Jun 15, 2021 Teaching Your Older Children About Money
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.
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.
- 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.
Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).
This is provided for general information only and contains information that is not suitable for everyone. As such, nothing herein should be construed as the provision of specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. There is no guarantee that the views and opinions expressed herein will come to pass. This newsletter contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information prepared by any unaffiliated third party incorporated herein and take no responsibility therefore.
Any projections, forecasts and estimates, including without limitation any statement using “expect” or “believe” or any variation of either term or a similar term, contained here are forward-looking statements and are based upon certain current assumptions, beliefs and expectations that LRIA considers reasonable or that the applicable third parties have identified as such. Forward-looking statements are necessarily speculative in nature, and it can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes. Some important factors that could cause actual results or outcomes to differ materially from those in any forward-looking statements include, among others, changes in interest rates and general economic conditions in the U.S. and globally, changes in the liquidity available in the market, change and volatility in the value of the U.S. dollar, market volatility and distressed credit markets, and other market, financial or legal uncertainties. Consequently, the inclusion of forward-looking statements herein should not be regarded as a representation by LRIA or any other person or entity of the outcomes or results that will be achieved by following any recommendations contained herein. While the forward-looking statements here reflect estimates, expectations and beliefs, they are not guarantees of future performance or outcomes. LRIA has no obligation to update or otherwise revise any forward-looking statements, including any revisions to reflect changes in economic conditions or other circumstances arising after the date hereof or to reflect the occurrence of events (whether anticipated or unanticipated), even if the underlying assumptions do not come to fruition. Opinions expressed herein are subject to change without notice and do not necessarily take into account the particular investment objectives, financial situations, or particular needs of all investors.
For additional information about LRIA, including fees and services, please contact us for our Form ADV disclosure brochure using our contact information herein. Please read the disclosure brochure carefully before you invest or send money.