Last month, we looked at ways to start teaching younger children about money and how to handle it wisely. This month, we will look at ways to teach older children about finances, including savings, budgeting, and credit. Below are some additional steps parents can take to help their children build a solid financial base.

Earning and handling income

Older children (especially teenagers) may earn income from part-time jobs after school or on weekends. If this money supplements any allowance, wages enable children to get a taste of financial independence.

Earned income from part-time jobs might be subject to withholdings for FICA and federal and/or state income taxes. This is an excellent chance to show your children how taxes take a bite out of their paychecks.

Creating a balanced budget

With greater financial independence comes greater fiscal responsibility. Older children may have more expenses, and their extra income can be used to cover at least some of those expenses. To ensure that they’ll have enough to make ends meet, help them prepare a budget.

To develop a balanced budget, first list all incomes. Next, list essential expenses. These expenses include charitable giving and savings for big-ticket items or college costs. Next, inventory routine expenses like pizza with friends, movies, or gas for the car. Don’t include things you will cover. Finally, subtract the expenses from the income. If they are in the black, you can encourage further savings or contributions to their favorite charity. If the results show that your children will be in the red, however, help them develop a plan to address the shortfall.

To help children learn about budgeting:

• Devise a system for keeping track of spending
• Categorize expenses as needs and wants, and wishes to help them prioritize
• Suggest ways to increase income or reduce expenses

Several budgetting apps are designed to assist children to save, such as PiggyBot, Allowance+, RoosterMoney, etc.

Another tip is to have your children set up a savings account and a checking account at their bank. Setting up both types of accounts gets your child in the habit of monitoring their accounts and if they spend all in their checking account, they have to consciously transfer money from savings or stop spending until they get paid again.

Saving

Teenagers should be ready to focus on saving for larger goals (e.g., a new computer or a car) and longer-term goals (e.g., college, an apartment). And while bank accounts may still be the primary savings vehicle for them, you might also want to consider introducing your teenagers to the principles of investing.

To do this, consider opening investment accounts for your child. An advisor can meet with you and your child to introduce and educate them on the basic principles of investing. Helping older children learn about topics such as risk tolerance, time horizons, market volatility, and asset diversification may predispose them to take charge of their financial future.

Should you give your child a credit card?

If older children (especially those about to go off to college) are responsible, you may be thinking about getting them a credit card. However, credit card companies cannot issue cards to anyone under 21 unless they can show proof they can repay the debt themselves or an adult cosigns the credit card agreement. If you decide to cosign, keep in mind that you’re taking on legal liability for the debt, and the debt will appear on your credit report. It may be a good idea to get duplicate statements if you are ultimately responsible for repaying the debt.

Also:

• Set limits on the card’s use
• Make sure children understand the grace period, fee structure, and how interest accrues on the unpaid balance
• Agree on how the bill will be paid and what will happen if the bill goes unpaid
• Make sure children understand how long it takes to pay off a credit card balance if they only make minimum payments

If putting a credit card in your child’s hands is a scary thought, you may want to start off with a prepaid spending card. These cards don’t build credit, but can help practice how to manage it. A prepaid spending card looks like a credit card but functions more like a prepaid phone card. Load the card with a predetermined amount, and use the card anywhere credit cards are accepted. Purchases are deducted from the card’s balance, and you can transfer more money to the card’s balance whenever necessary. Although there may be some fees associated with the card, no debt or interest charges accrue; children can only spend what’s loaded onto the card.

One thing you might especially like about prepaid spending cards is that they allow children to get the hang of using credit responsibly gradually. Because you can access the account information online or over the phone, you can monitor the spending habits of your children. If need be, you can then sit down with them and discuss their spending behavior and money management skills.

Other ways to build credit

If you want to help your children build credit, having their own card is not the only option you have available. A couple of ways that may increase credit include:

• Signing up to have payments reported to a credit bureau. Services like Experian Boost can start showing payment history.
• Some cards let you add your children as authorized users. They usually have a minimum age, and not all companies report, so confirm with them prior to initiating.
• Ask the credit card company for a low credit limit (e.g., $300) or a secured card to help children learn to manage credit without getting into serious debt.

If you have any questions about getting your child or grandchild started with saving, budgeting and credit, reach out to your advisor with questions.