5 ways to prepare your kids for a bright financial future
One of the best gifts you can give your children is a good repertoire of financial skills. Teach your kids smart spending, saving and even charging habits when they are young, and they will be less likely to find themselves in a financial bind as they enter adulthood.
Here are five tips on how to teach your kids responsible credit card usage.
- Start at an early age.
Kids are impressionable -- if they see you modeling good money habits, even when you think they are too young to notice, they will be more likely to emulate them later. Seeing demonstrated savings habits and good financial skills from parents can be a huge influence on children, Deborah McMillan, founder and CEO of Knowledge Makes Cents, a Toronto-area company providing financial education classes to parents and children, said in an emailed response to questions.
Additionally, habits formed at a young age are hard to break. When you start teaching your child to save, say, 10 per cent of his allowance each week when he is a young child, by the time he gets a job, that 10 per cent savings will be an automatic response.
Finally, get them involved with the family finances as soon as you can, and don't underestimate them. Of course, financial education for children should be age or grade appropriate. But, McMillan said, children as young as three can begin learning about finances, so long as the content is at their level. For instance, toddlers can start learning the difference between wants versus needs.
- Give your children an allowance.
Giving children an allowance is a good way to instill a sense of ownership, said McMillan. Every person manages money differently. Learning a money management style and making financial mistakes at a young age better prepare the child for adulthood, when they begin to have more money.
- Then, explain how to create and balance a
Children should be taught how to budget as soon as they can understand the concept. Have your child make a list of all the things she will need in a month: money for pizza day at school? Change for vending machines? A treat at the mall? You can help her estimate how much each item will cost, and give her enough money to cover all the items on the first of the month.
Tell her she must be able to cover all her needs with that money and, if there is any leftover, she should put half in savings and use the other half as she pleases. Once the money's gone, it's gone, until you start over next month.
As an added benefit, it's easier to explain to your child why he can't have a new toy every time you go out if he understands that money isn't infinite.
- Teach them delayed gratification.
No one likes to wait for something they really want, especially when they've got a pocket full of cash -- or, later, plastic. Teaching children about delayed gratification when they're young will help them stay on budget and save up for purchases when they're older.
Use a real-life example of a time when you had to delay gratification. Did you have to save up for, say, a new TV for the family room? Explain how you saved: was it a certain amount of money each month, or each paycheque? Then, show them how you were able to afford a bigger TV, or perhaps better quality, by waiting, rather than buying a lower-end product right away. Explain how much money you saved by saving up to pay for the purchase outright instead of charging it to a credit card.
- Be honest about how credit works.
Learning about credit usage is extremely important, said McMillan. Children often don't recognize credit and debit cards are tied to real money -- they see mom or dad use a card to pay for groceries or to withdraw seemingly unlimited amounts of cash from the ATM. Explaining how plastic cards work and how credit card bills have to be paid monthly will help your child once he has his own bills to pay
Once you've established a monthly budget-and-allowance situation for your pre-teen children, explain that if they really need or want something that is out of their price range, they can borrow the money from you -- but they must pay you back. Give them the choice of skipping next month's allowance to pay their debt, or receiving half their allowance for the next two months. Explain that this is how credit works: it's a loan, not free cash.
When your kids reach their teens, you can start allowing them to sit with you while you pay bills. It's best if you pay your credit card bill in full, but if you carry over a balance, explain why and show your child how much interest will be added the next month. Not only will this teach your child how credit works, but introduces your child to the world of bill pay, which can be intimidating to a newcomer.
Teaching your kids about finances doesn't have to be hard, and you don't need to use "kid gloves" as much as you think. You'll be surprised at how much even young children can learn and retain. Your best bet is to model the behaviour you hope your children will display later in life, be as honest as possible and include your kids in your family finances. That way, they can see real world examples and ask all their questions while they're still living with you, rather than relying on friends or other unreliable sources once they leave home.See related: How to negotiate financial expenses with kids, 3 ways you may be stifling your child's financial independence, Growing up: Your teen's first credit card
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