Give your kids a crash course in financial literacy.
By Jenny Hoff
It’s a topic that likely makes you nervous to broach with your children. It’s intimate, personal and makes most people who think about it feel guilty, insecure or confused. No, it’s not sex; it’s money.
Financial literacy is a vital skill every young adult should have as he or she heads off to college or simply reaches the age at which they have the ability to make financial decisions. It’s not just knowing how to balance a checkbook or make payments on time, but knowing how to invest, what kind of debt to pay off first and how to use the most valuable asset every young adult has: time.
As a parent, there are steps you can take to teach your kids about money, even if you don’t consider yourself financially literate. It’s never too early—or too late—to learn how to make money work for you.
1. Educate yourself.
If you have no idea about stocks versus bonds, good debt versus bad debt, secured credit cards versus traditional credit cards, it’s a good idea to review the basics. Make Your Kid a Money Genius (Even If You’re Not!) by personal-finance expert Beth Kobliner is a great place to start. It’s easy to understand, discusses the most important concepts and offers tips for educating kids from 3 to 23. Remember, kids learn most by the example you set. If you show good money- management skills and include them in the learning process, your kids will be more likely to adopt those same habits in adulthood.
2. Help them start investing.
What young people have as a distinct advantage is time. Investing money before you really have any is a daunting prospect, but it will more than pay off in the long run. Once your children see how it grows and what the potential is (they can be millionaires one day, even if they have low-paying jobs), they’re more likely to continue the trend as they become more independent. You can start helping them invest with part of what they earn through part-time jobs, just to show them what happens when they make their money work for them. When they understand investing, they’ll know to put money in a 401(k) as soon as they get a job so it can grow tax-free for decades and compound far beyond their actual investment. “That’s been called the eighth wonder of the world,” Kobliner says. “Mathematically, it’s a very exciting thing how quickly that money grows, and it’s really important not to miss out on that opportunity.”
3. Help them build credit.
Having good credit translates to lower interest rates for loans, more ease when renting an apartment and even better job prospects since many employers now perform credit checks as part of the application process. The best way to teach your kids how to build good credit is by encouraging them to get a secured credit card, through which they can learn how to use a credit card properly and pay it off on time without the risk of charging more than they can afford. If they register on a site like creditkarma.com, they can watch their credit score go up with each on-time payment.
Becoming financially literate is a process—and it starts with you. While college will certainly impact their finances, it won’t necessarily teach your children how to manage them. The best gift you can give your kids as they head off to school is a good understanding of how money works so they can graduate with more than just degrees and student loans, including a solid financial plan to set them on the course to realizing their dreams.
Starting a Retirement Fund
With compound interest, a small amount put in a fund at 18 years old will grow to a huge amount by the time your kids are ready to retire. It can be difficult to think that far ahead, but explain it to your kids this way: If they invest $300 a month (about $10 a day) starting at 18 years old and get the average 8 percent rate of return, that investment will turn into more than $2 million by the time they turn 68. If they start investing that same amount at age 25, that investment will compound to $863,000. If they wait until they are 38 to start investing that same amount, they will have $332,000 when they turn 68. Time is the greatest asset your children have. Make sure they use it!