Set your Child on a Solid Financial Path that leads to Home Ownership
April is Financial Literacy Month and a great opportunity to talk to your child about the importance of wise financial choices. Financial wisdom, if attained early in life, can ensure a much smoother process down the road when your child is ready to make, most likely, the largest purchase of their life—a home.
If you have young children, you may think it’s too early to start talking to your child about money. However, research shows that kids have more money than you think, and they begin making big financial decisions much earlier than you might realize.
According to data compiled by StatisticBrain.com, U.S. teens earn around $91 billion each year. The average income of a 12-14 year old in the U.S. is $2,767. For teens 15-17, that number nearly doubles to $4,923. That means that parents have about 10 years to instill good financial habits in their kids before those kids are making financial decisions themselves.
The good news is that many teens surveyed said they are being careful with their money. Nearly 40% of teens say they are currently saving some of their money, with more than half saying they were saving for clothes or college (36% said they were saving for a car).
Nearly a quarter of teens (25%) say they don’t save anything, however, and since 79% of girls identify “shopping” as one of their “hobbies and activities,” spending is certainly a major part of their lives. In fact, families spend an estimated $157 billion on teens each year for food, apparel, personal-care items, and entertainment. Regardless of who earned the money, that number tells us that a lot of financial decisions revolve around teenagers.
So how can parents help teenagers make wise financial decisions? One answer is to start talking about money when your kids are young. MyMoney.gov outlines five building blocks for managing and growing money. We’ve outlined those building blocks below, along with a few suggestions about how you can talk to your kids about each one.
Building Block #1 – Earn: Show your child your paycheck statement. Review the details, including the taxes that are withheld, deductions for insurance, and other benefits listed. Talk about the difference between the required deductions and optional ones and explain the benefits you receive from those choices.
Building Block #2 – Spend: Write down a simple family budget for the month and review the budget with your child. Talk about needs, including food, electricity, water, and school expenses. Then talk about wants—fees for sports, lessons, vacations, and other activities. Talk about how you make decisions when it comes to spending money and share tips for getting the best value for your dollars.
Building Block #3 – Save & Invest: Take your child to the bank and open a savings account (most banks offer a fee-free account for children). Make a small initial deposit, then talk about ways your child can contribute to the account (birthday and holiday gifts, for example). Explain the concept of “interest” and show examples of savings growth from regular deposits and interest at 10 years, 20 years, and 50 years. If you invest in other savings programs, such as retirement plans, talk to your child about those decisions and the short- and long-term benefits of each.
Building Block #4 – Protect: The Protect principle means taking precautions about your financial situation. It includes the importance of accumulating emergency savings, buying insurance, and maintaining private and secure accounts to protect yourself from identity theft. Talk to your child about your insurance decisions. If you’ve been a victim of identity theft, explain what happened and how you took steps to correct the information. Emphasize the importance of keeping passwords, account numbers, and other information private when using a computer or mobile device. Finally, discuss schemes and “too-good-to-be-true” deals, especially online, that might be attempts to get private information.
Building Block #5 – Borrow: Sometimes it’s necessary to borrow for major purchases. Talk to your child about times you’ve borrowed money (for college, a car, a house, or maybe even to pay for an unexpected expense). Explain how borrowing money works and how interest is added to loans. Discuss the pros and cons of borrowing money and the importance of paying bills on time to guard against late payments and interest hikes.
It’s important for your kids to hear your stories of financial successes and failures, especially as they begin making more of their own spending and saving decisions. There are also many children’s books that can be a great introduction to money conversations with your younger children.
Here are some of our favorites:
- The Berenstain Bears’ Trouble with Money by Stan and Jan Berenstain
- A Bargain for Frances byRussell Hoban
- Something Good by Robert Munsch
- Bunny Money (Max and Ruby) by Rosemary Wells
- Alexander, Who Used to Be Rich Last Sunday by Judith Viorst
Finally, Dr. Sharon M. Danes of the University of Minnesota has some great suggestions for “Teaching Children Money Habits for Life.” Here are 10 suggestions we love:
- Help establish an amount for children to save when they earn money or receive gifts.
- Have children figure out expenses for their projects.
- Teach children to check prices in ads or online before buying.
- Discuss the cost of an item your child cannot afford.
- Play grocery store and bank with play money.
- Let your child pay for one item when you shop.
- Teach children that family members work to pay for food and clothes.
- Explain sales receipts, including tax and savings from sales or coupons.
- Discuss the difference between needs and wants.\
- Teach by example.
While teaching your children to make wise financial decisions may be challenging, it’s a challenge worth taking. Someday your children will go from buying an ice cream cone to buying a house. You can help them be ready for those big decisions down the road!
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