Far too often, a student entering college or a young adult joining the workforce has had little exposure to money management or understands the value of financial planning because he or she did not have to do so before that. Financial planning is essential for every part of life, from getting your own place to live to studying in college and going on to bigger goals in your life.
Student loans are a great example of this necessity for financial literacy and planning. With a 11.2% delinquency rate on student loans, according to fourth quarter 2016 data from the Federal Reserve Bank of New York, it is essential to have some financial education to prevent this kind of mishap from happening as best as possible. On average, a borrower aged 20 to 30 years old pays $351 a month in student debt, according to the Federal Reserve Bank of Cleveland. (For related reading, see: What Are You Teaching Your Kids About Money?)
Financial literacy is not part of most public school curriculums at any age and not common in private schools either. However, being educated about money can make a huge difference in the quality of life of your child at every stage in life. It is important that as a parent, you teach your kids good money habits early on as best as you can to help them become self-sufficient and financially well prepared for their futures.
So many adults today would have benefited from financial education earlier on. Getting student loans and not knowing how to balance a bank account or manage money is unfortunately a common problem. This can be overcome however, through a little financial education. You can even make it fun and rewarding.
Starting Early: Elementary School
Maybe you did this as a kid yourself where you saved your money in a piggy bank or jar. Doing this with your kid is a good exercise especially if the container is clear and your kid can literally see it fill up.
Pay attention to your own behavior. Do you argue about money with your spouse or kids? Set a good example as kids often imitate and mimic the adults around them. When you go out shopping, do you pay with a credit card, debit card or cash? If you are always paying with a credit card, are you paying that balance off in full every month? Think again about the example you are setting for your kid.
Teach your child the cost of things they want to buy. For example, if your kid wants to buy a toy or game, encourage your child to use the money saved in the jar to pay for it and have your kid purchase it from the cashier in front of you. There’s nothing like direct hands-on experience for learning these things. (For related reading, see: Is Your Child Ready for a Credit Card?)
Encourage your kid to give and share. When you are making a donation to a charity, religious organization, fundraiser or just directly to a person, see if you can involve your kid as well in a positive way. Teach them to give.
Middle School and High School
You can build upon the good habits your kid has learned so far, encouraging your child to really learn the cost of anything they wish to buy, be willing to work for it and be willing to share with others.
Opportunity cost, in simple terms, is a comparison cost of buying any item compared to another. Give your kid examples of this when he or she wants to buy something so your kid will learn the cost of things and begin making good decisions regarding financial purchases. For a kid, it could be a game he or she wants to buy that you compare to clothing, footwear or anything else in a similar price range. You are essentially giving your kid a budget to work with and encouraging your kid to prioritize expenses. Make it fun and encourage your kid to think and question.
Some parents give their kids allowances or payment for doing chores. However you wish to do it, teach your kid that he or she can earn money through behavior and completing work.
Next, set up a bank account with your kid to help manage money. This is the next step in becoming responsible about money and it is a huge thing for your kid. It can be a simple account, but your kid is in charge of managing the money in it.
When your kid is a teenager, having a job is a great idea part time. It should be something that does not interfere with their school and offers them a way to earn money. It could be babysitting. for example, or doing outdoor chores for people in the neighborhood like mowing the lawn. Most teenagers have a lot of free time on their hands in the summer. You can help your kid be active and learn, while making money through a summer job.
You’ll also want to explain to your kids about credit card usage and how it can affect almost every aspect of your financial life. You will want to explain what interest rates are and give examples so that your kid is clear on the dangers and how it is easy to get saddled with debt. Many teenagers go on to get credit cards as soon as they are eligible.
The more you can teach your kid about saving, budgeting, smart credit card usage and being eager to work and earn, the more you will succeed in helping them be financially smart and healthy. Show your kids the value of compound interest and how saving early and often can protect their future, give peace of mind and provide financial independence.
(For more from this author, see: 5 Costly College Mistakes to Avoid.)