 5% to 10% of their salary. If that is too high based on their bills, starting at 1% or 2% and gradually increasing the % each year is much better than doing nothing.
If their employer offers a company match, encourage them to contribute the maximum amount to receive the maximum matching funds allowed. Never ever leave free money on the table.
7. Inform them about life insurance
Talk to your adult child about the importance of life insurance. If you don’t already have a policy in place for them, this might be a great time for them to start their own. At 18 or 21, the rates are still extremely low and there are policies available that actually build cash value which will allow your child to pull out money if needed later in life (check out insure.com or talk to a licensed insurance agent for details).
8. Lead by example
Our children learn firsthand from us. Ask yourself: How did your parents handle money? Do you handle your finances in the same way or did you choose the opposite route?
Like most parents, I’m sure you want the absolute best for your children and if you struggled with finances, you probably don’t want them to have to struggle too. Likewise, if you have done really well with your finances, you want to help your children have the same or better financial success than you have. Either way you are going to lead them, so why not lead them in the right direction?
Do you have a tip you want to add? Please comment below…