What Should I Be Teaching My Teenager?
Part 3: Ways to Guide a Child to Financial Maturity and Security!
If you’ve been keeping up with our blog, you’ll be familiar with these suggestions for introducing and teaching children about money and how to manage it. Here are the pointers that were discussed:
- Show emotional joy when saving
- Teach them the difference between a “want” and a “need”
- Teach them to set goals
- Teach them how to save
- Teach them how to make a deposit and how to read an account statement
As the children grow up through junior high and into high school, it is a good time to teach them more about the household budget, credit and interest. We all know that learning comes best by doing, so it is highly recommended that you provide more opportunities for them to work with cash. The objective is to see if they work toward their goals and within their budget.
Setting goals and really being able to understand the difference between a “want” and a “need “is so crucial to creating a budget. It is important to show that a well-planned budget not only leads to living a meaningful life but also to a healthy savings program. As parents, we may want to make sure that we help them create a budget that not only makes sense to them but fits in with the family budget too. Like everything in life, children/teens should learn and understand that everything has a parameter to grow and expand in.
It should come as no surprise that children and teens really like receiving an allowance. As a teaching mechanism, provide a meaningful amount that is based on joint expectations between them and you as the parent. It is probably not a good idea to come across as a dictator of why the allowance is limited to whatever you decide to make it because they would fail to see any reason for your decision. In other words, you should really consider having an open discussion about the family budget and what goals are set for the financial well-being of the family. By doing this, the youth are more likely to understand the importance of money management, why their allowance is what it is and how they fit into the larger picture of supporting the family.
If they receive an allowance, allow them to use it with the stipulation that they must also be accountable for how they used it. Practice is the key to learning and the only way for them to learn is to actually take control of their actions while you provide mentoring, direction and oversight. Your role is to monitor if they are living within the means of their budget and saving for the goals that they created.
Once they show some signs of responsibility and financial maturity, it is a great time to talk about interest and credit. Earned interest can be described as free money – or the best use of it. Everyone likes free money so teaching them how to make their money work for them should be a welcome conversation. Point out that credit unions, banks, investment firms and others are willing to pay you (interest) for the use of your money. Some are willing to pay you more than others and although that is important, it is not the only thing to consider when loaning it out. Share with them the different ways you let your money work for you and why you chose to put your money to use. This should include the discussion of risk and how every decision made should consider the risk of the borrower. Create a game to play in the family where members are willing to pay interest to them for the use of their money. Be sure to explain that each family member has a certain risk that may affect their ability to repay and then watch how they react and make decisions. This makes for a realistic situation provided in a safe environment that can be used for teaching.
Now would be a great time to introduce a discussion about credit cards. A great way to describe the use of a credit card is to say that “credit cards are used to purchase things just like using cash. If you purchase something with a credit card then you are actually borrowing money that must be paid back in a certain time with interest. Using a credit card is just like taking out a loan.” The credit card is definitely not free money because you have to pay it back, and the longer it takes for you to pay back the more it will cost you.
However, there are times a credit card can be a great tool to use for the right reasons. Some good reasons are:
- For emergencies when cash is not available
- To help build up your credit score which is a representation of your reputation to keep promises on paying back money to people on time
- To make smart investments that fit your goals and budget
- Some give rewards for making payments on time
- If they are stolen, a credit card company will usually not penalize you for what the thief purchased with it providing that you immediately reported the card stolen or lost.
Hopefully you can use this information to help teach your teenagers more about the importance of using a budget, cash, interest and credit cards. If you implement these suggestions as well as the techniques provided to you in our previous posts, you’ll be on the way to having a Money Smart Teen before you know it!
Our next blog post, Part 4, is the last in the series: Ways to Guide a Child to Financial Maturity and Security. We will provide suggestions geared for the college student!
Please stay tuned and feel free to leave your comments.